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 June 30, 2008





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
              Incorporation
                or Organization)
            
            (I.R.S.
                Employer Identification Number)





570
                Lausch Lane, Suite 300
              Lancaster,
                Pennsylvania
            
            17601(Address
                of Principal Executive Offices)
            
            (Zip
                Code)





(717)
      492-2222


(Registrant's
      Telephone Number, Including Area Code)





Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.





Yes x No
o





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





Large
      accelerated filer oAccelerated
      filer oNon-accelerated
      filer x Smaller
      reporting company o





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




Yes o No
x





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





2,720,119
      shares of $.25 (par) common stock were outstanding as of August 13,
      2008.





UNION
      NATIONAL FINANCIAL CORPORATION


FORM
      10-Q


INDEX




PAGE
                NO.**PART
                I –****FINANCIAL
                INFORMATION**Item
                1 -
            Financial
                Statements (Unaudited)Consolidated
                Statements of Financial Condition As of June 30, 2008 and December
                31,
                2007
            1Consolidated
                Statements of Income For the Three and Six Months Ended June 30,
                2008 and
                2007
            2Consolidated
                Statements of Changes in Stockholders’ Equity For the Six Months Ended
                June 30, 2008 and 2007
            3Consolidated
                Statements of Cash Flows For the Six Months Ended June 30, 2008 and
                2007
            4
                -
                5Notes
                to Consolidated Financial Statements
            6
                -
                17Item
                2 -
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            18
                - 31Item
                3 -
            Quantitative
                and Qualitative Disclosures about Market Risk
            32Item
                4 -
            Controls
                and Procedures
            33Item
                4T -
            Controls
                and Procedures
            33**PART
                II –****OTHER
                INFORMATION**Item
                1 -
            Legal
                Proceedings
            34Item
                1A -
            Risk
                Factors
            34Item
                2 -
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            34Item
                3 -
            Defaults
                upon Senior Securities
            34Item
                4 -
            Submission
                of Matters to a Vote of Security Holders
            34Item
                5 -
            Other
                Information
            35Item
                6 -
            Exhibits
            35Signatures
            
            36




*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 per share data)





June 30,
              2008
            
            December 31,
              2007ASSETSCash
                and Due from Banks
            
            $
            15,412
            
            $
            16,700Interest-Bearing
                Deposits in Other Banks
            
            
            33
            
            
            227Federal
                Funds Sold
            
            
            ─
            
            
            20,955Total
                Cash and Cash Equivalents
            
            
            15,445
            
            
            37,882Interest-Bearing
                Time Deposits in Other Banks
            
            
            1,874
            
            
            ─Investment
                Securities Available-for-Sale
            
            
            70,079
            
            
            74,176Loans
                and Leases, Net of Unearned Income
            
            
            375,275
            
            
            364,337Less:
                Allowance for Loan and Lease Losses
            
            
            (3,831
            )
            
            (3,675
            )Net
                Loans and Leases
            
            
            371,444
            
            
            360,662Premises
                and Equipment, Net
            
            
            12,463
            
            
            9,038Restricted
                Investment in Bank Stocks
            
            
            3,521
            
            
            3,652Bank-Owned
                Life Insurance
            
            
            10,887
            
            
            10,669Other
                Assets
            
            
            7,575
            
            
            5,697TOTAL
                ASSETS
            
            $
            493,288
            
            $
            501,776LIABILITIESDeposits:Noninterest-Bearing
            
            $
            49,147
            
            $
            46,624Interest-Bearing
            
            
            323,358
            
            
            329,687Total
                Deposits
            
            
            372,505
            
            
            376,311Short-Term
                Borrowings
            
            
            19,083
            
            
            6,629Long-Term
                Debt
            
            
            51,334
            
            
            68,816Junior
                Subordinated Debentures
            
            
            17,341
            
            
            17,341Other
                Liabilities
            
            
            3,152
            
            
            3,879TOTAL
                LIABILITIES
            
            
            463,415
            
            
            472,976STOCKHOLDERS'
                EQUITYCommon
                Stock, par value $0.25 per shareShares
                authorized - 20,000,000; Issued - 3,129,866 and 2,964,738 at June
                30, 2008
                and December 31, 2007, respectively; Outstanding - 2,711,677 and
                2,546,549
                at June 30, 2008 and December 31, 2007, respectively
            
            
            782
            
            
            741Surplus
            
            
            14,795
            
            
            13,313Retained
                Earnings
            
            
            23,707
            
            
            23,063Accumulated
                Other Comprehensive (Loss) Income
            
            
            (1,082
            )
            
            12Treasury
                Stock, 418,189 shares, at cost
            
            
            (8,329
            )
            
            (8,329
            )TOTAL
                STOCKHOLDERS' EQUITY
            
            
            29,873
            
            
            28,800TOTAL
                LIABILITIES and STOCKHOLDERS' EQUITY
            
            $
            493,288
            
            $
            501,776




*See
      accompanying 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 June 30
            
            Six Months Ended June 302008
            
            2007
            
            2008
            
            2007**INTEREST
                INCOME**Interest
                and Fees on Loans and Leases
            
            $
            6,146
            
            $
            6,759
            
            $
            12,507
            
            $
            13,214Investment
                Securities:Taxable
                Interest
            
            
            784
            
            
            701
            
            
            1,572
            
            
            1,618Tax-Exempt
                Interest
            
            
            ─
            
            
            187
            
            
            ─
            
            
            404Dividends
            
            
            25
            
            
            66
            
            
            68
            
            
            151Other
            
            
            77
            
            
            101
            
            
            222
            
            
            117Total
                Interest Income
            
            
            7,032
            
            
            7,814
            
            
            14,369
            
            
            15,504**INTEREST
                EXPENSE**Deposits
            
            
            2,358
            
            
            2,558
            
            
            5,154
            
            
            4,970Short-Term
                Borrowings
            
            
            4
            
            
            56
            
            
            65
            
            
            163Long-Term
                Debt
            
            
            713
            
            
            843
            
            
            1,459
            
            
            1,922Junior
                Subordinated Debentures
            
            
            266
            
            
            321
            
            
            566
            
            
            639Total
                Interest Expense
            
            
            3,341
            
            
            3,778
            
            
            7,244
            
            
            7,694Net
                Interest Income
            
            
            3,691
            
            
            4,036
            
            
            7,125
            
            
            7,810**PROVISION
                for LOAN and LEASE LOSSES**
            
            
            139
            
            
            270
            
            
            279
            
            
            477Net
                Interest Income after Provision for Loan & Lease
                Losses
            
            
            3,552
            
            
            3,766
            
            
            6,846
            
            
            7,333**NON-INTEREST
                INCOME**Income
                from Fiduciary Activities
            
            
            78
            
            
            143
            
            
            158
            
            
            210Service
                Charges on Deposit Accounts
            
            
            493
            
            
            467
            
            
            946
            
            
            866Other
                Service Charges, Commissions, Fees
            
            
            275
            
            
            300
            
            
            534
            
            
            536Alternative
                Investment Sales Commissions
            
            
            209
            
            
            217
            
            
            407
            
            
            416Impairment
                Charge on Investment Security
            
            
            ─
            
            
            (450
            )
            
            ─
            
            
            (450
            )Net
                Investment Securities Gains
            
            
            10
            
            
            597
            
            
            201
            
            
            78Mortgage
                Banking/Brokerage Activities
            
            
            22
            
            
            619
            
            
            36
            
            
            1,405Title
                Insurance/Settlement Income
            
            
            ─
            
            
            100
            
            
            ─
            
            
            223Earnings
                from Bank-Owned Life Insurance
            
            
            111
            
            
            106
            
            
            218
            
            
            209Other
                Income
            
            
            36
            
            
            85
            
            
            146
            
            
            285Total
                Non-Interest Income
            
            
            1,234
            
            
            2,184
            
            
            2,646
            
            
            3,778**NON-INTEREST
                EXPENSE**Salaries
                and Wages
            
            
            1,546
            
            
            2,063
            
            
            3,064
            
            
            4,251Retirement
                Plan and Other Employee Benefits
            
            
            343
            
            
            513
            
            
            744
            
            
            1,113Net
                Occupancy
            
            
            358
            
            
            746
            
            
            868
            
            
            1,291Furniture
                and Equipment
            
            
            229
            
            
            272
            
            
            476
            
            
            532Professional
                Fees
            
            
            213
            
            
            495
            
            
            473
            
            
            868Data
                Processing Services
            
            
            209
            
            
            223
            
            
            437
            
            
            439Pennsylvania
                Shares Tax
            
            
            75
            
            
            94
            
            
            175
            
            
            156Advertising
                and Marketing
            
            
            140
            
            
            211
            
            
            187
            
            
            435ATM
                Processing
            
            
            71
            
            
            86
            
            
            146
            
            
            173Minority
                Interests in Losses of Subsidiaries
            
            
            ─
            
            
            (138
            )
            
            ─
            
            
            (67
            )Restructuring
                Charge
            
            
            ─
            
            
            181
            
            
            ─
            
            
            717Other
                Expenses
            
            
            1,246
            
            
            911
            
            
            2,046
            
            
            1,606Total
                Non-Interest Expense
            
            
            4,430
            
            
            5,657
            
            
            8,616
            
            
            11,514Income
                (Loss) Before Income Taxes (Benefit)
            
            
            356
            
            
            293
            
            
            876
            
            
            (403
            )**PROVISION
                for (BENEFIT from) INCOME TAXES**
            
            
            52
            
            
            (44
            )
            
            159
            
            
            (384
            )**NET
                INCOME (LOSS)**
            
            $
            304
            
            $
            337
            
            $
            717
            
            $
            (19
            )**EARNINGS
                (LOSS) PER SHARE**Basic
            
            $
            0.12
            
            $
            0.13
            
            $
            0.28
            
            $
            (0.01
            )Diluted
            
            
            0.12
            
            
            0.13
            
            
            0.28
            
            
            (0.01
            )Cash
                Dividends Paid
            
            
            ─
            
            
            0.06
            
            
            ─
            
            
            0.16





*See
      accompanying notes to consolidated financial statements.*




2


**Union
      National Financial Corporation**


**Consolidated
      Statements of Changes in Stockholders’ Equity (Unaudited)**


(Dollars
      in thousands, except share data)





**Six Months Ended June 30, 2008**Shares of
              Common
              Stock
              Outstanding
            
            Common
              Stock
            
            Surplus
            
            Retained
              Earnings
            
            Accumulated
              Other
              Comprehensive
              Income (Loss)
            
            Treasury
              Stock
            
            Total**Balance
                at December 31, 2007**
            
            
            2,546,549
            
            $
            741
            
            $
            13,313
            
            $
            23,063
            
            $
            12
            
            $
            (8,329
            )
            $
            28,800Comprehensive
                Loss:Net
                Income
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            717
            
            
            ─
            
            
            ─
            
            
            717Unrealized
                Losses on Available-for-Sale Securities arising during the period,
                net of
                tax
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            (961
            )
            
            ─
            
            
            (961
            )Reclassification
                Adjustment for Security Gains Included in Net Income, net of
                tax
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            (133
            )
            
            ─
            
            
            (133
            )Total
                Comprehensive Loss
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            (377
            )Issuance
                of Common Stock under:Private
                Placement Stock Offering, net of costs
            
            
            163,690
            
            
            41
            
            
            1,469
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            1,510Dividend
                Reinvestment and Stock Purchase Plan
            
            
            745
            
            
            ─
            
            
            8
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            8Employee
                Plans
            
            
            693
            
            
            ─
            
            
            5
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            5Split
                Dollar Life Prior Period Adjustment
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            (73
            )
            
            ─
            
            
            ─
            
            
            (73
            )**Balance
                at June 30, 2008**
            
            
            2,711,677
            
            $
            782
            
            $
            14,795
            
            $
            23,707
            
            $
            (1,082
            )
            $
            (8,329
            )
            $
            29,873





**Six
                Months Ended June 30, 2007**Shares of
              Common
              Stock
              Outstanding
            
            Common
              Stock
            
            Surplus
            
            Retained
              Earnings
            
            Accumulated
              Other
              Comprehensive
              Loss
            
            Treasury
              Stock
            
            Total**Balance
                at December 31, 2006**
            
            
            2,523,983
            
            $
            735
            
            $
            12,918
            
            $
            23,460
            
            $
            (242
            )
            $
            (8,323
            )
            $
            28,548Comprehensive
                Loss:Net
                Loss
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            (19
            )
            
            ─
            
            
            ─
            
            
            (19
            )Unrealized
                Losses on Available-for-Sale Securities arising during the period,
                net of
                tax
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            (369
            )
            
            ─
            
            
            (369
            )Reclassification
                Adjustment for Security Gains Included in Net Income, net of
                tax
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            (52
            )
            
            ─
            
            
            (52
            )Reclassification
                Adjustment for Impairment Charges on Investment Securities, net of
                tax
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            297
            
            
            ─
            
            
            297Unrealized
                Losses on Cash Flow Hedges,net
                of tax
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            (39
            )
            
            ─
            
            
            (39
            )Reclassification
                Adjustment for Hedging Losses included in Net Income, net of
                tax
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            93
            
