UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-Q





x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
Quarterly Period Ended March 31,
2009





OR





 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
transition period from_________to





Commission
file number 0-19214





UNION NATIONAL FINANCIAL
CORPORATION


(Exact
Name of Registrant as Specified in its Charter)





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





(717)
492-2222


(Registrant's
Telephone Number, Including Area Code)





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





Yes x          No
 ̈





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





Yes  ̈          No
 ̈





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





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





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





Yes  ̈          No
x





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





2,721,369 shares of $.25 (par)
common stock were outstanding as of May 14, 2009.









UNION
NATIONAL FINANCIAL CORPORATION


FORM
10-Q


INDEX





PART I – FINANCIAL
      INFORMATION
                                    
                                    PAGE NO.Item
      1.
                                    
                                    Financial
      Statements (Unaudited)Consolidated
      Statements of Financial ConditionAs
      of March 31, 2009 and December 31, 2008
                                    
                                    1Consolidated
      Statements of IncomeFor
      the Three Months Ended March 31, 2009 and 2008
                                    
                                    2Consolidated
      Statements of Changes in Stockholders’
      EquityFor
      the Three Months Ended March 31, 2009 and 2008
                                    
                                    3Consolidated
      Statements of Cash FlowsFor
      the Three Months Ended March 31, 2009 and 2008
                                    
                                    4Notes
      to Unaudited Consolidated Financial Statements
                                    
                                    5 -
      13Item
      2.
                                    
                                    Management’s Discussion
      and Analysis ofFinancial
      Condition and Results of Operations
                                    
                                    14
      - 27Item
      3.
                                    
                                    Quantitative
      and Qualitative Disclosures about Market Risk
                                    
                                    28Item
      4.
                                    
                                    Controls
      and Procedures
                                    
                                    29Item
      4T.
                                    
                                    Controls
      and Procedures
                                    
                                    29PART
      II –
      OTHER INFORMATIONItem
      1.
                                    
                                    Legal
      Proceedings
                                    
                                    29Item
      1A.
                                    
                                    Risk
      Factors
                                    
                                    30Item
      2.
                                    
                                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                                    
                                    30Item
      3.
                                    
                                    Defaults
      upon Senior Securities
                                    
                                    30Item
      4.
                                    
                                    Submission
      of Matters to a Vote of Security Holders
                                    
                                    30Item
      5.
                                    
                                    Other
      Information
                                    
                                    30Item
      6.
                                    
                                    Exhibits
                                    
                                    31Signatures
                                    
                                    34





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





PART I ─ FINANCIAL
INFORMATION





Item
1.  Financial Statements





Union
National Financial Corporation


Consolidated
Statements of Financial Condition


(Unaudited,
Dollars in thousands, except share data)





March
      31,
                          
                          
                          December
      31,2009
                          
                          
                          2008AssetsCash
      and Due from Banks
                          
                          $
                          12,230
                          
                          
                          $
                          17,621Federal
      Funds Sold
                          
                          
                          3,000
                          
                          
                          
                          14,150Interest-Bearing
      Demand Deposits in Other Banks
                          
                          
                          42,772
                          
                          
                          
                          66Total
      Cash and Cash Equivalents
                          
                          
                          58,002
                          
                          
                          
                          31,837Interest-Bearing
      Time Deposits in Other Banks
                          
                          
                          2,755
                          
                          
                          
                          1,775Investment
      Securities Available for Sale
                          
                          
                          63,807
                          
                          
                          
                          64,289Loans
      and Leases, Net of Unearned Income
                          
                          
                          356,289
                          
                          
                          
                          358,280Less:  Allowance
      for Credit Losses
                          
                          
                          (4,319
                          )
                          
                          
                          (4,358
                          )Net
      Loans and Leases
                          
                          
                          351,970
                          
                          
                          
                          353,922Premises
      and Equipment, Net
                          
                          
                          11,952
                          
                          
                          
                          12,088Restricted
      Investment in Bank Stocks
                          
                          
                          3,703
                          
                          
                          
                          3,703Bank-Owned
      Life Insurance
                          
                          
                          11,216
                          
                          
                          
                          11,108Other
      Assets
                          
                          
                          7,517
                          
                          
                          
                          6,387Total
      Assets
                          
                          $
                          510,922
                          
                          
                          $
                          485,109LiabilitiesDeposits:Non-Interest
      Bearing
                          
                          $
                          46,186
                          
                          
                          $
                          46,875Interest-Bearing
                          
                          
                          361,703
                          
                          
                          
                          336,702Total
      Deposits
                          
                          
                          407,889
                          
                          
                          
                          383,577Long-Term
      Debt
                          
                          
                          50,334
                          
                          
                          
                          50,334Junior
      Subordinated Debentures
                          
                          
                          17,341
                          
                          
                          
                          17,341Other
      Liabilities
                          
                          
                          4,429
                          
                          
                          
                          3,063Total
      Liabilities
                          
                          
                          479,993
                          
                          
                          
                          454,315Stockholders’
      EquityCommon
      Stock, par value $0.25 per shareShares
      authorized - 20,000,000; Issued – 3,139,247 and
                            3,138,265
      at March 31, 2009 and December 31, 2008, respectively;
                            Outstanding
      - 2,721,058 and 2,720,076 at March 31, 2009 and December 31, 2008,
      respectively
                          
                          
                          785
                          
                          
                          
                          785Surplus
                          
                          
                          14,872
                          
                          
                          
                          14,868Retained
      Earnings
                          
                          
                          22,925
                          
                          
                          
                          23,434Accumulated
      Other Comprehensive Income
                          
                          
                          676
                          
                          
                          
                          36Treasury
      Stock - 418,189 shares, at cost
                          
                          
                          (8,329
                          )
                          
                          
                          (8,329
                          )Total
      Stockholders’ Equity
                          
                          
                          30,929
                          
                          
                          
                          30,794Total
      Liabilities and Stockholders’ Equity
                          
                          $
                          510,922
                          
                          
                          $
                          485,109





See
accompanying notes to unaudited consolidated financial
statements.


1


Union
National Financial Corporation


Consolidated
Statements of Income


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





Three Months Ended March 31,2009
                      
                      
                      2008Interest
      IncomeInterest
      and Fees on Loans and Leases
                      
                      $
                      5,385
                      
                      
                      $
                      6,361Investment
      Securities:Taxable
      Interest
                      
                      
                      595
                      
                      
                      
                      788Tax-Exempt
      Interest
                      
                      
                      22
                      
                      
                      –Dividends
                      
                      
                      13
                      
                      
                      
                      43Other
                      
                      
                      34
                      
                      
                      
                      145Total
      Interest Income
                      
                      
                      6,049
                      
                      
                      
                      7,337Interest
      ExpenseDeposits
                      
                      
                      2,302
                      
                      
                      
                      2,796Short-Term
      Borrowings
                      
                      –
                      
                      
                      
                      61Long-Term
      Debt
                      
                      
                      645
                      
                      
                      
                      746Junior
      Subordinated Debentures
                      
                      
                      231
                      
                      
                      
                      300Total
      Interest Expense
                      
                      
                      3,178
                      
                      
                      
                      3,903Net
      Interest Income
                      
                      
                      2,871
                      
                      
                      
                      3,434Provision
      for Credit Losses
                      
                      
                      313
                      
                      
                      
                      140Net
      Interest Income after Provision for Credit Losses
                      
                      
                      2,558
                      
                      
                      
                      3,294Non-Interest
      IncomeIncome
      from Fiduciary Activities
                      
                      
                      46
                      
                      
                      
                      80Service
      Charges on Deposit Accounts
                      
                      
                      473
                      
                      
                      
                      453Other
      Service Charges, Commissions, Fees
                      
                      
                      267
                      
                      
                      
                      259Alternative
      Investment Sales Commissions
                      
                      
                      110
                      
                      
                      
                      198Net
      Investment Securities Gains
                      
                      
                      411
                      
                      
                      
                      191Impairment
      Charges on Investment Securities
                      
                      
                      (839
                      )
                      
                      –Mortgage
      Banking/Brokerage Activities
                      
                      
                      28
                      
                      
                      
                      14Earnings
      from Bank-Owned Life Insurance
                      
                      
                      108
                      
                      
                      
                      107Other
      Income
                      
                      
                      15
                      
                      
                      
                      110Total
      Non-Interest Income
                      
                      
                      619
                      
                      
                      
                      1,412Non-Interest
      ExpenseSalaries,
      Wages, and Employee Benefits
                      
                      
                      1,946
                      
                      
                      
                      1,919Net
      Occupancy
                      
                      
                      478
                      
                      
                      
                      552Furniture
      and Equipment
                      
                      
                      246
                      
                      
                      
                      247Professional
      Fees and Regulatory Assessments
                      
                      
                      257
                      
                      
                      
                      308Data
      and ATM Processing
                      
                      
                      404
                      
                      
                      
                      435Pennsylvania
      Shares Tax
                      
                      
                      89
                      
                      
                      
                      100Advertising
      and Marketing
                      
                      
                      67
                      
                      
                      
                      47Supplies
      and Postage
                      
                      
                      74
                      
                      
                      
                      138FDIC
      Insurance
                      
                      
                      120
                      
                      
                      
                      76Other
      Expense
                      
                      
                      333
                      
                      
                      
                      364Total
      Non-Interest Expense
                      
                      
                      4,014
                      
                      
                      
                      4,186(Loss)
      Income Before (Benefit from) Provision for Income Taxes
                      
                      
                      (837
                      )
                      
                      
                      520(Benefit
      from) Provision for Income Taxes
                      
                      
                      (328
                      )
                      
                      
                      107Net
      (Loss) Income
                      
                      $
                      (509
                      )
                      
                      $
                      413(Loss)
      Earnings Per ShareBasic
                      
                      $
                      (0.19
                      )
                      
                      $
                      0.16Diluted
                      
                      
                      (0.19
                      )
                      
                      
                      0.16Cash
      Dividends Paid Per Share
                      
                      –
                      
                      
                      –





See
accompanying notes to unaudited consolidated financial
statements.


2


Union
National Financial Corporation


Consolidated
Statements of Changes in Stockholders’ Equity


(Unaudited,
Dollars in thousands, except share data)





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





Three Months Ended March 31, 2008Shares of
                    Common
                    Stock
                    Outstanding
                  
                  
                  Common
                    Stock
                  
                  
                  Surplus
                  
                  
                  Retained
                    Earnings
                  
                  
                  Accumulated
                    Other
                    Comprehensive
                    Income (Loss)
                  
                  
                  Treasury
                    Stock
                  
                  
                  TotalBalance
      at December 31, 2007
                  
                  
                  2,546,549
                  
                  
                  $
                  741
                  
                  
                  $
                  13,313
                  
                  
                  $
                  23,063
                  
                  
                  $
                  12
                  
                  
                  $
                  (8,329
                  )
                  
                  $
                  28,800Comprehensive
      Loss:Net
      Income
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  
                  413
                  
                  
                  –
                  
                  
                  –
                  
                  
                  
                  413Net
      Change in Unrealized Gains (Losses) on Available-for-Sale Securities, Net
      of Tax
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  
                  (610
                  )
                  
                  –
                  
                  
                  
                  (610
                  )Total
      Comprehensive Loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (197
                  )Issuance
      of Common Stock under:Dividend
      Reinvestment and Stock Purchase Plan
                  
                  
                  745
                  
                  
                  –
                  
                  
                  
                  8
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  
                  8Employee
      Plans
                  
                  
                  693
                  
                  
                  –
                  
                  
                  
                  5
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  
                  5Implementation
      of EITF 06-04
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  
                  (73
                  )
                  
                  –
                  
                  
                  –
                  
                  
                  
                  (73
                  )Balance
      at March 31, 2008
                  
                  
                  2,547,987
                  
                  
                  $
                  741
                  
                  
                  $
                  13,326
                  
                  
                  $
                  23,403
                  
                  
                  $
                  (598
                  )
                  
                  $
                  (8,329
                  )
                  
                  $
                  28,543





See
accompanying notes to unaudited consolidated financial
statements.