            
            ─
            
            
            93Total
                Comprehensive Loss
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            (89
            )Acquisition
                of Treasury Stock
            
            
            (50
            )
            
            ─
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            (2
            )
            
            (2
            )Share-based
                Compensation Expense
            
            
            ─
            
            
            ─
            
            
            67
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            67Issuance
                of Common Stock under:Dividend
                Reinvestment and Stock Purchase Plan
            
            
            5,088
            
            
            2
            
            
            84
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            86Employee
                Plans
            
            
            13,272
            
            
            3
            
            
            171
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            174Cash
                Dividends
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            (404
            )
            
            ─
            
            
            ─
            
            
            (404
            )**Balance
                at June 30, 2007**
            
            
            2,542,293
            
            $
            740
            
            $
            13,240
            
            $
            23,037
            
            $
            (312
            )
            $
            (8,325
            )
            $
            28,380





*See
      accompanying notes to consolidated financial statements.*


3


**Union
      National Financial Corporation**


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


**** (Dollars
      in thousands)


Six
                Months Ended June 30,2008
            
            2007CASH
                FLOWS from OPERATING ACTIVITIESNet
                Income (Loss)
            
            $
            717
            
            $
            (19
            )Adjustments
                to Reconcile Net Income (Loss) to NetCash
                (Used In) Provided by Operating Activities:Depreciation
                and Amortization
            
            
            635
            
            
            653Provision
                for Loan and Lease Losses
            
            
            279
            
            
            477Restructuring
                Charge
            
            
            ─
            
            
            717Cash
                Payments Related to Restructuring Charge
            
            
            (149
            )
            
            (206
            )Impairment
                Charge on Investment Security
            
            
            ─
            
            
            450Stock-Based
                Compensation Expense
            
            
            ─
            
            
            67Net
                Accretion of Investment Securities’ Discounts
            
            
            (89
            )
            
            (18
            )Net
                Investment Securities Gains
            
            
            (201
            )
            
            (78
            )Decrease
                in Minority Interest in Consolidated Subsidiaries
            
            
            (1
            )
            
            (67
            )Earnings
                from Bank-Owned Life Insurance
            
            
            (218
            )
            
            (209
            )Gains
                on Loans Sold
            
            
            ─
            
            
            (1,024
            )Net
                Gain on Sale of Foreclosed Real Estate
            
            
            ─
            
            
            (128
            )Proceeds
                from Sales of Loans
            
            
            ─
            
            
            37,713Loans
                Originated for Sale
            
            
            ─
            
            
            (36,520
            )Decrease
                in Accrued Interest Receivable
            
            
            417
            
            
            506Increase
                in Other Assets
            
            
            (1,833
            )
            
            (127
            )(Decrease)
                Increase in Other Liabilities
            
            
            (651
            )
            
            454Net
                Cash (Used In) Provided by Operating Activities
            
            
            (1,094
            )
            
            2,641CASH
                FLOWS from INVESTING ACTIVITIESProceeds
                from Sales of Available-for-Sale Securities
            
            
            24,479
            
            
            81,885Proceeds
                from Maturities of Available-for-Sale Securities
            
            
            29,772
            
            
            4,766Purchases
                of Available-for-Sale Securities
            
            
            (51,528
            )
            
            (20,213
            )Purchases
                of Time Deposits in Other Banks
            
            
            (1,874
            )
            
            ─Net
                Sales of Restricted Investments in Bank Stocks
            
            
            131
            
            
            1,981Proceeds
                from Sale of Foreclosed Real Estate
            
            
            ─
            
            
            314Net
                Loans and Leases Made to Customers
            
            
            (11,060
            )
            
            (17,538
            )Purchases
                of Premises, Equipment and Software
            
            
            (3,952
            )
            
            (513
            )Net
                Cash (Used In) Provided by Investing Activities
            
            
            (14,032
            )
            
            50,682CASH
                FLOWS from FINANCING ACTIVITIESNet
                Decrease in Demand Deposits and Savings Accounts
            
            
            (614
            )
            
            (419
            )Net
                (Decrease) Increase in Time Deposits
            
            
            (3,192
            )
            
            16,925Net
                Increase (Decrease) in Short-Term Borrowings
            
            
            12,454
            
            
            (6,667
            )Proceeds
                from Issuance of Long-Term Debt
            
            
            ─
            
            
            4,254Payments
                on Long-Term Debt
            
            
            (17,482
            )
            
            (53,009
            )Acquisition
                of Treasury Stock
            
            
            ─
            
            
            (2
            )Issuance
                of Common Stock
            
            
            1,523
            
            
            260Cash
                Dividends Paid
            
            
            ─
            
            
            (404
            )Net
                Cash Used in Financing Activities
            
            
            (7,311
            )
            
            (39,062
            )Net
                (Decrease) Increase in Cash and Cash Equivalents
            
            
            (22,437
            )
            
            14,261CASH
                and CASH EQUIVALENTS - Beginning of Period
            
            
            37,882
            
            
            15,462CASH
                and CASH EQUIVALENTS - End of Period
            
            $
            15,445
            
            $
            29,723





*See
      accompanying notes to consolidated financial statements.*


4


**Union
      National Financial Corporation**


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


**** (Dollars
      in thousands)




**Six Months Ended June 30,****2008**
            
            **2007****Supplemental
                Disclosures of Cash Flow Information**Cash
                Payments (Refunds) for:Interest
            
            $
            7,953
            
            $
            7,858Income
                Taxes
            
            
            ─
            
            
            (200
            )




*See
      accompanying notes to consolidated financial statements.*


5


**Union
      National Financial Corporation**


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





***1.
      Basis of Presentation***





The
      consolidated financial statements for 2008 and 2007 include the accounts of
      Union National Financial Corporation (“Union National”), its subsidiary Union
      National Community Bank (the “Bank”), and Bank subsidiary Union National
      Insurance Agency. The consolidated financial statements for 2007 also include
      the accounts of the Bank subsidiary Home Team Financial, LLC and its subsidiary
      TA of Lancaster, LLC (together, “Home Team”), which ceased operations in October
      2007. 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.





Certain
      information and footnote disclosures normally included in consolidated financial
      statements prepared in accordance with generally accepted accounting principles
      in the United States of America (“GAAP”) have been condensed or omitted pursuant
      to the rules and regulations of the Securities and Exchange Commission (“SEC”).
      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 June 30, 2008 and
      December 31, 2007, and the related consolidated statements of income, changes
      in
      stockholder’s equity and cash flows for each of the periods ended June 30, 2008
      and 2007. The results of operations for interim periods are not necessarily
      indicative of operating results expected for the full year. These interim
      consolidated financial statements should be read in conjunction with the audited
      financial statements and notes thereto included in Union National’s Annual
      Report on Form 10-K for the year ended December 31, 2007, and with Union
      National’s Forms 8-K, that were filed during 2008 with the SEC.





***2.
      Use of Estimates***





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





***3.
      Earnings per Share***





Basic
      earnings (loss) per share is computed by dividing net income (loss) by the
      weighted-average number of common shares outstanding during the three and six
      months ended June 30, 2008 and 2007. Diluted earnings (loss) per share reflects
      the potential dilution that could occur if options to issue stock were
      exercised.





The
      following table sets forth the computation of basic and diluted earnings per
      share:





**Three Months Ended June 30**
            
            **Six Months Ended June 30****2008**
            
            **2007**
            
            **2008**
            
            **2007**Net
                Income (Loss):
            
            $
            304,000
            
            $
            337,000
            
            $
            717,000
            
            $
            (19,000
            )Weighted-average
                number of common shares outstanding
            
            
            2,584,671
            
            
            2,528,321
            
            
            2,565,908
            
            
            2,527,090**Basic
                earnings (loss) per share**
            
            $
            0.12
            
            $
            0.13
            
            $
            0.28
            
            $
            (0.01
            )Weighted-average
                number of common shares outstanding
            
            
            2,584,671
            
            
            2,528,321
            
            
            2,565,908
            
            
            2,527,090Common
                stock equivalents due to effect of stock options
            
            
            ─
            
            
            6,283
            
            
            ─
            
            
            ─Total
                weighted-average common shares and equivalents
            
            
            2,584,671
            
            
            2,534,604
            
            
            2,565,908
            
            
            2,527,090**Diluted
                earnings (loss) per share**
            
            $
            0.12
            
            $
            0.13
            
            $
            0.28
            
            $
            (0.01
            )





Stock
      options outstanding which had no intrinsic value, and therefore, would not
      be
      included in a diluted earnings (loss) per share computation, were 108,679 and
      107,008 as of June 30, 2008 and 2007, respectively.


6


***4.
      Stock-Based Compensation***





Union
      National had two stock option plans outstanding as of June 30, 2008: (i) the
      Employee Stock Incentive Plan (“SIP”); and (ii) the Independent Directors’ Stock
      Option Plan (“IDSOP”). Neither of these plans had remaining options available
      for grant as of June 30, 2008. It is Union National’s policy to issue new shares
      upon the exercise of stock options.





Options
      granted under the SIP are incentive stock options with terms up to 10 years
      and
      option prices equal to the fair value of the shares on the date of the grant.
      SIP options vest over six months, become exercisable nine months after the
      grant
      date, and generally lapse 90 days after termination of employment. 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.





Prior
      to
      March 1, 2008, Union National had an Employee Stock Purchase Plan (“ESPP”);
      options granted under the ESPP had a five-year term and could be exercised
      at
      85% of the fair market value of the stock on the date of exercise.





In
      accordance with Statement of Financial Accounting Standards No. 123(R),
“Share-Based Payments”, Union National recognizes compensation expense for
      share-based awards based upon an assessment of the grant date fair value. The
      fair value of each option is estimated on the date of grant using the
      Black-Scholes option-pricing model. Union National recognizes share-based
      compensation expense for share-based awards on a straight-line basis over the
      vesting period of the award.





No
      options were granted or vested during the six months ended June 30, 2008. Union
      National did not have any share-based compensation expense for the three months
      and six months ended June 30, 2008 as all options are fully vested. The
      per-share weighted-average fair value of the 31,900 stock options granted during
      the six months ended June 30, 2007 (7,200 of which were forfeited during the
      second quarter of 2007 due to employee terminations) was $3.41 computed using
      the following assumptions:





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





Share-based
      compensation expense was $31,000 and $67,000 for the three and six months ended
      June 30, 2007, respectively. Stock option transactions for the six months ended
      June 30, 2008, are summarized below:





Shares
            
            Weighted-Average
              Exercise PriceOutstanding
                at December 31, 2007 (Prices range from $9.31 to $22.14)
            
            
            124,439
            
            $
            18.32Granted
            
            
            ─
            
            
            ─Exercised
                (under the ESPP)
            
            
            (693
            )
            
            8.70Forfeited
            
            
            (12,085
            )
            
            19.17Expired
            
            
            (2,982
            )
            
            8.93Outstanding
                at June 30, 2008 (Prices range from $11.52 to $22.14)
            
            
            108,679
            
            $
            18.53





The
      following table presents information regarding options outstanding (all
      exercisable) at June 30, 2008:




Number
                of options
            
            
            108,679Weighted-average
                contractual remaining term
            
            
            4.8
                YearsWeighted-average
                exercise price
            
            $
            18.53Aggregate
                intrinsic value
            
            $
            -0-




During
      the six months ended June 30, 2008 and 2007, Union National received proceeds
      of
      $5,000 and $171,000, respectively, for the exercise of options with an intrinsic
      value of $1,000 and $25,000, respectively. Intrinsic value represents the amount
      by which the market price of the stock on the measurement date exceeded the
      exercise price of the option.


7


***5.
      Commitments and Guarantees***





In
      the
      ordinary course of business, Union National makes commitments to extend credit
      to its customers through letters of credit, loan commitments and lines of
      credit. As of June 30, 2008, the Bank had $130,129,000 outstanding in loan
      commitments and other unused lines of credit extended to its customers, as
      compared to $117,742,000 at December 31, 2007.





The
      Bank
      does not issue any guarantees that would require liability recognition or
      disclosure, other than its standby letters of credit. Standby letters of credit
      written are conditional commitments issued by Union National to guarantee the
      performance of a customer to a third party. Generally, all letters of credit,
      when issued, have expiration dates within one year. The credit risk involved
      in
      issuing letters of credit is essentially the same as that involved in extending
      loan facilities to customers. The Bank generally holds collateral and/or
      personal guarantees supporting these commitments. There were $5,953,000 and
      $6,239,000 of standby letters of credit outstanding as of June 30, 2008 and
      December 31, 2007, respectively. Management believes that the proceeds obtained
      through a liquidation of collateral and the enforcement of guarantees would
      be
      sufficient to cover the potential amount of future payments required under
      the
      corresponding standby letters of credit. The current amount of the liability
      at
      June 30, 2008 and December 31, 2007, for Bank guarantees under standby letters
      of credit issued is not considered to be material.