3


Union
National Financial Corporation


Consolidated
Statements of Cash Flows


(Unaudited,
Dollars in thousands)





Three Months Ended March 31,2009
                                  
                                  
                                  2008Cash
      Flows from Operating ActivitiesNet
      (Loss) Income
                                  
                                  $
                                  (509
                                  )
                                  
                                  $
                                  413Adjustments
      to Reconcile Net (Loss) Income to Net Cash Provided by Operating
      Activities:Depreciation
      and Amortization
                                  
                                  
                                  313
                                  
                                  
                                  
                                  280Provision
      for Credit Losses
                                  
                                  
                                  313
                                  
                                  
                                  
                                  140Net
      Amortization (Accretion) of Investment Securities Premiums
      (Discounts)
                                  
                                  
                                  90
                                  
                                  
                                  
                                  (70
                                  )Net
      Investment Securities Gains
                                  
                                  
                                  (411
                                  )
                                  
                                  
                                  (191
                                  )Provision
      for Deferred Income Taxes
                                  
                                  
                                  451
                                  
                                  
                                  
                                  374Earnings
      from Bank-Owned Life Insurance
                                  
                                  
                                  (108
                                  )
                                  
                                  
                                  (107
                                  )(Increase)
      Decrease in Accrued Interest Receivable
                                  
                                  
                                  (69
                                  )
                                  
                                  
                                  181Increase
      in Other Assets
                                  
                                  
                                  (1,531
                                  )
                                  
                                  
                                  (302
                                  )Increase
      (Decrease) in Other Liabilities
                                  
                                  
                                  1,366
                                  
                                  
                                  
                                  (423
                                  )Impairment
      Charges on Investment Securities
                                  
                                  
                                  839
                                  
                                  
                                  –Cash
      Payments Related to Restructuring Charge
                                  
                                  –
                                  
                                  
                                  
                                  (84
                                  )Net
      Cash Provided by Operating Activities
                                  
                                  
                                  744
                                  
                                  
                                  
                                  211Cash
      Flows from Investing ActivitiesProceeds
      from Sales of Available-for-Sale Securities
                                  
                                  
                                  23,152
                                  
                                  
                                  
                                  17,975Proceeds
      from Maturities and Principal Repayments on Available-for-Sale
      Securities
                                  
                                  
                                  5,108
                                  
                                  
                                  
                                  20,859Purchases
      of Available-for-Sale Securities
                                  
                                  
                                  (27,327
                                  )
                                  
                                  
                                  (33,605
                                  )Net
      Purchases of Time Deposits in Other Banks
                                  
                                  
                                  (980
                                  )
                                  
                                  –Proceeds
      from Sales of Restricted Investments in Bank Stocks, net
                                  
                                  –
                                  
                                  
                                  
                                  538Net
      Decrease (Increase) in Loans and Leases
                                  
                                  
                                  1,290
                                  
                                  
                                  
                                  (2,588
                                  )Purchases
      of Premises, Equipment and Software
                                  
                                  
                                  (138
                                  )
                                  
                                  
                                  (40
                                  )Net
      Cash Provided by Investing Activities
                                  
                                  
                                  1,105
                                  
                                  
                                  
                                  3,139Cash
      Flows from Financing ActivitesNet
      Increase in Demand Deposits and Savings Accounts
                                  
                                  
                                  8,318
                                  
                                  
                                  
                                  8,570Net
      Increase in Time Deposits
                                  
                                  
                                  15,994
                                  
                                  
                                  
                                  6,020Issuance
      of Common Stock
                                  
                                  
                                  4
                                  
                                  
                                  
                                  13Net
      Decrease in Short-Term Borrowings
                                  
                                  –
                                  
                                  
                                  
                                  (6,629
                                  )Payments
      on Long-Term Debt
                                  
                                  –
                                  
                                  
                                  
                                  (10,105
                                  )Net
      Cash Provided by (Used in) Financing Activities
                                  
                                  
                                  24,316
                                  
                                  
                                  
                                  (2,131
                                  )Net
      Increase in Cash and Cash Equivalents
                                  
                                  
                                  26,165
                                  
                                  
                                  
                                  1,219Cash
      and Cash Equivalents at Beginning of Period
                                  
                                  
                                  31,837
                                  
                                  
                                  
                                  37,882Cash
      and Cash Equivalents at End of Period
                                  
                                  $
                                  58,002
                                  
                                  
                                  $
                                  39,101Supplemental
      Disclosures of Cash Flow ActivitiesInterest
      Paid
                                  
                                  $
                                  3,154
                                  
                                  
                                  $
                                  4,330Income
      Tax Paid
                                  
                                  
                                  250
                                  
                                  
                                  –Supplemental
      Disclosures of Non-cash Flow ActivitiesTransfers
      to Other Real Estate Owned
                                  
                                  $
                                  349
                                  
                                  
                                  $
                                  –





See
accompanying notes to unaudited consolidated financial
statements.


4


Union
National Financial Corporation


Notes
to Unaudited Consolidated Financial Statements





Note
1 ─ Basis of Presentation





The
consolidated financial statements for 2009 and 2008 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.   All material intercompany accounts and
transactions have been eliminated in consolidation.  Certain amounts
previously reported have been reclassified to conform to the financial statement
presentation for 2009.  The reclassifications had no effect on net
income.  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 March
31, 2009 and December 31, 2008, and the related consolidated statements of
income, changes in stockholders’ equity and cash flows for the three month
periods ended March 31, 2009 and 2008.  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, 2008, and with Union National’s Forms 8-K, that were filed during
2009 with the SEC.





Note
2 ─ Use of Estimates





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





Note
3 ─ Earnings Per Share





Basic
earnings per share is computed by dividing net income by the weighted-average
number of common shares outstanding during the period.  Diluted
earnings per share reflects the potential dilution that could occur if options
to issue common stock were exercised.  Potential common shares that
may be issued relate solely to outstanding stock options and are determined
using the treasury stock method.  For the three months ended March 31,
2009 and 2008, there were no outstanding stock options which, if exercised,
would have a dilutive effect.  All stock options outstanding, 91,958
and 108,731 as of March 31, 2009 and 2008, respectively, had no intrinsic
value.  Accordingly, the diluted earnings per share for each period
was the same as the basic earnings per share.





The
computation of basic and diluted earnings per share for the three months ended
March 31, 2009 and 2008, are presented below (amounts, except earnings per
share, in thousands):


Three Months Ended
                    March 312009
                  
                  
                  2008Net
      (Loss) Income:
                  
                  $
                  (509
                  )
                  
                  $
                  413Weighted-average
      number of common shares outstanding
                  
                  
                  2,720
                  
                  
                  
                  2,547Basic
      and diluted (losses) earnings per share
                  
                  $
                  (0.19
                  )
                  
                  $
                  0.16


5


Note
4 ─ Stock-Based Compensation





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





Union
National had two stock option plans outstanding as of March 31, 2009: (i) the
Employee Stock Incentive Plan (“SIP”); and, (ii) the Independent Directors’
Stock Option Plan (“IDSOP”).  Neither of these plans had remaining
options available for grant as of March 31, 2009.





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.  It is Union National’s policy
to issue new shares upon the exercise of stock options.





No
share-based awards were granted or vested during the three months ended March
31, 2009 and 2008; accordingly, no compensation expense was recorded for these
periods.  Stock option activity for the three months ended March 31,
2009, is summarized below:


Shares
                  
                  
                  Weighted-
                    Average
                    Exercise
                    PriceBeginning
      of Period (Prices range from $11.52 to $22.14)
                  
                  
                  93,511
                  
                  
                  $
                  18.82Granted
                  
                  –
                  
                  
                  –Exercised
                  
                  –
                  
                  
                  –Forfeited
                  
                  
                  (1,553
                  )
                  
                  
                  18.26Expired
                  
                  –
                  
                  
                  –End
      of Period (Prices range from $11.52 to $22.14)
                  
                  
                  91,958
                  
                  
                  $
                  18.82





The
following table presents information regarding options outstanding (all fully
vested and exercisable) at March 31, 2009:





Number
      of options
                              
                              
                              91,958Weighted-average
      contractual remaining term
                              
                              4.5
      YearsWeighted-average
      exercise price
                              
                              $
                              18.82Aggregate
      intrinsic value
                              
                              $
                              –





Note
5 ─ Commitments, Guarantees and Contingencies





In the
ordinary course of business, Union National makes commitments to extend credit
to its customers through letters of credit, loan commitments and lines of
credit.  As of March 31, 2009, the Bank had $101,880,000 outstanding
in loan commitments and other unused lines of credit extended to its customers,
as compared to $109,907,000 at December 31, 2008.





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 $5,558,000 and $5,474,000 of standby letters
of credit outstanding as of March 31, 2009 and December 31, 2008,
respectively.  Management believes that the proceeds obtained through
a liquidation of collateral and the enforcement of guarantees would be
sufficient to cover the potential amount of future payments required under the
corresponding standby letters of credit.  The current amount of the
liability at March 31, 2009 and December 31, 2008, for Bank guarantees under
standby letters of credit issued is not considered to be
material.


6


Subsequent
to March 31, 2009, Union National agreed to and received an insurance settlement
in the amount of $278,000 against losses from loans which were fraudulently or
otherwise improperly made by one former employee.  The settlement
provides for substantial reimbursement of a one-time charge of $370,000 which
was recorded and previously disclosed in 2008 related to the irregular
activity.  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 authorities’
investigation and the insurer’s recovery and legal restitution from the former
employee.  These proceeds were received in May 2009 and, as such, a
gain relating to this incident has been recognized in the second quarter of
2009.





Note
6 ─ De-Leveraging and Restructuring Activities





In 2008,
the Bank continued with certain cost-reducing de-leveraging activities by using
funds from low-interest earning assets and low-interest cost short-term
borrowings to pay down higher interest cost long-term debt.  For the
three months ended March 31, 2008, Union National prepaid $10,105,000 of FHLB
advances, reducing total long-term debt to $58,711,000.  In
conjunction with the prepayments, the Bank incurred $12,000 of prepayment
penalties, which were included in other non-interest expense for the first
quarter of 2008.  Additionally, the Bank terminated and repaid its
remaining short-term borrowing agreements without penalty.





In total,
the Bank prepaid $18,482,000 of FHLB advances in 2008, reducing total long-term
debt to $50,334,000 at December 31, 2008.  The FHLB advances that were
prepaid had a weighted average interest cost of 4.19%.  In conjunction
with the prepayments, the Bank incurred $72,000 of prepayment penalties, which
were included in other non-interest expense.  Additionally in 2008,
the Bank called $16,410,000 of brokered CDs which had a fixed weighted average
interest cost of 4.91%.





As of
March 31, 2009, the Bank did not prepay any additional FHLB
advances.  Subsequently, in April 2009, the Bank prepaid $12,000,000
of FHLB advances which had a fixed weighted average interest cost
5.67%.  In conjunction with the prepayments, the Bank incurred
$393,000 of prepayment penalties, which was recognized in April
2009.





In
addition to the de-leveraging activities above, during the first quarter of
2008, the Bank made cash payments of $84,000 related to the severance liability
that was incurred in 2007 as part of the previously disclosed restructuring
charges.  There were no restructuring charges in 2008 or 2009 and the
severance liability was paid in full at December 31, 2008.





Note
7 ─ Other-Than-Temporary Impairment of Investment Securities





In order
to determine whether unrealized losses in the fair value of investment
securities are other-than-temporary, management regularly reviews the entire
portfolio of investment securities for possible impairment, analyzing factors
including but not limited to the underlying creditworthiness of the issuing
organization, the length of time for which the fair value of the investment
securities has been less than cost, independent analysts’ opinions about
circumstances that could affect the performance of the investment securities,
and management’s intention and ability to hold the investment securities to the
earlier of recovery of losses or maturity.  The Bank recorded
$1,290,000 of other-than-temporary investment impairment charges for the year
ended December 31, 2008 and recorded an additional $839,000 of
other-than-temporary investment impairment charges for the three months ended
March 31, 2009.





As of
March 31, 2009, Union National maintains four investment securities with
recorded impairments.  The fair value of the four impaired investments
was $2,206,000 as compared to an original amortized cost of
$5,986,000.  All payments received on impaired investment securities
are fully applied to principal.  As discussed more thoroughly in Note
10 to the unaudited consolidated financial statements, the fair value of these
investment securities was determined by calculating the net present value of the
expected future cash flows of each security, with qualitative risk-adjusted
discounting for potential credit risks and nonperformance in the underlying
issuers, and market sector illiquidity concerns (in accordance with FSP
SFAS No. 157-3, “Determining the Fair Value of a Financial Asset When
The Market for That Asset Is Not Active”(“FSP 157-3”)).  Under FSP
157-3, when an active market for a security does not exist, the use of
management estimates that incorporate current market participant expectations of
future cash flows, and include appropriate risk premiums, is
acceptable.  Management’s judgment was that, as of March 31, 2009, the
facts and circumstances indicated significant illiquidity and an inactive market
for these types of investments when other relevant observable inputs were not
available; therefore, expected cash flows were a reasonable basis in determining
the fair value of the corporate investment securities.  Prior to
September 30, 2008, management used other observable inputs to determine the
fair value of the corporate investment securities including broker indicated
prices and quoted prices in limited trading activity of the
issuances.