***6.
      Residential Mortgage Business Venture***





Effective
      October 31, 2007, Union National management decided to cease operations at
      Home
      Team, a residential mortgage brokerage subsidiary of the Bank, due to a
      weakening housing market and the related reduction in brokered residential
      mortgage loan volume. Accordingly, consolidated operating results for the three
      months and six months ended June 30, 2008 reflected no mortgage brokerage and
      title insurance income, and no operating expenses, related to Home Team.
      Consolidated operating results for the three months and six months ended June
      30, 2007 included $606,000 and $1,371,000, respectively, of mortgage brokerage
      income, $100,000 and $223,000, respectively, of title insurance/settlement
      income, and $551,000 and $1,279,000, respectively, of operating expenses,
      related to Home Team.





***7.
      Restructuring and De-Leveraging Initiatives***





Restructuring





In
      the
      first half of 2007, management completed a restructuring of the Bank’s
      operations. The resulting restructuring charges, consisting of severance and
      related costs, totaled $181,000 and $717,000 for the three and six months ended
      June 30, 2007. For the six-months ended June 30, 2008 and 2007, Union National
      made cash payments related to the 2007 severance liability of $149,000 and
      $206,000, respectively.




De-Leveraging





In
      the
      first six months of 2008, Union National executed certain cost-effective
      de-leveraging activities using low-interest yielding short-term earning assets
      to reduce higher cost long-term borrowings. The Bank liquidated Federal Funds
      Sold to prepay a total of $17,482,000 of FHLB advances outstanding, reducing
      total FHLB borrowings outstanding to $51,334,000. Additionally, the Bank
      terminated and repaid its remaining short-term borrowing agreements and also
      called $9,809,000 of brokered CD’s. The Bank had the option to call an
      additional $6,602,000 of brokered CD’s in July 2008 (and subsequently exercised
      the option and called the CD’s in July 2008). The $9,809,000 of brokered CD’s
      called through June 30, 2008 had a fixed weighted average interest cost of
      4.66%, and the $6,602,000 of brokered CD’s subsequently called in July 2008 had
      a fixed weighted average interest cost of 5.27%.





In
      June
      2007 **,** net
      security gains of $597,000 were realized by liquidating $81,885,000 of municipal
      securities yielding 4.97%. These securities were replaced with U.S. Agency
      securities yielding 5.31%, to enhance income tax effectiveness.





In
      January 2007, Union National began to de-leverage its Balance Sheet in order
      to
      strengthen the Bank’s capital position, enhance its income tax effectiveness,
      facilitate its future core banking growth strategies for loans and deposits,
      and
      improve its interest rate profile. Consequently, Union National reduced the
      size
      of its available-for-sale securities portfolio by $64,345,000 and reduced its
      restricted investment in FHLB stock by $2,039,000, realizing pre-tax losses
      on
      the sale of the securities of $519,000. The sales proceeds were used to pay
      down
      $48,755,000 of FHLB debt and $6,550,000 of other short-term borrowings, with
      related pre-tax debt prepayment penalties of $31,000 included in Other Expenses.
      In the aggregate, the first quarter 2007 de-leveraging activities adversely
      impacted after-tax earnings $363,000 or $0.14 per share.




8




***8.
      Other-Than-Temporary Impairment of Investment
      Securities***





In
      order
      to determine whether unrealized losses in the market value of investment
      securities are other than temporary, management regularly reviews the entire
      portfolio of investment securities for possible impairment, analyzing factors
      including but not limited to the underlying creditworthiness of the issuing
      organization, the length of time for which the market value had been less than
      cost, independent analysts’ opinions about circumstances that could affect the
      performance of the investment, and management’s intention and ability to hold
      the securities to the earlier of recovery of losses or maturity.





During
      2007, management recorded $800,000 in other-than-temporary impairment charges
      (including $450,000 recorded through the six month period ended June 30, 2007)
      related to declines in the value of three available-for-sale corporate debt
      investment securities with an original amortized cost of $3,000,000. Scheduled
      income payments on the securities received through the first six months of
      2008
      were fully applied to principal, further reducing the combined book value of
      the
      three investments to $2,003,000 at June 30, 2008.





Union
      National’s combined market valuation of the three securities at June 30, 2008
      reflects additional unrealized losses, versus carrying value, of $1,103,000.
      A
      corresponding after-tax reduction of stockholders ’ equity
      of $728,000 was recorded as of June 30, 2008 as an other comprehensive loss.
      Management used market pricing as of June 30, 2008 based upon quoted prices
      in
      limited trading activity of the issuances (see related discussion in Note 12
      to
      the consolidated financial statements). **** The
      temporarily reduced market prices were not a result of a default in the
      underlying issuers. The three securities remain rated as investment grade as
      of
      June 30, 2008, as they have been since the time of purchase. Management
      determined the additional declines in market value in 2008 to be recorded and
      treated as temporary based upon the following considerations:





·
            The
                financial condition and near-term prospects of the issuers do not
                reflect
                any defaults or other specific events which may have influenced the
                operations of the issuers, such as changes in technology that may
                have
                impaired the earnings potential of the investments, or the discontinuance
                of a segment of the business that may affect the future earnings
                potential. The three investment securities were current, as of June
                30,
                2008, for scheduled investment interest payments since
                issuance.


·
            The
                reduced market value of the securities was based upon limited trading
                activity during the first six months in 2008; therefore, the recent
                unrealized losses have been for a short period of time (less than
                six
                months).


·
            Management
                has both the ability and intention to hold the securities until a
                reasonable recovery towards the carrying
                value.





***9.
      Private Placement Stock Offering***





On
      May
      19, 2008, Union National commenced the sale of up to 526,315 unregistered shares
      of Union National’s common stock, par value $0.25 per share, at $9.50 per share
      for a maximum aggregate offering price of $4,999,992.50. There is no minimum
      offering amount. Upon receipt of proceeds from the sale of the shares, Union
      National will immediately contribute such amounts to the general corporate
      purposes of Union National including, but not limited to, continuing to meet
      regulatory capital requirements and increasing the regulatory lending ability
      of
      the Bank.





The
      shares are being offered pursuant to an exemption from registration under
      Section 3(b) of the Securities Act of 1933 and Rule 505 of SEC Regulation D.
      The
      shares sold will be restricted securities for purposes of the United States
      securities laws and cannot be transferred except under these laws.





As
      of
      June 30, 2008, Union National sold 163,690 shares representing gross proceeds
      of
      $1,555,000 under the private placement stock offering.


9


***10.
      Split Dollar Life Insurance Postretirement Benefits***





Effective
      January 1, 2008 , Union National adopted the provisions of Emerging Issues
      Task
      Force (“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, and 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. Union National has certain
      split-dollar life insurance arrangements as part of Union National’s bank-owned
      life insurance program, and recognized its liability and related compensation
      expense in accordance with SFAS No. 106. In adopting EITF 06-4, Union National
      recorded a cumulative effect adjustment to the balance of retained earnings
      of
      $73,000 as of January 1, 2008. An additional $4,000 and $8,000 of related net
      periodic postretirement benefit expense was recorded for the three month and
      six
      month periods ended June 30, 2008, respectively. ****





***11.
      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.





Included
      in the response to the MOU, Union National has established target capital rates
      for the Bank of 8% for Tier I Capital to Average Total Assets, 9% for Tier
      I
      Capital to Risk-Based Assets, and 12% for Total Capital to Risk-Based Assets.
      The OCC has accepted management’s capital targets and established June 30, 2008
      as the target achievement date. As of June 30, 2008, Union National has met
      these capital targets by reducing borrowings, generating capital from net
      earnings, and by raising additional capital through the private placement stock
      offering (see related discussion in Note 9 to the consolidated financial
      statements).





The
      following table summarizes the Bank’s regulatory capital ratios as of June 30,
      2008:





Actual
            
            Target Required
              by the MOU
            
            To Be Well Capitalized
              Under Prompt Corrective
              Action ProvisionsTier
                1 (leverage) capital
            
            
            8.35
            %
            
            8.00
            %
            
            5.00
            %Tier
                1 risk-based capital
            
            
            9.70
            
            
            9.00
            
            
            6.00Total
                risk-based capital
            
            
            12.04
            
            
            12.00
            
            
            10.00





Additionally,
      as of June 30, 2008, management believes that the Bank 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.


10


***12.
      Fair Value Measurement of Assets and Liabilities***





Effective
      January 1, 2008, Union National adopted SFAS No. 157, "Fair Value Measurements",
      for financial assets and financial liabilities. In accordance with Financial
      Accounting Standards Board Staff Position (FSP) No. 157-2, “Effective Date of
      FASB Statement No. 157,” Union National will delay application of SFAS No. 157
      for non-financial assets and non-financial liabilities, until January 1, 2009.
      SFAS 157 defines fair value, establishes a framework for measuring fair value
      in
      accordance with generally accepted accounting principles, and expands
      disclosures about fair value measurements.





SFAS
      157
      defines fair value as the price that would be received to sell an asset or
      paid
      to transfer a liability in an orderly transaction between market participants.
      A
      fair value measurement assumes that the transaction to sell the asset or
      transfer the liability occurs in the principal market for the asset or liability
      or, in the absence of a principal market, the most advantageous market for
      the
      asset or liability. The price in the principal (or most advantageous) market
      used to measure the fair value of the asset or liability shall not be adjusted
      for transaction costs. An orderly transaction is a transaction that assumes
      exposure to the market for a period prior to the measurement date to allow
      for
      marketing activities that are usual and customary for transactions involving
      such assets and liabilities; it is not a forced transaction. Market participants
      are buyers and sellers in the principal market that are (i) independent, (ii)
      knowledgeable, (iii) able to transact, and (iv) willing to
      transact.





SFAS
      157
      requires the use of valuation techniques that are consistent with the market
      approach, the income approach and/or the cost approach. The market approach
      uses
      prices and other relevant information generated by market transactions involving
      identical or comparable assets and liabilities. The income approach uses
      valuation techniques to convert future amounts such as cash flows or earnings,
      to a single present amount on a discounted basis. The cost approach is based
      on
      the amount that currently would be required to replace the service capacity
      of
      an asset (replacement cost). Valuation techniques should be consistently
      applied. Inputs to valuation techniques refer to the assumptions that market
      participants would use in pricing the asset or liability. Inputs may be
      observable, meaning those that reflect the assumptions market participants
      would
      use in pricing the asset or liability developed based on market data obtained
      from independent sources, or unobservable, meaning those that reflect the
      reporting entity’s own assumptions about the assumptions market participants
      would use in pricing the asset or liability based upon the best information
      available in the circumstances. In that regard, SFAS 157 establishes a fair
      value hierarchy for valuation inputs that gives the highest priority to quoted
      prices in active markets for identical assets or liabilities and the lowest
      priority to unobservable inputs. The fair value hierarchy is as
      follows:





**Level 1 Inputs -**
            Unadjusted
                quoted prices in active markets that are accessible at the measurement
                date for ****identical,
                unrestricted assets or
                liabilities;




**Level 2 Inputs -**
            Quoted
                prices in markets that are not active, or inputs that are observable
                either directly orindirectly,
                for substantially the full term of the asset or
                liability;





**Level 3 Inputs -**
            Prices
                or valuation techniques that require inputs that are both significant
                to
                the fair valuemeasurement
                and unobservable (i.e., supported by little or no market
                activity).





A
      description of the valuation methodologies used for instruments measured at
      fair
      value, as well as the general classification of such instruments pursuant to
      the
      valuation hierarchy, is set forth below. These valuation methodologies were
      applied to all of Union National’s financial assets and financial liabilities
      carried at fair value effective January 1, 2008.





Securities
      Available for Sale





Securities
      classified as available for sale are generally reported at fair value utilizing
      Level 2 inputs. For these securities, we obtain fair value measurements from
      an
      independent pricing service. The fair value measurements consider observable
      data that may include dealer quotes, market spreads, cash flows, the U.S.
      Treasury yield curve, live trading levels, trade execution data, market
      consensus prepayment speeds, credit information and the bond’s terms and
      conditions, among other things.


11


Level
      3
      inputs are for investment security positions that are not traded in active
      markets or are subject to transfer restrictions, and/or where valuations are
      adjusted to reflect illiquidity and/or non-transferability. Such adjustments
      are
      generally based on available market evidence. In the absence of such evidence,
      management’s best estimate is used. Management’s best estimate consists of both
      internal and external support on certain Level 3 investments. Internal cash
      flow
      models using a present value formula along with indicative exit pricing obtained
      from broker/dealers were used to support certain Level 3 investments. Subsequent
      to inception, management only changes Level 3 inputs and assumptions when
      corroborated by evidence such as transactions in similar instruments, completed
      or pending third-party transactions in the underlying investment or comparable
      entities, subsequent rounds of financing, recapitalizations and other
      transactions across the capital structure, offerings in the equity or debt
      markets, and changes in financial ratios or cash flows.





Impaired
      Loans





Certain
      impaired loans are reported at the fair value of the underlying collateral
      if
      repayment is expected solely from the collateral. Collateral values are
      estimated using Level 3 inputs based upon customized discounting
      criteria.