7


As of
March 31, 2009, all four of the impaired investment securities were rated as
below “investment-grade”.  One of the impaired securities was a
private-issuer mortgage backed security and the other three impaired investment
securities are pooled trust- preferred debt securities.





Management
determined that further impairments as of March 31, 2009 were not warranted
based upon the following considerations:





·
            The
      financial condition and near-term prospects of the issuers reflect only
      one default, which was fully considered when determining the
      other-than-temporary impairment charge
taken.


·
            The
      other three of the four impaired investment securities were current, as of
      March 31, 2009, for scheduled investment interest payments since
      issuance.  The financial condition and near-term prospects of
      the issuers do not reflect any specific events which may have influenced
      the operations of the issuers, such as changes in technology 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
      securities experienced very limited trading activity during the last 12
      months as the securities are in a market sector with a high degree of
      illiquidity and dislocation; therefore the determined fair value based
      upon discounted cash flows is
reasonable.


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





Note
8 ─ Private Placement Stock Offering





On May
19, 2008, Union National commenced a private placement stock offering for 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 $4,999,993. There was no minimum offering amount. Upon receipt of proceeds
from the sale of the shares, Union National immediately contributed 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 were 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 were restricted securities for purposes of the
United States securities laws and cannot be transferred except under these
laws.





Although
Union National could withdraw or terminate the offering of the shares at any
time, its intentions were to offer the shares for an initial period of six
months commencing May 19, 2008.  The Board of Directors of Union
National subsequently elected to extend the offering period for the shares until
February 17, 2009.  The Board of Directors further elected to let the
private placement expire on February 17, 2009.





Union
National received gross proceeds of $1,635,000 on the private placement stock
offering representing 172,132 shares.  Issuance costs of $49,000 were
offset against the gross proceeds.





Note
9 ─  Memorandum of Understanding





In 2007,
the Bank entered into a Memorandum of Understanding (“MOU”) with the Office of
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
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 (see related discussion titled Capital Adequacy on page
24).





As of
March 31, 2009, management believes that the Bank has made substantial progress
in addressing the terms of the MOU and has sent to the OCC the documentation and
progress reports as required under the MOU.


8


Note
10 ─ 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, and on January 1, 2009, adopted
the provision for non-financial assets and non-financial
liabilities.  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
                  -
                  Unadjusted
      quoted prices in active markets that are accessible at the measurement
      date for identical, unrestricted assets or liabilities;Level 2
                  -
                  Quoted
      prices in markets that are not active, or inputs that are observable
      either directly or indirectly, for substantially the full term of the
      asset or liability;Level 3
                  -
                  Prices
      or valuation techniques that require inputs that are both significant to
      the fair value measurement and unobservable (i.e., supported by little or
      no market
activity).





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


Equity
securities, comprised mostly of bank stocks, traded on a national securities
exchange are reported at fair value using the Level 1 valuation hierarchy
because these securities tend to trade frequently, and quoted prices are
considered active.  Other equity securities, comprised mostly of bank
stocks, traded on the OTC Bulletin Board (“OTCBB”) are reported at fair value
using the Level 2 valuation hierarchy because these securities tend to trade
infrequently, and quoted prices are not considered active.  Debt
securities classified as available for sale are generally reported at fair value
utilizing Level 2 inputs.  For these securities, 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.





Level 3
inputs are for certain corporate investment security positions that are not
traded in active markets or are subject to transfer restrictions, and/or where
valuations are adjusted to reflect illiquidity and/or
non-transferability.  Such adjustments are generally based on
available market evidence.  In the absence of such evidence,
management’s best estimate is used.  Management’s best estimate
consists of both internal and external support on certain Level 3
investments.  Management only changes Level 3 inputs and assumptions
when corroborated by evidence such as transactions in similar instruments,
completed or pending third-party transactions in the underlying investment or
comparable entities, subsequent 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.  As of March
31, 2009, the fair value of securities valued using Level 3 inputs was
determined by management by calculating the net present value of the expected
future cash flows of each security, with qualitative risk-adjusted discounting
for potential credit risks and nonperformance in the underlying issuers, and
market sector illiquidity concerns (in accordance with FSP
SFAS No. 157-3, “Determining the Fair Value of a Financial Asset When
The Market for That Asset Is Not Active”).  Prior to September 30,
2008, management used market pricing based upon quoted prices from very limited
trading activity of the issuances.


9


The
following table summarizes financial assets and financial liabilities measured
at fair value on a recurring basis as of March  31, 2009 and December
31, 2008, segregated by the level of the valuation inputs within the fair value
hierarchy utilized to measure fair value (in thousands):


Available-For-Sale SecuritiesInputs:
                  
                  March 31,
                    2009
                  
                  
                  December 31,
                    2008Level
      1
                  
                  $
                  64
                  
                  
                  $
                  74Level
      2
                  
                  
                  59,624
                  
                  
                  
                  59,778Level
      3
                  
                  
                  4,119
                  
                  
                  
                  4,437Total
      Fair Value
                  
                  $
                  63,807
                  
                  
                  $
                  64,289





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


Available-For-Sale
                    SecuritiesBeginning Balance at January 1, 2009
                  
                  $
                  4,437Payments
      received and applied to principal
                  
                  
                  (235
                  )Total
      realized and unrealized gainsIncluded
      in net loss
                  
                  
                  (839
                  )Included
      in other comprehensive income
                  
                  
                  756Ending
      Balance at March 31, 2009
                  
                  $
                  4,119





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).





Impaired
Loans


Certain
impaired loans are reported at the fair value of the underlying collateral if
repayment is expected solely from the collateral.  Collateral values
are estimated using Level 3 inputs based upon customized discounting criteria.
The valuation allowance on impaired loans was $1,449,000 and $1,499,000 at March
31, 2009 and December 31, 2008, respectively.





Repossessed
Assets


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





Other
Real Estate Owned


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


10


The
following table summarizes financial assets and financial liabilities measured
at fair value on a nonrecurring basis as of March 31, 2009 and December 31,
2008, segregated by the level of the valuation inputs within the fair value
hierarchy utilized to measure fair value (in thousands):


March 31, 2009Assets:
                                    
                                    Level 1
                                      Inputs
                                    
                                    Level 2
                                      Inputs
                                    
                                    Level 3
                                      Inputs
                                    
                                    
                                    Total Fair
                                      ValueImpaired
      Loans
                                    
                                    –
                                    
                                    –
                                    
                                    $
                                    6,853
                                    
                                    
                                    $
                                    6,853Repossessed
      Assets
                                    
                                    –
                                    
                                    –
                                    
                                    
                                    675
                                    
                                    
                                    
                                    675Other
      Real Estate Owned
                                    
                                    –
                                    
                                    –
                                    
                                    
                                    349
                                    
                                    
                                    
                                    349Total
                                    
                                    –
                                    
                                    –
                                    
                                    $
                                    7,877
                                    
                                    
                                    $
                                    7,877





December 31, 2008Assets:
                                    
                                    Level 1
                                      Inputs
                                    
                                    Level 2
                                      Inputs
                                    
                                    Level 3
                                      Inputs
                                    
                                    
                                    Total Fair
                                      ValueImpaired
      Loans
                                    
                                    –
                                    
                                    –
                                    
                                    $
                                    3,559
                                    
                                    
                                    $
                                    3,559Repossessed
      Assets
                                    
                                    –
                                    
                                    –
                                    
                                    
                                    479
                                    
                                    
                                    
                                    479Other
      Real Estate Owned
                                    
                                    –
                                    
                                    –
                                    
                                    –
                                    
                                    
                                    –Total
                                    
                                    –
                                    
                                    –
                                    
                                    $
                                    4,038
                                    
                                    
                                    $
                                    4,038





Note
11 – Junior Subordinated Debentures





Union
National has three issuances of junior subordinated debentures outstanding as of
March 31, 2009 and December 31, 2008.





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





In
December 2003, Union National Capital Trust I (“UNCT I”) issued $8,248,000 of
floating-rate debentures due January 23, 2034, of which $248,000 is related to
Union National’s capital contribution.  UNCT I provides for quarterly
distributions at a variable annual coupon rate that is reset quarterly, based on
three-month LIBOR plus 2.85%.  The coupon rate was 4.02% and 6.32% at
March 31, 2009 and December 31, 2008, respectively.





In
October 2004, Union National Capital Trust II (“UNCT II”) issued $3,093,000 of
debentures due November 23, 2034, of which $93,000 is related to Union
National’s capital contribution.  UNCT II provides for quarterly
distributions at a variable annual coupon rate that is reset quarterly, based on
three-month LIBOR plus 2.00%. The coupon rate was 3.25% and 4.15% at March 31,
2009 and December 31, 2008, respectively.





All of
the junior subordinated debentures are callable at Union National’s option five
years from the date of issuance.  These debentures do not have to be
called in full.  UNCT I became callable in December 2008, UNCT II will
be callable in October 2009, and the Bank’s subordinated debenture will be
callable in July 2011.  These issuances of junior subordinated
debentures qualify as a component of capital for regulatory
purposes.


11


Note
12 ─ Comprehensive Income (Loss)





U.S.
generally accepted accounting principles require that recognized revenue,
expenses, gains, and losses be included in net (loss) 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 statements of financial condition, such
items, along with net (loss) income, are components of comprehensive income
(loss).





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





Three Months Ended March 31, 2009Before
                    Tax
                    Amount
                  
                  
                  Tax
                    Impact
                  
                  
                  Net-of-
                    Tax
                    AmountNet
      Loss
                  
                  $
                  (837
                  )
                  
                  $
                  (328
                  )
                  
                  $
                  (509
                  )Other Comprehensive
      Income:Unrealized
      Gains on Available-for-Sale Securities Arising During the
      Period
                  
                  
                  541
                  
                  
                  
                  184
                  
                  
                  
                  357Reclassification
      Adjustment for Securities Gains  included in Net
      Loss
                  
                  
                  (411
                  )
                  
                  
                  (140
                  )
                  
                  
                  (271
                  )Reclassification
      Adjustment for Impairment Charges on Investment Securities
                  
                  
                  839
                  
                  
                  
                  285
                  
                  
                  
                  554Other
      Comprehensive Income
                  
                  
                  969
                  
                  
                  
                  329
                  
                  
                  
                  640Total
      Comprehensive Income
                  
                  $
                  132
                  
                  
                  $
                  1
                  
                  
                  $
                  131





Three Months Ended March 31, 2008Before
                    Tax
                    Amount
                  
                  
                  Tax
                    Impact
                  
                  
                  Net-of-Tax
                    AmountNet
      Income
                  
                  $
                  520
                  
                  
                  $
                  107
                  
                  
                  $
                  413Other Comprehensive
      Loss:Unrealized
      Losses on Available-for-Sale Securities Arising During the
      Period
                  
                  
                  (733
                  )
                  
                  
                  (249
                  )
                  
                  
                  (484
                  )Reclassification
      Adjustment for Securities Gains  included in Net
      Income
                  
                  
                  (191
                  )
                  
                  
                  (65
                  )
                  
                  
                  (126
                  )Other
      Comprehensive Loss
                  
                  
                  (924
                  )
                  
                  
                  (314
                  )
                  
                  
                  (610
                  )Total
      Comprehensive Loss
                  
                  $
                  (404
                  )
                  
                  $
                  (207
                  )
                  
                  $
                  (197
                  )





Note
13 ─ Recent Accounting Pronouncements





FSP
FAS 157-4


In April
2009, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position (FSP) No. FAS 157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly” (“FSP FAS
157-4”).  FASB Statement 157, “Fair Value Measurements,” defines fair
value as the price that would be received to sell the asset or transfer the
liability in an orderly transaction (that is, not a forced liquidation or
distressed sale) between market participants at the measurement date under
current market conditions. FSP FAS 157-4 provides additional guidance on
determining when the volume and level of activity for the asset or liability has
significantly decreased. The FSP also includes guidance on identifying
circumstances when a transaction may not be considered orderly.