The
      following table summarizes financial assets and financial liabilities measured
      at fair value on a recurring basis as of June 30, 2008, segregated by the level
      of the valuation inputs within the fair value hierarchy utilized to measure
      fair
      value (in thousands):


Level
                1
              Inputs
            
            Level
                2
              Inputs
            
            Level
                3
              Inputs
            
            Total
                Fair
              ValueInvestment
                Securities Available-For-Sale
            
            $
            ─
            
            $
            69,179
            
            $
            900
            
            $
            70,079Impaired
                Loans
            
            
            ─
            
            
            ─
            
            $
            6,537
            
            $
            6,537





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





Available
              For-Sale
              SecuritiesBeginning
                Balance at December 31, 2007
            
            $
            2,172Payments
                received and applied to principal
            
            
            (118
            )Total
                realized and unrealized gains (losses)Included
                in net income
            
            
            ─Included
                in other comprehensive income (loss)
            
            
            (1,104
            )Ending
                Balance at March 31, 2008
            
            $
            950Payments
                received and applied to principal
            
            
            (50
            )Total
                realized and unrealized gains (losses)Included
                in net income
            
            
            ─Included
                in other comprehensive income (loss)
            
            
            ─Ending
                Balance at June 30, 2008
            
            $
            900




12


The
      following is a reconciliation of the beginning and ending balances of recurring
      fair value measurements of impaired loans using significant unobservable (Level
      3) inputs (in thousands):




Impaired
              LoansBeginning
                Balance at December 31, 2007
            
            $
            2,636Loans
                added to impaired classification in 2008
            
            
            4,125Payments
                received and applied to principal
            
            
            (51
            )Repossessed
                assets
            
            
            ─Charge-off
                of impaired loans
            
            
            (55
            )Ending
                Balance at March 31, 2008
            
            $
            6,655Loans
                added to impaired classification in 2008
            
            
            269Payments
                received and applied to principal
            
            
            (87
            )Repossessed
                assets
            
            
            (300
            )Charge-off
                of impaired loans
            
            
            ─Ending
                Balance at June 30, 2008
            
            $
            6,537





The
      valuation allowance on impaired loans was $318,000 at June 30, 2008 compared
      to
      $380,000 at December 31, 2007. During the six-month period ended June 30, 2008,
      the valuation allowance on impaired loans was reduced by $62,000 due primarily
      to principal repayments on impaired loans.





Certain
      financial assets and financial liabilities are measured at fair value on a
      nonrecurring basis; that is, the instruments are not measured at fair value
      on
      an ongoing basis, but are subject to fair value adjustments in certain
      circumstances (for example, when there is evidence of impairment). Financial
      assets and financial liabilities measured at fair value on a non-recurring
      basis
      were not significant as of June 30, 2008.





Effective
      January 1, 2008, Union National adopted the provisions of 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
      permits Union National to measure eligible items at fair value at specified
      election dates. Unrealized gains and losses on items for which the fair value
      measurement option has been elected are reported in earnings at each subsequent
      reporting date. The fair value option (i) may be applied instrument by
      instrument, with certain exceptions, thus Union National may record identical
      assets and liabilities at fair value or by another measurement basis permitted
      under generally accepted accounting principles, (ii) is irrevocable (unless
      a
      new election date occurs) and (iii) is applied only to entire instruments and
      not to portions of instruments. Adoption of SFAS 159 on January 1, 2008, did
      not
      have a significant impact on Union National’s consolidated financial
      statements.





***13.
      Junior Subordinated Debentures***





Union
      National has three issuances of junior subordinated debentures. On July 28,
      2006, the Bank issued $6,000,000 of subordinated debentures with a five-year
      initial fixed rate of 7.17%, and then an annual coupon rate, reset quarterly,
      based on three-month LIBOR plus 1.65%. Other subordinated debentures issued
      by
      Union National are:





Union
      National Capital Trust I


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 7.83% and 5.75%
      at December 31, 2007 and June 30, 2008, respectively.





Union
      National Capital Trust II


In
      October 2004, $3,000,000 of net funding was obtained through the issuance of
      debentures at a fixed rate of 5.28% for an initial period of approximately
      three
      years and then at an annual coupon rate, reset quarterly, based on three-month
      LIBOR plus 2.00%. The coupon rate remained at 5.28% through December 31, 2007
      but reset to 4.64% as of June 30, 2008.





All
      of
      the above debentures are callable at our option five years after issuance.
      These
      issuances of junior subordinated debentures qualify as a component of capital
      for regulatory purposes.


13




***14.
      Comprehensive Income***





U.S.
      generally accepted accounting principles require that recognized revenue,
      expenses, gains, and losses be included in net income. Although certain changes
      in assets and liabilities, such as unrealized gains and losses on available
      for
      sale securities, are reported as a separate component of the equity section
      of
      the consolidated balance sheets, such items, along with net income, are
      components of comprehensive income.





The
      components of comprehensive income and related tax effects are as follows (in
      thousands):





Three
                Months Ended June 30, 2008
            
            Three
                Months Ended June 30, 2007Before
              Tax
              Amount
            
            Tax
              Expense
              (Benefit)
            
            Net-of-
              Tax
              Amount
            
            Before
              Tax
              Amount
            
            Tax
              Expense
              (Benefit)
            
            Net-of-
              Tax
              Amount**Net
                Income**
            
            $
            356
            
            $
            52
            
            $
            304
            
            $
            293
            
            $
            (44
            )
            $
            337**Other
                Comprehensive Loss:******Unrealized
                Losses on Available-for-Sale Securities Arising During the
                Period
            
            
            (729
            )
            
            (252
            )
            
            (477
            )
            
            (697
            )
            
            (237
            )
            
            (460
            )Less:
                Reclassification Adjustment for Gains included in Net
                Income
            
            
            10
            
            
            3
            
            
            7
            
            
            597
            
            
            202
            
            
            395Less:
                Reclassification Adjustment for Impairment Charges on Investment
                Securities, net of tax
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            (450
            )
            
            (153
            )
            
            (297
            )Unrealized
                Losses on Cash Flow Hedges
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            (67
            )
            
            (23
            )
            
            (44
            )Less:
                Reclassification Adjustment for Hedging Losses included in Net Income
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            (111
            )
            
            (38
            )
            
            (73
            )**Total
                Other Comprehensive Loss**
            
            
            (739
            )
            
            (255
            )
            
            (484
            )
            
            (800
            )
            
            (271
            )
            
            (529
            )**TOTAL
                COMPREHENSIVE LOSS**
            
            $
            (383
            )
            $
            (203
            )
            $
            (180
            )
            $
            (507
            )
            $
            (315
            )
            $
            (192
            )





Six
                Months Ended June 30, 2008
            
            Six
                Months Ended June 30, 2007Before
              Tax
              Amount
            
            Tax
              Expense
              (Benefit)
            
            Net-of-
              Tax
              Amount
            
            Before
              Tax
              Amount
            
            Tax
              Expense
              (Benefit)
            
            Net-of-
              Tax
              Amount**Net
                Income (Loss)**
            
            $
            876
            
            $
            159
            
            $
            717
            
            $
            (403
            )
            $
            (384
            )
            $
            (19
            )**Other
                Comprehensive Loss:******Unrealized
                Losses on Available-for-Sale Securities Arising During the
                Period
            
            
            (1,462
            )
            
            (501
            )
            
            (961
            )
            
            (559
            )
            
            (190
            )
            
            (369
            )Less:
                Reclassification Adjustment for Gains included in Net Income
                (Loss)
            
            
            201
            
            
            68
            
            
            133
            
            
            78
            
            
            26
            
            
            52Less:
                Reclassification Adjustment for Impairment Charges on Investment
                Securities, net of tax
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            (450
            )
            
            (153
            )
            
            (297
            )Unrealized
                Losses on Cash Flow Hedges
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            (59
            )
            
            (20
            )
            
            (39
            )Less:
                Reclassification Adjustment for Hedging Losses included in Net Income
                (Loss)
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            (141
            )
            
            (48
            )
            
            (93
            )**Total
                Other Comprehensive Loss**
            
            
            (1,663
            )
            
            (569
            )
            
            (1,094
            )
            
            (105
            )
            
            (35
            )
            
            (70
            )**TOTAL
                COMPREHENSIVE LOSS**
            
            $
            (787
            )
            $
            (410
            )
            $
            (377
            )
            $
            (508
            )
            $
            (419
            )
            $
            (89
            )




14





***15.
      Recent Accounting Pronouncements***





On
      January 1, 2008, Union National adopted SFAS No. 157, "Fair Value Measurements."
      SFAS No. 157 defines fair value, establishes a framework for measuring fair
      value in generally accepted accounting principles, and expands disclosures
      about
      fair value measurements (see related discussion in Note 12 to the consolidated
      financial statements).





On
      January 1, 2008, Union National adopted the provisions of the Emerging Issues
      Task Force (“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. Union National has split-dollar life insurance
      arrangements and has recorded the impact the adoption of the standard had on
      the
      Consolidated Statements of Income and the Consolidated Statement of Financial
      Condition (See Note 10 - *Split
      Dollar Life Insurance Postretirement Benefits* ).




On
      January 1, 2008, Union National adopted the provisions of 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, Union
      National 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. (See Note
      12 - *Fair
      Value Measurements of Assets and Liabilities* ).





In
      June
      2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue
      No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based
      Payment Awards” (“EITF 06-11”). EITF 06-11 states that an entity should
      recognize a realized tax benefit associated with dividends on nonvested equity
      shares, nonvested equity share units and outstanding equity share options
      charged to retained earnings as an increase in additional paid in
      capital. The amount recognized in additional paid in capital should be
      included in the pool of excess tax benefits available to absorb potential future
      tax deficiencies on share-based payment awards. EITF 06-11 should be
      applied prospectively to income tax benefits of dividends on equity-classified
      share-based payment awards that are declared in fiscal years beginning after
      December 15, 2007.  The adoption of EITF 06-11 did not have a
      significant impact on Union National’s consolidated financial position and
      results of operations.





In
      December 2007, the FASB issued SFAS No. No. 141 (R) “Business Combinations”
(“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how the
      acquirer of a business recognizes and measures in its financial statements
      the
      identifiable assets acquired, the liabilities assumed, and any noncontrolling
      interest in the acquiree. SFAS 141(R) also provides guidance for recognizing
      and
      measuring the goodwill acquired in the business combination and determines
      what
      information to disclose to enable users of the financial statements to evaluate
      the nature and financial effects of the business combination. The guidance
      will
      become effective as of the beginning of a corporation’s fiscal year beginning
      after December 15, 2008. SFAS 141(R) will impact Union National’s accounting for
      business combinations beginning January 1, 2009.





In
      December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
      Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS 160”). SFAS
      160 establishes accounting and reporting standards for the noncontrolling
      interest in a subsidiary and for the deconsolidation of a subsidiary. The
      guidance will become effective as of the beginning of a corporation’s fiscal
      year beginning after December 15, 2008. Management does not believe that SFAS
      160 will have a material impact on Union National’s consolidated financial
      position and results of operations.





The
      SEC
      has issued Staff Accounting Bulletin No. 109, "Written Loan Commitments Recorded
      at Fair Value Through Earnings" (“SAB 109”), which expresses the views of the
      staff regarding written loan commitments that are accounted for at fair value
      through earnings under generally accepted accounting principles. To make the
      staff's views consistent with current authoritative accounting guidance, the
      SAB
      revises and rescinds portions of SAB No. 105, "Application of Accounting
      Principles to Loan Commitments."  Specifically, the SAB revises the
      SEC staff's views on incorporating expected net future cash flows related to
      loan servicing activities in the fair value measurement of a written loan
      commitment. The SAB retains the staff's views on incorporating expected net
      future cash flows related to internally-developed intangible assets in the
      fair
      value measurement of a written loan commitment. The staff expects registrants
      to
      apply the views in Question 1 of SAB 109 on a prospective basis to derivative
      loan commitments issued or modified in fiscal quarters beginning after December
      15, 2007. Adoption and consideration of SAB 109 did not have a significant
      impact on Union National’s consolidated financial position and results of
      operations.


15




The
      SEC
      has issued Staff Accounting Bulletin No. 110 (“SAB 110”), which amends and
      replaces Question 6 of Section D.2 of Topic 14, “Share-Based Payment,” of the
      Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14
      expresses the views of the staff regarding the use of the “simplified” method in
      developing an estimate of expected term of “plain vanilla” share options and
      allows usage of the “simplified” method for share option grants prior to
      December 31, 2007. SAB 110 allows public companies which do not have
      historically sufficient experience to provide a reasonable estimate to continue
      use of the “simplified” method for estimating the expected term of “plain
      vanilla” share option grants after December 31, 2007. Adoption and
      consideration of SAB 110 did not have a significant impact on Union National’s
      consolidated financial statements.





In
      February 2008, the FASB issued FASB Staff Position (FSP) FAS 140-3, “Accounting
      for Transfers of Financial Assets and Repurchase Financing Transactions.” This
      FSP addresses the issue of whether or not these transactions should be viewed
      as
      two separate transactions or as one "linked" transaction. The FSP includes
      a
      "rebuttable presumption" that presumes linkage of the two transactions unless
      the presumption can be overcome by meeting certain criteria. The FSP will be
      effective for fiscal years beginning after November 15, 2008 and will apply
      only
      to original transfers made after that date; early adoption will not be allowed.
      Management is currently evaluating the potential impact the new pronouncement
      will have on its consolidated financial statements.