FSP FAS
157-4 provides a list of factors that a reporting entity should evaluate to
determine whether there has been a significant decrease in the volume and level
of activity for the asset or liability in relation to normal market activity for
the asset or liability. When the reporting entity concludes there has been a
significant decrease in the volume and level of activity for the asset or
liability, further analysis of the information from that market is needed and
significant adjustments to the related prices may be necessary to estimate fair
value in accordance with FASB Statement 157.


12


This FSP
clarifies that when there has been a significant decrease in the volume and
level of activity for the asset or liability, some transactions may not be
orderly. In those situations, the entity must evaluate the weight of the
evidence to determine whether the transaction is orderly. The FSP provides a
list of circumstances that may indicate that a transaction is not orderly. A
transaction price that is not associated with an orderly transaction is given
little, if any, weight when estimating fair value.





This FSP
is effective for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009.  An entity early adopting FSP FAS 157-4 must also early adopt
FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments.”  The Corporation did not early
adopt this FSP and is currently reviewing the effect this new pronouncement will
have on its consolidated financial statements.





FSP
FAS 115-2 and FAS 124-2


In April
2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition
and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2” and “FAS
124-2”).  FSP FAS 115-2 and FAS 124-2 clarifies the interaction of the
factors that should be considered when determining whether a debt security is
other-than-temporarily impaired. For debt securities, management must assess
whether (a) it has the intent to sell the security and (b) it is more
likely than not that it will be required to sell the security prior to its
anticipated recovery. These steps are done before assessing whether the entity
will recover the cost basis of the investment. Previously, this assessment
required management to assert it has both the intent and the ability to hold a
security for a period of time sufficient to allow for an anticipated recovery in
fair value to avoid recognizing an other-than-temporary impairment. This change
does not affect the need to forecast recovery of the value of the security
through either cash flows or market price.





In
instances when a determination is made that an other-than-temporary impairment
exists but the investor does not intend to sell the debt security and it is not
more likely than not that it will be required to sell the debt security prior to
its anticipated recovery, FSP FAS 115-2 and FAS 124-2 changes the presentation
and amount of the other-than-temporary impairment recognized in the income
statement. The other-than-temporary impairment is separated into (a) the
amount of the total other-than-temporary impairment related to a decrease in
cash flows expected to be collected from the debt security (the credit loss) and
(b) the amount of the total other-than-temporary impairment related to all
other factors. The amount of the total other-than-temporary impairment related
to the credit loss is recognized in earnings. The amount of the total
other-than-temporary impairment related to all other factors is recognized in
other comprehensive income.





This FSP
is effective for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009.  An entity early adopting FSP FAS 115-2 and FAS 124-2 must also
early adopt FSP FAS 157-4, “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly.”  The Corporation did not early
adopt this FSP and is currently reviewing the effect this new pronouncement will
have on its consolidated financial statements.





FSP
FAS 107-1 and APB 28-1


In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures
about Fair Value of Financial Instruments” (“FSP FAS 107-1” and “APB
28-1”).  FSP FAS 107-1 and APB 28-1 amends FASB Statement
No. 107, “Disclosures about Fair Value of Financial Instruments,” to
require disclosures about fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial
statements. This FSP also amends APB Opinion No. 28, “Interim Financial
Reporting”, to require those disclosures in summarized financial information at
interim reporting periods.





This FSP
is effective for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009.  An entity early adopting FSP FAS 107-1 and APB 28-1 must also
early adopt FSP FAS 157-4, “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly” and FSP FAS 115-2 and FAS 124-2, “Recognition
and Presentation of Other-Than-Temporary Impairments.”  The
Corporation did not early adopt this FSP and is currently reviewing the effect
this new pronouncement will have on its consolidated financial
statements.


13


Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations





Overview





Management’s
discussion and analysis represents an overview of the 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”).  Union National’s
consolidated financial condition and results of operations consist primarily of
the Bank’s financial condition and results of operations. Union National’s trust
subsidiaries, Union National Capital Trust I and Union National Capital Trust
II, were established for the purpose of issuing $11,000,000 of trust capital
securities during 2003 and 2004.





Forward Looking
Statements





This
quarterly report may contain forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995. Actual results and trends
could differ materially from those set forth in such statements due to various
factors.  Such factors include the possibility that anticipated cost
savings may not be realized, estimated synergies may not occur, increased demand
or prices for the Corporation’s financial services and products may not occur,
changing economic and competitive conditions, technological developments and
other risks and uncertainties.  Such risks, uncertainties and other
factors that could cause actual results and experience to differ from those
projected include, but are not limited to, the following: ineffectiveness of
their business strategy due to changes in current or future market conditions;
the effects of competition, and of changes in laws and regulations on
competition, including industry consolidation and development of competing
financial products and services; interest rate movements; difficulties in
integrating distinct business operations, including information technology
difficulties; disruptions making it more difficult to maintain relationships
with customers and employees, and challenges in establishing and maintaining
operations in new markets; volatilities or significant deterioration in the
securities markets; and deteriorating economic conditions.  When we
use words such as “believes”, “expects”, “anticipates”, or similar expressions,
we are making forward-looking statements.  Union National undertakes
no obligation to publicly revise or update these forward-looking statements to
reflect events or circumstances that arise after the date of this
report.





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, 2008, Union National’s Forms 8-K, and in the
documents that are incorporated by reference, could affect the future financial
results of Union National, the Bank or the combined Corporation 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:





§
            Volatilities
      in the securities markets and related potential impairments of investment
      securities;


§
            Deteriorating
      economic conditions;


§
            Effects
      of deterioration of economic conditions on customers specifically the
      effect on loan customers to repay
loans;


§
            Inability
      of Union National to raise or achieve desired or required levels of
      capital;


§
            Operating,
      legal and regulatory risks;


§
            Economic,
      political and competitive forces;


§
            Rapidly
      changing technology; and


§
            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 our Form 10-K for
the year ended December 31, 2008.





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.  These accounting policies, along with the disclosures
presented in other financial statement notes and in this financial review,
provide information on how significant assets and liabilities are valued in the
financial statements and how those values are determined.  Management
views critical accounting policies to be those which are highly dependent on
subjective or complex judgments, estimates and assumptions, and where changes in
those estimates and assumptions could have a significant impact on the
consolidated financial statements.  Management currently views the
determination of the allowance for loan and lease losses and the fair value of
investment securities to be critical accounting policies.