In
      March
      2008, the FASB issued Statement No. 161, “Disclosures about Derivative
      Instruments and Hedging Activities—an amendment of FASB Statement No. 133”
(Statement 161).  Statement 161 requires entities that utilize
      derivative instruments to provide qualitative disclosures about their objectives
      and strategies for using such instruments, as well as any details of
      credit-risk-related contingent features contained within
      derivatives.  Statement 161 also requires entities to disclose
      additional information about the amounts and location of derivatives located
      within the financial statements, how the provisions of SFAS 133 has been
      applied, and the impact that hedges have on an entity’s financial position,
      financial performance, and cash flows.  Statement 161 is effective for
      fiscal years and interim periods beginning after November 15, 2008, with early
      application encouraged.  Management is currently evaluating the
      potential impact the new pronouncement will have on its consolidated financial
      statements.





In
      April
      2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of
      the Useful Life of Intangible Assets.” This FSP amends the factors that should
      be considered in developing renewal or extension assumptions used to determine
      the useful life of a recognized intangible asset under FASB Statement
      No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of
      this FSP is to improve the consistency between the useful life of a recognized
      intangible asset under SFAS 142 and the period of expected cash flows used
      to measure the fair value of the asset under SFAS 141R, and other GAAP. This
      FSP
      is effective for financial statements issued for fiscal years beginning after
      December 15, 2008, and interim periods within those fiscal years. Early
      adoption is prohibited. Management is currently evaluating the potential impact
      the new pronouncement will have on its consolidated financial
      statements.





In
      May
      2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
      Accounting Principles.” This Statement identifies the sources of accounting
      principles and the framework for selecting the principles used in the
      preparation of financial statements. This Statement is effective 60 days
      following the SEC’s approval of the Public Company Accounting Oversight Board
      amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with
      Generally Accepted Accounting Principles.” Management is currently evaluating
      the potential impact the new pronouncement will have on its consolidated
      financial statements.





In
      May
      2008, the FASB issued FASB Staff Position (FSP) APB 14-1, "Accounting for
      Convertible Debt Instruments That May Be Settled in Cash upon Conversion
      (Including Partial Cash Settlement)" which clarifies the accounting for
      convertible debt instruments that may be settled in cash (including partial
      cash
      settlement) upon conversion. The FSP requires issuers to account separately
      for
      the liability and equity components of certain convertible debt instruments
      in a
      manner that reflects the issuer's nonconvertible debt borrowing rate when
      interest cost is recognized. The FSP requires bifurcation of a component of
      the
      debt, classification of that component in equity and the accretion of the
      resulting discount on the debt to be recognized as part of interest expense.
      The
      FSP requires retrospective application to the terms of instruments as they
      existed for all periods presented. The FSP is effective for fiscal years
      beginning after December 15, 2008, and interim periods within those years.
      Early
      adoption is not permitted. Management is currently evaluating the potential
      impact the new pronouncement will have on its consolidated financial
      statements.


16




In
      June
      2008, the FASB issued FASB Staff Position (FSP) EITF 03-6-1, “Determining
      Whether Instruments Granted in Share-Based Payment Transactions Are
      Participating Securities.” This FSP clarifies that all outstanding unvested
      share-based payment awards that contain rights to nonforfeitable dividends
      participate in undistributed earnings with common shareholders. Awards of this
      nature are considered participating securities and the two-class method of
      computing basic and diluted earnings per share must be applied. This FSP is
      effective for fiscal years beginning after December 15, 2008. Management is
      currently evaluating the potential impact the new pronouncement will have on
      its
      consolidated financial statements.





In
      June
      2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument
      (or an Embedded Feature) Is Indexed to an Entity’s Own Stock” (EITF 07-5). EITF
      07-5 provides that an entity should use a two step approach to evaluate whether
      an equity-linked financial instrument (or embedded feature) is indexed to its
      own stock, including evaluating the instrument’s contingent exercise and
      settlement provisions. It also clarifies the impact of foreign currency
      denominated strike prices and market-based employee stock option valuation
      instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning
      after December 15, 2008. Management is currently evaluating the potential impact
      the new pronouncement will have on its consolidated financial
      statements.




In
      June
      2008, the FASB ratified EITF Issue No. 08-3, “Accounting for Lessees for
      Maintenance Deposits Under Lease Arrangements” (EITF 08-3). EITF 08-3 provides
      guidance for accounting for nonrefundable maintenance deposits. It also provides
      revenue recognition accounting guidance for the lessor. EITF 08-3 is effective
      for fiscal years beginning after December 15, 2008. Management is currently
      evaluating the potential impact the new pronouncement will have on its
      consolidated financial statements.




17








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





Management’s
      discussion and analysis represents an overview of the results of operations
      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-month and six-month
      periods ended June 30, 2008 and 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, but ceased operations in October 2007. Home Team operated a mortgage
      banking and brokerage business and also offered title insurance and settlement
      services.





This
      discussion should be read in conjunction with the financial tables, statistics,
      and the audited financial statements and notes thereto included in Union
      National’s Annual Report on Form 10-K for the year ended December 31, 2007, and
      with Union National’s Forms 8-K and 10-Q, that were filed during 2008 with the
      SEC. The results of operations for interim periods are not necessarily
      indicative of operating results expected for the full year.





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 Annual Report on Form 10-K for the year ended December 31, 2007,
      Union National ’ s
      Forms
      8-K and 10-Q, 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.




Union
      National undertakes no obligation to publicly revise or update these
      forward-looking statements to reflect events or circumstances that arise after
      the date of this report. Readers should carefully review the risk factors
      described in the Annual Report and other documents that we periodically file
      with the Securities and Exchange Commission, including Union National’s Annual
      Report on Form 10-K for the year ended December 31, 2007.





***Critical
      Accounting Policies***





The
      reporting of our financial condition and results of operations is impacted
      by
      the application of accounting policies by management, some of which are
      particularly sensitive and require significant judgments, estimates and
      assumptions to be made in matters that are inherently uncertain.





The
      provision for loan and lease losses and the level of the allowance for loan
      and
      lease losses involve significant estimates by management in evaluating the
      adequacy of the allowance for loan losses 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. Loans
      and lease financing receivables are, throughout the remainder of Management’s
      Discussion and Analysis, collectively referred to as “loans”. While we use
      available information to make such evaluations, future adjustments to the
      allowance and the provision for loan and lease losses may be necessary if
      economic conditions or loan credit quality differ substantially from the
      assumptions we used in making the evaluation.


18


Investments
      are carried at fair value with any unrealized gains, as well as losses that
      we
      consider to be temporary, reported net of tax as an adjustment to stockholders’
equity. If we determine 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 a decline in market value is other
      than temporary.





***Financial
      Condition***





As
      of
      June 30, 2008, total assets decreased to $493,288,000 as compared to
      $501,776,000 at December 31, 2007. This decrease was generally attributable
      to
      further de-leveraging activities as Union National used lower yielding Federal
      Funds Sold assets to pay down wholesale funding liabilities including long-term
      FHLB debt and certain brokered CD deposits.





Investment
      Securities





Investment
      securities at June 30, 2008 were $70,079,000 as compared to $74,176,000 at
      December 31, 2007. The decrease in investment securities was primarily due
      to
      calls, maturities and principal pay-downs. A $1,663,000 decline in the fair
      value of Union National’s investment portfolio during the six month period ended
      June 30, 2008, also contributed to the decrease in carrying value for the six
      month period ended June 30, 2008.





All
      of
      Union National’s investment securities are classified as available for sale.
      Securities classified as available for sale are those debt securities that
      we
      intend to hold for an indefinite period of time, but not necessarily to
      maturity, and marketable equity securities. We possess the ability and intent
      to
      hold securities with temporary impairment to maturity or recovery; however,
      we
      recognize that the investment portfolio serves other functions including an
      ultimate source of liquidity and a tool to manage interest rate risk. In order
      to acknowledge these functions, we have designated our entire portfolio of
      investment securities as being available for sale. Any decision to sell a
      security classified as available for sale would be based on various factors,
      including significant movements in interest rates, changes in maturity mix
      of
      our assets and liabilities, liquidity needs, regulatory capital considerations,
      changes in the creditworthiness of the issuing entity, and other similar
      factors. Changes in unrealized gains or losses on available-for-sale securities,
      net of taxes, are recorded as Other Comprehensive Income (Loss), a component
      of
      Stockholders' Equity (see related discussion in Note 14 to the consolidated
      financial statements).





Union
      National purchases certain types of mortgage-backed securities to better
      position our investment portfolio for a subsequent increase or decrease in
      interest rates, as aligned with our interest rate risk position. These
      securities may be purchased at premiums or discounts, with short-, mid-, or
      long-term average expected lives or maturities. Overall yields on these
      securities will increase or decrease based on changes in prepayment speeds
      and
      subsequent cash flow reinvestments. The weighted-average yield on
      mortgage-backed securities was 4.74% and 4.95% at June 30, 2008 and December
      31,
      2007, respectively. Cash flows from these securities and changes in market
      interest rates are considered in our net interest income simulation model.
      See
      other sections of Management’s Discussion and Analysis titled *Liquidity* and *Market
      Risk - Interest Rate Risk* for
      further discussion.





As
      of
      June 30, 2008 and December 31, 2007, Union National had a portfolio of
      investment securities as follows:





June 30, 2008
            
            
            December 31, 2007Market
                Value of Debt Securities
            
            $
            69,800,000
            
            $
            73,729,000Market
                Value of Equity Securities
            
            
            279,000
            
            
            447,000Total
                Market Value of Investment Securities
            
            $
            70,079,000
            
            $
            74,176,000





Equity
      securities held are comprised primarily of common stock holdings in other
      financial institutions. The market values include aggregate unrealized losses
      of
      $2,000 as of June 30, 2008 and aggregate unrealized gains of $88,000 as of
      December 31, 2007, respectively.





19


Debt
      securities include government agencies, mortgage-backed securities,
      collateralized mortgage obligations and corporate securities. The market value
      of these debt securities included aggregated pre-tax unrealized losses of
      $1,644,000 and $70,000 as of June 30, 2008 and December 31, 2007, respectively,
      which amounted to 2.3% and 0.1% of the amortized cost basis of the debt
      securities as of June 30, 2008 and December 31, 2007, respectively.





As
      of
      June 30, 2008, $69,179,000 or 98.7% of the fair value of total investment
      securities were measured using Level 2 inputs as defined by SFAS 157, and
      $900,000 or 1.3% were measured using Level 3 inputs as defined by SFAS 157
      (see
      definitions and related discussion in Note 12 to the consolidated financial
      statements).





The
      fair
      value of Level 3 investment securities decreased to $900,000 at June 30, 2008
      from $2,172,000 at December 31, 2007. $169,000 of the decrease in value related
      to interest payments received, which were fully applied to principal throughout
      2008. The remaining $1,103,000 of the decrease in value between June 30, 2008
      and December 31, 2007 were unrealized losses which management determined to
      be
      temporary (with a corresponding after-tax reduction of stockholders’ equity of
      $729,000 recorded as an other comprehensive loss). The reduction in
      stockholders’ equity did not materially impact Union National’s capital
      position, as net income substantially offset the impact of the other
      comprehensive losses. Additionally, because the securities have a higher degree
      of illiquidity, they are not viewed by management as a primary and relied upon
      source of Union National’s liquidity and funds management
      processes.





The
      Level
      3 securities are three corporate debt obligations (see related discussion in
      Note 8 to the consolidated financial statements) with underlying positions
      being
      primarily trust preferred instruments. Management’s valuation and assessment of
      these Level 3 investments was based primarily upon indicative exit pricing
      and
      analyses obtained from broker/dealers who are market makers for these specific
      types of securities. Additional support for the valuation included internal
      assessments of cash flow, and internal analyses of investment performance and
      ratings. The temporarily reduced market prices as of June 30, 2008 were not
      a
      result of a default in the underlying issuers. The three securities remain
      rated
      as investment grade as of June 30, 2008, as they have been since the time of
      purchase, and all three securities were current, as of June 30, 2008, for
      scheduled investment interest payments since origination. Management determined
      the declines in market value to be recorded and treated as temporary based
      upon
      the following considerations:





·
            The
                financial condition and near-term prospects of the issuers do not
                reflect
                any defaults or other specific events which may have influenced the
                operations of the issuers, such as changes in technology that may
                have
                impaired the earnings potential of the investments, or the discontinuance
                of a segment of the business that may affect the future earnings
                potential.


·
            The
                reduced market value of the securities was based upon limited trading
                activity in the first six months of 2008 as the securities reflect
                a
                higher degree of illiquidity.


·
            The
                recent unrealized losses have been for a short period of time (less
                than
                six months).


·
            Management
                has both the ability and intention to hold the securities until a
                reasonable recovery towards the carrying
                value.





Loans,
      Credit Quality and Credit Risk





Management
      does not believe there are any significant trends, events or uncertainties
      that
      are reasonably expected to have a material impact on future results of
      operations, liquidity or capital resources. However, we recognize 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. Management continues to closely monitor economic and business
      conditions and the impact on borrowers' financial strength.


20


At
      June
      30, 2008, total nonperforming loans amounted to $2,854,000, or 0.8% of net
      loans, as compared to a level of $3,039,000, or 0.8%, at December 31, 2007.
      Historically, the percentage of nonperforming loans to net loans as for the
      five-year period ending December 31, 2007, was an average of 0.7%.





Schedule
      of Nonperforming Assets (dollars in thousands):





June 30, 2008
            
            December 31, 2007Nonaccruing
                Loans
            
            $
            2,704
            
            $
            2,919Accruing
                Loans – 90 days or more past due
            
            
            150
            
            
            120Total
                Nonperforming Loans
            
            
            2,854
            
            
            3,039Repossessed
                Assets
            
            
            479
            
            
            156Total
                Nonperforming Assets
            
            $
            3,333
            
            $
            3,195Nonperforming
                Loans as a % of Net Loans
            
            
            0.8
            %
            
            0.8
            %Allowance
                for Loan Losses as a % of Nonperforming Loans
            
            
            134
            %
            
            121
            %





Union
      National considers a loan or lease to be impaired when, based upon current
      information and events, it is probable that all interest and principal payments
      due according to the contractual terms of the loan or lease agreement will
      not
      be collected. An insignificant delay or shortfall in the amounts of payments
      would not cause a loan or lease to be considered impaired. Management determines
      the significance of payment delays and payment shortfalls on a case-by-case
      basis, taking into consideration all of the circumstances surrounding the loan
      or lease and the borrower, including the length of the delay, the reasons for
      the delay, the borrower’s prior payment record and the amount of the shortfall
      in relation to the principal and interest owed. Larger groups of small-balance
      loans, such as residential mortgages and consumer installment loans, are
      collectively evaluated for impairment. Accordingly, Union National does not
      separately identify individual consumer and residential loans for impairment
      disclosures unless such loans are the subject of a restructuring agreement.





As
      of
      June 30, 2008, Union National had impaired loans totaling $6,537,000 or 1.7%
      of
      total loans and leases (before the allowance for loan and lease losses), a
      net
      increase of $3,901,000 as compared to December 31, 2007, when the total value
      of
      impaired loans was $2,636,000 or 0.7% of total loans and leases. The increase
      in
      impaired loans relates to certain larger commercial credits which were rated
      as
      classified as of December 31, 2007; however, during the first quarter of 2008,
      management determined that the loans further met the criteria as impaired.





As
      previously discussed in Note 12 to the consolidated financial statements, Union
      National determines the fair value of impaired loans on a loan-by-loan basis
      based primarily upon the fair value of the underlying collateral using Level
      3
      inputs comprised of customized collateral value discounting
      analyses.





Allowance
      for Loan and Lease 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 reviewed monthly and formally evaluated
      on a quarterly basis. The allowance is increased by provisions charged to
      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.


21


We
      believe, based on information currently available, that the current allowance
      for loan and lease losses of $3,831,000 is adequate to meet potential loan
      and
      lease losses. A summary of the transactions in the Allowance for Loan and Lease
      Losses for the three and six months ended June 30, 2008 and June 30, 2007 are
      presented below (dollars in thousands):





Three Months Ended
              June 30
            
            Six Months Ended
              June 302008
            
            2007
            
            2008
            
            2007Average
                Total Loans Outstanding (Net of Unearned Income)
            
            $
            369,026
            
            $
            353,472
            
            $
            367,331
            
            $
            349,812Allowance
                for Loan Losses, Beginning of Period
            
            $
            3,742
            
            $
            3,188
            
            $
            3,675
            
            $
            3,070Loans
                Charged Off During Period
            
            
            (53
            )
            
            (9
            )
            
            (134
            )
            
            (99
            )Recoveries
                of Loans Previously Charged Off
            
            
            3
            
            
            ─
            
            
            11
            
            
            1Net
                Loans Charged Off
            
            
            (50
            )
            
            (9
            )
            
            (123
            )
            
            (98
            )Addition
                to Provision for Loan Losses Charged to Operations
            
            
            139
            
            
            270
            
            
            279
            
            
            477Allowance
                for Loan Losses, End of Period
            
            $
            3,831
            
            $
            3,449
            
            $
            3,831
            
            $
            3,449Ratio
                of Net Loans Charged Off to Average Loans Outstanding
                (Annualized)
            
            
            0.05
            %
            
            0.01
            %
            
            0.07
            %
            
            0.06
            %Ratio
                of Allowance for Loan Losses to Net Loans atEnd
                of Period
            
            
            
            
            
            
            
            
            1.02
            %
            
            0.96
            %





The
      portion of the allowance for loan and lease losses which related to Level 3
      valued impaired loans was $318,000 at June 30, 2008 as compared to $380,000
      at
      December 31, 2007. During the three and six month period ended June 30, 2008,
      the allowance for loan and lease losses related to impaired loans was reduced
      by
      $(100,000) and $(62,000), respectively.





Stockholders'
      Equity





Stockholder’s
      equity increased to $29,873,000 at June 30, 2008 compared to $28,800,000 at
      December 31, 2007. The increase in stockholder’s equity was primarily a result
      of cash proceeds received from a private placement stock offering in the amount
      of $1,510,000 (see related discussion in Note 9 to the consolidated financial
      statements) and increases to retained earnings from year-to-date earnings,
      offset by other comprehensive losses arising during the period. Union National's
      common equity position at June 30, 2008 exceeds the regulatory required minimums
      as disclosed on page 30.





***Results
      of Operations for the Three Months Ended June 30, 2008 and
      2007*** ******





Overview





Net
      income for the second quarter of 2008 was $304,000 or $0.12 diluted earnings
      per
      share, as compared to net income of $337,000 or $0.13 diluted earnings per
      share
      for the second quarter of 2007. Annualized return on average equity for the
      second quarter of 2008 was 4.2% as compared to 4.7% for the same period in
      2007.
      Annualized return on average assets was 0.3% for the quarters ended June 30,
      2008 and 2007. The decrease in net income was primarily the result of a decrease
      in non-interest income and net interest income offset by a decrease in
      non-interest expense. The discussion that follows further explains the changes
      in the components of net income when comparing the second quarter of 2008 to
      the
      second quarter of 2007.





Net
      Interest Income





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%.


22


Although
      the effective interest rate impact on earning assets and funding sources can
      be
      reasonably estimated at current interest rate levels, the options selected
      by
      customers, and the future mix of the loan, investment and deposit products
      in
      the Bank's portfolios, may significantly change the estimates used in the
      simulation models. In addition, our net interest income may be impacted by
      further interest rate actions of the Federal Reserve Bank.





Net
      interest income was $3,691,000 for the second quarter of 2008, as compared
      to
      $4,036,000 for the same quarter in 2007. The reduction in interest rates that
      began in the latter half of 2007, and continued more rapidly through the first
      half of 2008, contributed to the decline in Union National’s net interest margin
      percentage and contributed to a decline in net interest income when comparing
      the three months ended June 30, 2008 to the same period in 2007. Union
      National’s net interest margin was 3.31% for the second quarter of 2008 as
      compared to 3.90% for the second quarter of 2007. However, the net interest
      margin of 3.31% for the second quarter of 2008 reflected an increase from the
      net interest margin of 3.06% for the first quarter of 2008, as Union National
      implemented several measures to reduce its cost of funds including prepayment
      of
      higher-cost long-term debt and brokered deposits.





Interest
      and fees on loans decreased $613,000 in the second quarter of 2008 as compared
      to the same period in 2007. A decrease in average yield of approximately 100
      basis points due to interest rate cuts in the past year more than offset
      additional earnings from a $15,554,000 increase in the average balance of the
      loan portfolio.





Interest
      and dividends earned on investment securities decreased $145,000 in the second
      quarter of 2008 as compared to the same period in 2007. A decrease in the
      average yield of 138 basis points due to both market rate reductions and
      generally lower risk, lower yielding investments more than offset additional
      earnings from a slight increase in the average balance of the investment
      portfolio which resulted in less interest earned on investment securities in
      comparison to the 2007 period.





Interest
      expense was $3,341,000 for the second quarter of 2008, as compared to $3,778,000
      for the same quarter in 2007. Union National’s overall cost of funds declined to
      3.31% for the second quarter of 2008 as compared to 3.93% for the second quarter
      of 2007. This reduction was attributable to both market interest rate decreases
      and the de-leveraging of higher cost wholesale liabilities (see related
      discussion in Note 7 to the consolidated financial statements).





Provision
      for Loan and Lease Losses





The
      provision for loan and lease losses is an estimated expense charged to earnings
      to provide for losses attributable to uncollectible loans and leases, based
      on
      our analysis of the adequacy of the allowance for loan and lease losses. The
      provision of $139,000 for the second quarter of 2008, was to fund charge-offs
      incurred in the quarter, and to provide appropriate allowance coverage for
      realized loan growth. The provision of $270,000 for the second quarter of 2007,
      funded charge-offs and increased the allowance relative to loan growth and
      certain higher 2007 estimates of potential losses. Future adjustments to the
      allowance, and the provision for loan and lease losses, may be needed 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 additional
      discussion on *Loans,
      Credit Quality and Credit Risk* ,
      and the *Allowance
      for Loan and Lease Losses* in the
      Financial Condition section of this Management Discussion and
      Analysis.




23




Non-Interest
        Income
 
 Non-interest
        income decreased by $950,000 or 43.5% during the second quarter of 2008 versus
        the same quarter of 2007. The decrease was a result of net increases (decreases)
        in the following components of non-interest income (in thousands):
 
 **Three Months Ended**Non-Interest Income
              
              **June 30, 2008 vs. 2007**Income
                  from Fiduciary Activities
              
              $
              (65
              )Service
                  Charges on Deposit Accounts
              
              
              26Other
                  Service Charges, Commissions, and Fees
              
              
              (25
              )Alternative
                  Investment Sales Commissions
              
              
              (8
              )Impairment
                  Charge on Investment Security
              
              
              450Net
                  Investment Securities Gains (Losses)
              
              
              (587
              )Mortgage
                  Banking/Brokerage Activities
              
              
              (597
              )Title
                  Insurance/Settlement Income
              
              
              (100
              )Earnings
                  from Bank-Owned Life Insurance
              
              
              5Other
              
              
              (49
              )Total
                  Decrease in Other Operating Income
              
              $
              (950
              )
  Much
        of
        the decrease in non-interest income was primarily to reductions in mortgage
        banking income related to the closure in the fourth quarter of 2007 of Union
        National’s mortgage brokerage subsidiary, Home Team (see related discussion in
        Note 6 of the consolidated financial statements). For the three months ended
        June 30, 2008 consolidated operating results reflected no mortgage
        banking/brokerage and title insurance/settlement income related to Home Team,
        as
        compared to the three months ended June 30, 2007, non-interest income included
        $606,000 of mortgage brokerage income and $100,000 of title insurance/settlement
        income related to Home Team.
 
 During
        the second quarter of 2007, gains of $597,000 were realized on the liquidation
        of municipal securities related to the deleveraging initiative described
        in Note
        7 to the Consolidated Financial Statements.
 
 Also,
        a
        pre-tax loss of $450,000 was recognized during the second quarter of 2007
        for an
        other-than-temporary impairment in the value of an available-for-sale corporate
        debt investment security, as described in Note 8 to the Consolidated Financial
        Statements.
 
 Non-Interest
        Expense
 
 Non-interest
        expense decreased by $1,227,000 or 21.7% during the second quarter of 2008
        versus the second quarter of 2007. Increases (decreases) in the components
        of
        non-interest expense when comparing the three-month period ended June 30,
        2008
        and 2007 are as follows (in thousands):
 
 **Three Months Ended**Non-Interest Expense
              
              **June 30, 2008 vs. 2007**Salaries
                  and Wages
              
              $
              (517
              )Employee
                  Benefit Costs
              
              
              (170
              )Net
                  Occupancy
              
              
              (388
              )Furniture
                  & Equipment
              
              
              (43
              )Professional
                  Fees
              
              
              (282
              )Data
                  Processing Services
              
              
              (14
              )Pennsylvania
                  Shares Tax
              
              
              (19
              )Advertising
                  and Marketing
              
              
              (71
              )ATM
                  Processing
              
              
              (15
              )Minority
                  Interest in Earnings of Subsidiaries
              
              
              138Restructuring
                  Charge
              
              
              (181
              )Other
                  Expenses
              
              
              335Total
                  Decrease in Other Operating Expenses
              
              $
              (1,227
              )
 
  24
  The
        decrease in Salaries and Wages, and Employee Benefit Costs, reflect the positive
        impact realized from the staff restructuring, as well as and the cessation
        of
        operations of Home Team during the fourth quarter of 2007. Net Occupancy
        costs
        decreased primarily due to a charge of $259,000 in the second quarter of
        2007
        for a commitment
        on a parcel of real estate to be
        used for a future retail branch site. Professional fees decreased primarily
        due
        to 2007 expenses including fees for a nonrecurring profit improvement consulting
        engagement. Advertising and Marketing costs were higher in 2007 due to branding
        costs related to the Gold Café launch and marketing charges related to the now
        closed Home Team subsidiary. The change in Minority Interest in Earnings
        of
        Subsidiaries reflects the impact of the Home Team shutdown during the fourth
        quarter of 2007. The Restructuring Charge, as previously described in Note
        7 to
        the consolidated financial statements, consisted of staff reorganization
        severance and related costs incurred in the first and second quarters of
        2007.
 
 Included
        in other non-interest expenses for the quarter-ended June 30, 2008 was a
        one-time charge of $370,000 that occurred in the quarter ended June 30, 2008,
        related to certain fraudulent loans made by one employee who has since been
        terminated. Based upon Union National’s investigation of the matter, there does
        not appear to be any additional losses or the involvement of other employees.
        Union National has evaluated the impact of this incident on its current internal
        controls and procedures and has implemented changes necessary to strengthen
        control processes and address the issues raised by this isolated event. The
        appropriate governmental authorities have been notified and Union National
        is
        cooperating fully with respect to the authorities’ investigation. Union National
        is pursuing all available avenues for collection of the loss including insurance
        recovery and legal restitution from the former employee.
 
 Income
        Taxes
 
 Income
        tax expense was $52,000 for the three months ended June 30, 2008, as compared
        to
        an income tax benefit of $44,000 for the same period in 2007. The effective
        tax
        rate for the three months ended June 30, 2008 was 14.6%. Generally, Union
        National’s effective tax rate is below the statutory rate due to tax-exempt
        earnings on loans, investments, and bank-owned life insurance, and the impact
        of
        tax credits. The realization of deferred tax assets is dependent on future
        earnings. As a result of Union National’s adoption of FIN 48 and FIN 48-1
        effective January 1, 2007, no significant income tax uncertainties were
        identified, therefore, Union National recognized no adjustment for unrecognized
        income tax benefits for the periods ended June 30, 2008 and 2007. We currently
        anticipate that future earnings will be adequate to fully utilize deferred
        tax
        assets.
 
 ***Results
        of Operations for the Six Months Ended June 30, 2008 and
        2007*** ******
 
 Overview
 
 For
        the
        six months ended June 30, 2008, net income was $717,000 or $0.28 diluted
        earnings per share, compared to a net loss of ($19,000) or ($0.01) diluted
        loss
        per share for the same period in 2007. Annualized return on average equity
        for
        the six month period in 2008 was 4.9% compared to the prior year’s ratio for the
        same period of (0.13%). Annualized return on average assets for the six-month
        period in 2008 was 0.30% versus (.01%) in 2007. The increase in net income
        was
        primarily the result of a decrease in non-interest expense offset by decreases
        in net interest income and non-interest income. The discussion that follows
        further explains the changes in the components of net income when comparing
        the
        six-month period of 2008 to the same period in 2007.
 
 Net
        Interest Income
 
 For
        the
        six months ended June 30, 2008, net interest income was $7,125,000 compared
        to
        $7,810,000 for the same period in 2007. The decrease in net interest income
        was
        primarily the result of net interest margin compression. The reduction in
        interest rates that began in the latter half of 2007 and continued into 2008
        contributed to a decline in net interest margin. Union National’s net interest
        margin was 3.18% for the six month period of 2008 compared to 3.75% for the
        same
        period of 2007.
 
 Interest
        and fees on loans decreased by $707,000 for the six-months ended June 30,
        2008,
        as compared to the same period in 2007. A decrease in average yield of 75
        basis
        points due to market interest rate reductions more than offset earnings from
        a
        $17,519,000 increase in the average balance of the loan portfolio.
 
 Interest
        and dividends earned on investment securities decreased $533,000 for the
        six-months ended June 30, 2008, as compared to the same period in 2007. A
        decrease in the average yield of approximately 125 basis points coupled with
        a
        $7,658,000 decrease in the average balance of the investment portfolio resulted
        in less interest earned on investment securities in comparison to the 2007
        period.
 
  25
  Interest
        expense was $7,244,000 for the six-months ended June 30, 2008, as compared
        to
        $7,694,000 for the same period in 2007. Union National’s overall cost of funds
        declined to 3.55% for the six-months ended June 30, 2008, as compared to
        3.96%
        for the same period in 2007 (see related discussion of de-leveraging and
        interest rate reductions in Note 7 to the consolidated financial
        statements).
 
 Provision
        for Loan and Lease Losses
 
 The
        provision for loan losses from the first six months of 2008 was $279,000
        as
        compared to $477,000 for the first six months of 2007. The lower provision
        reflects fewer charge-offs in the first six months of 2008. Despite the lower
        provision, Union National increased its allowance for loan and lease losses
        by
        11% from $3,449,000 or 0.96% of total loans and leases at June 30, 2007,
        to
        $3,831,000 or 1.02% of total loans and leases at June 30, 2008. Future
        adjustments to the allowance, and the provision for loan and lease losses,
        may
        be needed 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
        additional discussion on Loans, Credit Quality and Credit Risk, and the
        Allowance for Loan and Lease Losses in the Financial Condition section of
        this
        Management Discussion and Analysis.
 
 Non-Interest
        Income
 
 For
        the
        six months ended June 30, 2008, non-interest income decreased by $1,132,000
        or
        30.0% as compared to the same period of 2007. The decrease was a result of
        net
        increases (decreases) in the following components of non-interest income
        (in
        thousands):
 
 **Six Months Ended**Non-Interest Income
              
              **June 30, 2008 vs. 2007**Income
                  from Fiduciary Activities
              
              $
              (52
              )Service
                  Charges on Deposit Accounts
              
              
              80Other
                  Service Charges, Commissions, and Fees
              
              
              (2
              )Alternative
                  Investment Sales Commissions
              
              
              (9
              )Impairment
                  Charge on Investment Security
              
              
              450Net
                  Investment Securities Gains (Losses)
              
              
              123Mortgage
                  Banking/Brokerage Activities
              
              
              (1,369
              )Title
                  Insurance/Settlement Income
              
              
              (223
              )Earnings
                  from Bank-Owned Life Insurance
              
              
              9Other
              
              
              (139
              )Total
                  Decrease in Other Operating Income
              
              $
              (1,132
              )
  Much
        of
        the decrease in non-interest income was primarily to reductions in mortgage
        banking income related to the closure in the fourth quarter of 2007 of Union
        National’s mortgage brokerage subsidiary, Home Team (see related discussion in
        Note 6 to the consolidated financial statements). For the six months ended
        June
        30, 2008, consolidated operating results reflected no mortgage banking/brokerage
        and title insurance/settlement income related to Home Team, as compared to
        the
        six months ended June 30, 2007 when non-interest income included $1,371,000
        of
        mortgage brokerage income and $223,000 of title insurance/settlement income
        related to Home Team.
 
 Union
        National realized gains on sales of investment securities of $201,000 in
        the
        first six months of 2008 as compared to realized gains of $78,000 for the
        same
        period in 2007. The 2007 activity related to securities sold as part of the
        2007
        de-leveraging activities, while the 2008 activity related to continued
        repositioning of Union National’s investment portfolio to a lower-risk profile
        that more directly supports liquidity management. Union National recognized
        a
        pre-tax loss of $450,000 during the first six months of 2007 for an
        other-than-temporary impairment in the value of an available-for-sale investment
        debt security, as described in Note 8 to the Consolidated Financial
        Statements.
 
  26
  Non-Interest
        Expense
 
 Non-interest
        expense decreased $2,898,000 or 25% when comparing the first six months of
        2008
        to the same period in 2007. Increases (decreases) in the components of
        non-interest expense when comparing the six-month period ended June 30, 2008
        and
        2007 are as follows (in thousands):
 **Six Months Ended**Non-Interest Expense
              
              **June 30, 2008 vs. 2007**Salaries
                  and Wages
              
              $
              (1,187
              )Employee
                  Benefit Costs
              
              
              (369
              )Net
                  Occupancy
              
              
              (423
              )Furniture
                  & Equipment
              
              
              (56
              )Professional
                  Fees
              
              
              (395
              )Data
                  Processing Services
              
              
              (2
              )Pennsylvania
                  Shares Tax
              
              
              19Advertising
                  and Marketing
              
              
              (248
              )ATM
                  Processing
              
              
              (27
              )Minority
                  Interest in Earnings of Subsidiaries
              
              
              67Restructuring
                  Charge
              
              
              (717
              )Other
                  Expenses
              
              
              440Total
                  Decrease in Other Operating Expenses
              
              $
              (2,898
              )
 
 The
        decrease in Salaries and Wages, and Employee Benefit Costs, reflect the positive
        impact realized from the staff restructuring, as well as the closure of
        operations of Home Team during the fourth quarter of 2007.
 
 Net
        Occupancy costs decreased primarily due to the second quarter of 2007 including
        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. Additionally, Union National has reduced
        its net occupancy expense through subleasing a portion of its corporate office
        facility. This facility was first occupied during the third quarter of 2007.
        As
        a result, there was no benefit recognized for the six-months ended June 30,
        2007. However, the benefit was recognized for entire six months ended June
        30,
        2008.
 
 Professional
        fees decreased primarily due to 2007 expenses including fees for a nonrecurring
        profit improvement consulting engagement. Advertising and Marketing costs
        were
        higher in 2007 due to branding costs related to the Gold Café launch and
        marketing charges related to the now closed Home Team subsidiary. Minority
        Interest in Earnings of Subsidiaries reflects the impact of the Home Team
        shutdown during the fourth quarter of 2007. The Restructuring Charge, as
        previously described in Note 7 to the consolidated financial statements,
        consisted of staff reorganization severance and related costs incurred in
        the
        first and second quarters of 2007.
 
 Included
        in other non-interest expenses was a one-time charge of $370,000 that occurred
        in the quarter ended June 30, 2008, related to certain fraudulent loans made
        by
        one employee who has since been terminated. Based upon Union National’s
        investigation of the matter, there does not appear to be any additional losses
        or the involvement of other employees. Union National has evaluated the impact
        of this incident on its current internal controls and procedures and has
        implemented changes necessary to strengthen control processes and address
        the
        issues raised by this isolated event. The appropriate governmental authorities
        have been notified and Union National is cooperating fully with respect to
        the
        authorities’ investigation. Union National is pursuing all available avenues for
        collection of the loss including insurance recovery and legal restitution
        from
        the former employee.
 
 Income
        Taxes
 
 Income
        tax expense was $159,000 for the six months ended June 30, 2008, as compared
        to
        a benefit of $384,000 for the same period in 2007. The effective tax rate
        for
        the six months ended June 30, 2008 was 18.2%. Generally, Union National’s
        effective tax rate is below the statutory rate due to tax-exempt earnings
        on
        loans, investments, and bank-owned life insurance, and the impact of tax
        credits. The realization of deferred tax assets is dependent on future earnings.
        As a result of Union National’s adoption of FIN 48 and FIN 48-1 effective
        January 1, 2007, no significant income tax uncertainties were identified,
        therefore, Union National recognized no adjustment for unrecognized income
        tax
        benefits for the periods ended June 30, 2008 and 2007. We currently anticipate
        that future earnings will be adequate to fully utilize deferred tax
        assets.
  27


***Outlook***





The
      economy in the Bank’s market in 2008 may be negatively impacted by recent
      national economic events and overall national economic trends including the
      lessening of certain borrowers' financial strength, a decline in the housing
      market and residential mortgage activity, and the recent significant decline
      in
      interest rates. Management is monitoring these general and specific trends
      closely. We are closely monitoring our commercial and consumer credit
      relationships, and both loans and investment holdings collateralized by
      residential mortgages, which are potentially impacted by the health of the
      housing market.





We
      are
      also closely monitoring and managing the decline in interest rates that began
      at
      the end of 2007 and accelerated into 2008. Though the significant decline in
      interest rates experienced in the past year has compressed our net interest
      margin and net interest income in the past year, we began to see improvements
      in
      our net interest spread during the second quarter of 2008 as we continued to
      grow our lower-cost retail deposit base and pay down our higher-cost wholesale
      borrowings and brokered deposits. We regularly assess our interest rate
      sensitivity, and have taken measures to reduce our core funding costs to
      mitigate the potential negative impacts of these significant rate shifts on
      our
      core net interest income.





Despite
      these challenging economic conditions, Union National’s results through the
      first half of 2008 are a continuing positive indicator of our renewed emphasis
      on our back-to-basics banking strategy. Further, the restructuring changes
      we
      made in the past year have substantially lowered our operating costs. We remain
      committed to growing earnings and enhancing shareholder value by focusing on
      the
      important elements of our future success - maintaining quality loan growth,
      expanding our core retail deposit base, improving our net interest margin,
      operating with greater efficiencies, sustaining liquidity, and strengthening
      our
      existing well-capitalized position.  We expect continued modest growth in
      loans for 2008, driven largely by our continued emphasis on our core banking
      business including expanding existing customer relationships, developing new
      business relationships, and promoting our retail deposit products through
      marketing and pricing initiatives. We expect generally a slight reduction in
      net
      interest income as savings in funding costs from interest rate reductions and
      de-leveraging debt reductions are more than offset by interest income decreases
      due to interest rate reductions on earning assets. We expect continued growth
      in
      certain core other operating income categories, including deposit servicing.
      With the closure of our Home Team subsidiary in 2007, we expect overall
      non-interest income and non-interest expenses to decrease in 2008 compared
      to
      2007 due to the substantial elimination of mortgage brokerage income and costs.
      Further, we expect continued substantial non-interest expense savings from
      efficiencies due to the 2007 restructuring activities.





***Capital
      Adequacy***





Union
      National and the Bank maintain capital ratios that are above the minimum total
      capital levels required by federal regulatory authorities.





On
      June
      20, 2007, the Bank entered into an MOU with the OCC as previously described
      in
      Note 11 of the consolidated financial statements. Included in the MOU is a
      requirement that the Bank 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. In response to the MOU,
      the
      Bank has established target capital ratios of 8% for Tier I Capital to Average
      Total Assets, 9% for Tier I Capital to Risk-Based Assets, and 12% for Total
      Capital to Risk-Based Assets. The OCC has accepted management’s capital targets
      and established June 30, 2008 as the target achievement date. As of June 30,
      2008, Union National has met these capital targets by reducing borrowings,
      generating capital from net earnings, and by raising additional capital through
      a private placement stock offering (see related discussion in Note 9 to the
      consolidated financial statements).





Except
      as
      discussed in the “Outlook” section above, there are no other known trends,
      events or uncertainties, including regulatory matters that are expected to
      have
      a material adverse impact on the capital resources of Union National for
      2008.


28


Union
      National is subject to restrictions on the payment of dividends to its
      stockholders pursuant to the Pennsylvania Business Corporation Law of 1988,
      as
      amended (the BCL).  The BCL operates generally to preclude dividend
      payments if the effect thereof would render us insolvent.  Our payment of
      dividends is contingent upon our ability to obtain funding in the form of
      dividends from the Bank.  Payment of dividends to Union National by the
      Bank is subject to the restrictions set forth in the National Bank Act. 
Generally, the National Bank Act would permit the Bank to declare dividends
      in
      2008 of approximately $884,000, plus an amount equal to the net profits of
      the
      Bank in 2008 up to the date of any such dividend declaration. Through June
      30,
      2008, the Bank paid $352,500 of dividends to Union National in compliance with
      the regulatory restrictions, which was used to pay holding company interest
      expense and operational costs.





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
      June 30, 2008 and December 31, 2007, Union National and the Bank met 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 June 30, 2008, and December 31,
      2007, as follows (dollars in thousands):




Actual
            
            Minimum Required
              For Capital Adequacy
              Purposes
            
            To Be WellCapitalized
              Under Prompt
              Corrective Action
              ProvisionsAmount
            
            Ratio
            
            Amount
            
            Ratio
            
            Amount
            
            Ratio**Union
                National Financial Corporation**June
                30, 2008:Tier
                1 (leverage) capital
            
            $
            40,540
            
            
            8.29
            %
            $
            19,549
            
            
            4.00
            %
            
            N/A
            
            
            N/ATier
                1 risk-based capital
            
            
            40,540
            
            
            9.63
            
            
            16,838
            
            
            4.00
            
            
            N/A
            
            
            N/ATotal
                risk-based capital
            
            
            51,774
            
            
            12.30
            
            
            33,675
            
            
            8.00
            
            
            N/A
            
            
            N/ADecember
                31, 2007:Tier
                1 (leverage) capital
            
            $
            38,370
            
            
            7.79
            %
            $
            19,705
            
            
            4.00
            %
            
            N/A
            
            
            N/ATier
                1 risk-based capital
            
            
            38,370
            
            
            9.08
            
            
            16,905
            
            
            4.00
            
            
            N/A
            
            
            N/ATotal
                risk-based capital
            
            
            49,487
            
            
            11.71
            
            
            33,810
            
            
            8.00
            
            
            N/A
            
            
            N/A**Union
                National Community Bank**June
                30, 2008:Tier
                1 (leverage) capital
            
            $
            40,703
            
            
            8.35
            %
            $
            19,487
            
            
            4.00
            %
            $
            24,359
            
            
            5.00
            %Tier
                1 risk-based capital
            
            
            40,703
            
            
            9.70
            
            
            16,785
            
            
            4.00
            
            
            25,177
            
            
            6.00Total
                risk-based capital
            
            
            50,534
            
            
            12.04
            
            
            33,570
            
            
            8.00
            
            
            41,962
            
            
            10.00December
                31, 2007:Tier
                1 (leverage) capital
            
            $
            38,633
            
            
            7.84
            %
            $
            19,705
            
            
            4.00
            %
            $
            24,631
            
            
            5.00
            %Tier
                1 risk-based capital
            
            
            38,633
            
            
            9.17
            
            
            16,845
            
            
            4.00
            
            
            25,268
            
            
            6.00Total
                risk-based capital
            
            
            48,308
            
            
            11.47
            
            
            33,691
            
            
            8.00
            
            
            42,114
            
            
            10.00


29


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 June 30, 2008, this limitation amounted to
      approximately $5,053,000. 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 is $9,714,000 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, $1,286,000, 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.





On
      May
      19, 2008, Union National commenced a private placement stock offering sale
      of up
      to 526,315 shares of its common stock, par value $0.25 per share, at $9.50
      per
      share for a maximum aggregate offering price of $4,999,992.50 (see related
      discussion in Note 9 to the consolidated financial statements). As of June
      30,
      2008, Union National sold 163,690 shares representing gross proceeds of
      $1,555,000, which have been invested into the Bank to increase the Bank’s
      capital levels.





***Liquidity***





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





·
            A
                growing core retail deposit base;


·
            Proceeds
                from the sale or maturity of investment
                securities;


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


·
            Overnight
                correspondent bank borrowings on various credit lines, and borrowing
                capacity available from the FHLB.





Based
      upon our retail deposit retention and growth, we believe that our core deposits
      are generally stable even in periods of changing interest rates like we are
      currently experiencing. Liquidity and funds management is governed by policies
      and is measured on a monthly basis. These measurements indicate that liquidity
      and contingent liquidity resources, generally remain stable. Other than the
      trends of continued competitive pressures and volatile interest rates, there
      are
      no known demands, commitments, events or uncertainties that will result in,
      or
      that are reasonably likely to result in, liquidity increasing or decreasing
      in
      any material way. We have obtained funding through FHLB advances and through
      the
      use of brokered CDs, as well as the issuance of junior subordinated debentures
      as previously described in Note 13 to the consolidated financial statements.





***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 $130,129,000 at June
      30, 2008 as compared to $117,742,000 at December 31, 2007. Total standby letters
      of credit amounted to $5,953,000 at June 30, 2008 as compared to $6,239,000
      at
      December 31, 2007.





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, resulting 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 resulted in annual savings of
      approximately $100,000 in data processing and ATM processing expenses as
      compared to the costs we would have incurred without the renegotiation. There
      has been no material change in contracts for services since December 31, 2007
      through June 30, 2008.


30


***Regulatory
      Matters***





From
      time
      to time, various types of federal and state legislation have been proposed
      that
      could result in additional regulation of, and restrictions on, the business
      of
      Union National and the Bank. As a consequence of the extensive regulation of
      commercial banking activities in the United States, Union National's and the
      Bank's business is particularly susceptible to being affected by federal and
      state legislation and regulations that may increase the cost of doing business.
      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 as previously described
      in
      Note 11 of the consolidated financial statements. Management believes that
      the
      Bank 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 end of the second quarter of 2008. We believe that the MOU will
      have
      no material, adverse 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 had already been implemented
      by
      Union National, and Union National has complied with the provisions of Section
      404 of the Sarbanes-Oxley Act as required during 2007, including providing
      a
      report on our internal control over financial reporting as of December 31,
      2007.
      To support our report on the internal control over financial reporting, we
      used
      contracted, independent internal audit services to identify, document and test
      key controls over the financial reporting process.





The
      Federal Deposit Insurance Reform Act of 2005 (“the Act”) allows eligible insured
      depository institutions to share in a one-time assessment credit, which was
      approximately $228,000 for the Bank. Through the year ended December 31, 2007,
      the Bank used $150,000 of this credit. The remaining $78,000 of the credit
      was
      used during the six months ended June 30, 2008.





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.


31


**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 a 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 decrease
      approximately 11.6% as compared to the constant rate scenario. In addition,
      a
      hypothetical two-percent general rise in rates would cause the Bank's net
      interest income over the next twelve months to increase approximately 7.4%.
      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
      are
      managing our interest rate risk position in 2008 by the following:





·
            De-leveraging
                with repayment of higher-cost, fixed rate FHLB long-term debt and
                brokered
                CDs.


·
            Managing
                the use of adjustable- and floating-rate loans, and hybrid loans
                with
                initial fixed-rates converting to variable-rates, in comparison to
                totally
                fixed-rate loans for new or refinanced commercial and agricultural
                loans;


·
            Repositioning
                of our investment security portfolio mix by purchasing lower-risk
                shorter
                term U.S. government agencies, and seasoned, shorter duration
                mortgage-back securities, to maintain liquidity and minimize significant
                changes in value due to declining interest rates;
                and


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





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.


32


**ITEM
      4 – CONTROLS AND PROCEDURES**





***Evaluation
      of Disclosure Controls and Procedures***





Union
      National maintains controls and procedures designed to ensure that information
      required to be disclosed in the reports that Union National files or submits
      under the Securities Exchange Act of 1934 is recorded, processed, summarized
      and
      reported within the time periods specified in the rules and forms of the
      Securities and Exchange Commission. Based upon their evaluation of those
      controls and procedures as of June 30, 2008, Union National’s Chief Executive
      Officer and Chief Financial Officer concluded that the disclosure controls
      and
      procedures were adequate.





***Changes
      in Internal Controls***





There
      were no changes since December 31, 2007 in our internal controls over financial
      reporting that have materially affected, or are reasonable likely to materially
      affect, these controls.





During
      the second quarter of 2008, Union National incurred a charge related to
      fraudulent loans (see related discussed under the section “Non-Interest Expense”
on pages 26 and 28). Union National has evaluated its current internal controls
      and procedures and has implemented changes necessary to strengthen control
      processes and address the issues raised by this isolated event.





**ITEM
      4T – CONTROLS AND PROCEDURES**





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


33


**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
      Memorandum of Understanding with the OCC and the effects thereof, as discussed
      earlier on pages 11 and 32 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 six months ended June 30, 2008, 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, 2007.





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





On
      May
      19, 2008, Union National commenced the sale of up to 526,315 shares of Union
      National’s common stock, par value $0.25 per share, at $9.50 per share for a
      maximum aggregate offering price of $4,999,992.50. There is no minimum offering
      amount. Upon receipt of proceeds from the sale of the shares, Union National
      will immediately contribute such amounts to the general corporate purposes
      of
      Union National including, but not limited to, continuing to meet regulatory
      capital requirements and increasing the regulatory lending ability of the
      Bank.





The
      shares are being offered pursuant to an exemption from registration under
      Section 3(b) of the Securities Act of 1933 and Rule 505 of SEC Regulation D.
      Under Rule 505 of SEC Regulation D, Union National may sell Shares to no more
      than 35 persons who are not Accredited Investors and to an unlimited number
      of
      persons who qualify as Accredited Investors. The shares sold will be restricted
      securities for purposes of the United States securities laws and cannot be
      transferred except under these laws.





**ITEM
      3 – DEFAULTS UPON SENIOR SECURITIES**





None





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





(a)
            The
                Annual Meeting of Shareholders was held at 10:00 a.m. on April 30,
                2008,
                at The Eden Resort Inn, 222 Eden Road, Lancaster, Pennsylvania 17601-4216.





(b)
            –
                (c) The following matters were voted
                upon:





Three
      Class C Directors were re-elected as follows:


Term Expires
              
              Votes Cast
                “For”
              
              Votes to“Withhold
                Authority”Kevin D. Dolan
              
              
              2011
              
              
              1,779,136
              
              
              201,582Thomas
                  J. McGrath
              
              
              2011
              
              
              1,784.414
              
              
              196,304William
                  M. Nies
              
              
              2011
              
              
              1,686,283
              
              
              294,435





Directors
      whose term continued after the meeting:





Class
              A Directors
            
            
            
            Class
                  B DirectorsMark
                D. Gainer
            
            
            2009
            
            Donald
              Cargas, Jr.
            
            
            2010Darwin
                A. Nissley
            
            
            2009
            
            Barry
              C. Huber
            
            
            2010James
                R. Godfrey
            
            
            2009
            
            Lloyd
              C. Pickell
            
            
            2010Nancy
                M. Shaub
            
            
            2009


34


**ITEM
      5 – OTHER INFORMATION**





None





**ITEM
      6 - EXHIBITS**





(a)
            Exhibits





Exhibit
      No. 10.18 **–** Form
      of
      Change of Control Agreement among Union National


Financial
      Corporation, Union National Community Bank and each of the


following
      officers: Michael L. Maurer, Samuel J. Smith and Bradley A. Willow,


filed
      herewith.





Exhibit
      No. 10.19 **–** Form
      of
      Change of Control Agreement among Union National


Financial
      Corporation, Union National Community Bank and each of the


following
      officers: R. Michael Mohn, Steve D. Garber and


Michael
      D. Peduzzi, filed herewith.





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


35


**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. GainerChairman,
                  CEO and President(Principal
                  Executive Officer)Date:
                  August 14, 2008





By
            /s/
                Michael D. PeduzziMichael
                D. PeduzziSenior
                Vice President and Chief Financial Officer(Principal
                Financial and Accounting Officer)Date:
                August 14, 2008


36