14


Determination
of the Allowance for Credit Losses


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





Fair
Value of Investment Securities


All
investments are carried at fair value with any unrealized gains and losses,
considered to be temporary, reported net of tax as an adjustment to
stockholders’ equity. If management determines that a decline in the value of an
investment security is an other-than-temporary impairment, the related loss is
recorded in the consolidated income statement. In order to determine whether
declines 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, independent analysts’
opinions about circumstances that could affect the performance of the
investment, and management’s intention and ability to hold the securities to
either of a reasonable recovery toward carrying value, or
maturity.  After considering such factors, it is a matter of judgment
on the part of management to make the determination of whether or not the
decline in market value is other-than-temporary.





Financial
Condition





Total
assets increased by $25,813,000 or 5% to $510,922,000 at March 31, 2009 from
$485,109,000 at December 31, 2008.  The increase was primarily the
result of strong retail deposit generation, which further strengthened Union
National’s liquidity position. The proceeds received from the deposit growth
were used to purchase short-term investments.  Total deposits grew by
$24,312,000 or 6% to $407,889,000 at March 31, 2009 from $383,577,000 at
December 31, 2008.





Investment
Securities


Investment
securities were $63,807,000 at March 31, 2009 as compared to $64,289,000 at
December 31, 2008.  All of Union National’s investment securities were
classified as available for sale at March 31, 2009 and December 31,
2008.  Securities classified as available for sale are marketable
equity securities, and those debt securities that we intend to hold for an
indefinite period of time, but not necessarily to maturity.  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 primary financial management functions including an ultimate source of
liquidity and a tool to manage interest rate risk.  In order to
support 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, changes in investment
strategy and portfolio mix, 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.





Union
National purchases certain types of mortgage-backed and asset-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.  Cash flows from these securities and changes in market
interest rates are considered in our net interest income simulation model (see
related discussion titled Market Risk - Interest Rate
Risk on page 28).





Subsequent
to March 31, 2009, Union National sold $29,015,000 of investment securities and
recognized $889,000 in gains, and purchased $27,374,000 of investment securities
in April 2009.  We periodically assess the strategy of selling
mortgage-backed securities and other available for sale
securities.  Investment security purchases and sales generally occur
to manage the Bank’s liquidity requirements, pledging requirements, interest
rate risk, and to enhance our net interest margin.  We regularly
evaluate our available for sale portfolio for possible opportunities to increase
earnings through potential investment security sales or portfolio
repositioning.


15


In
addition to the credit risk present in the loan portfolio, we also have credit
risk associated with our investment security holdings.  Based on
recent national economic trends and other factors, we have increased our
monitoring of our non-agency mortgage-backed securities and corporate debt
securities and changes in their credit ratings as published by national
statistical rating organizations.





During
the first quarter of 2009, the Bank had three securities that were downgraded to
below investment grade.  As such, the Bank recorded $839,000 of
other-than-temporary investment impairment charges related to three pooled
trust-preferred debt securities supported primarily by obligations from other
banks.  Management determined that, due to severe illiquidity and
distress in the financial markets, the unrealized declines in the value of these
investments were other-than-temporary, requiring the write-down in
value.





For the
securities with impairment charges recorded, interest income payments received
subsequent to impairment are fully applied to principal further reducing the
book value of these investments.





As of
March 31, 2009 and December 31, 2008, Union National had a portfolio of
investment securities as follows (in thousands):





March 31,
                    2009
                  
                  
                  December 31,
                    2008Market
      Value of Debt Securities
                  
                  $
                  63,615
                  
                  
                  $
                  64,083Market
      Value of Equity Securities
                  
                  
                  192
                  
                  
                  
                  206Total
      Market Value of Investment Securities
                  
                  $
                  63,807
                  
                  
                  $
                  64,289





Equity
securities held are comprised primarily of common stock holdings in other
financial institutions.  The market values include net unrealized
losses of $36,000 as of March 31, 2009 as compared to net unrealized losses of
$21,000 as of December 31, 2008.





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
gains of $1,062,000 and $77,000 as of March 31, 2009 and December 31, 2008,
respectively, which amounted to 1.7% and 0.1% of the amortized cost basis of the
debt securities as of March 31, 2009 and December 31, 2008,
respectively.





As of
March 31, 2009, $64,000 or 0.1% of the fair value of total investment securities
were measured using Level 1 inputs as defined by SFAS 157, $59,624,000 or 93.4%
of the fair value were measured using Level 2 inputs, and $4,119,000 or 6.5%
were measured using Level 3 inputs (see definitions and related discussion in
Note 10 to the consolidated financial statements).





The fair
value of Level 3 investment securities decreased to $4,119,000 at March 31, 2009
from $4,437,000 at December 31, 2008. Of the decrease in value, $839,000 was
related to impairment charges that were included in net income and $235,000 was
related to principal and interest payments received, which were fully applied to
principal, offset by $756,000 of unrealized gains (with a corresponding
after-tax increase to stockholders’ equity of $499,000 recorded as other
comprehensive income).





In order
to determine whether unrealized losses in the fair value of investment
securities are other than temporary, management regularly reviews the entire
portfolio of investment securities for possible impairment, analyzing factors
including but not limited to the underlying creditworthiness of the issuing
organization, the length of time for which the fair value of the investment
securities has been less than cost, independent analysts’ opinions about
circumstances that could affect the performance of the investment securities,
and management’s intention and ability to hold the investment securities to the
earlier of recovery of losses or maturity.  As discussed inNote 7to the consolidated
financial statements, the Bank recorded $839,000 of other-than-temporary
investment impairment charges in the first quarter of 2009 and $1,290,000 of
other-than-temporary investment impairment charges for the year ended December
31, 2008.


16


As of
March 31, 2009, Union National maintains four investment securities with
recorded impairments.  The fair value of the four impaired investments
is $2,206,000 as compared to an original amortized cost of $5,986,000 as of
March 31, 2009.  All payments received on impaired investment
securities are fully applied to principal.  As discussed in Note 10 to
the consolidated financial statements, the fair value of these investment
securities was determined by calculating the net present value of the expected
future cash flows of each security, with qualitative risk-adjusted discounting
for potential credit risks and nonperformance in the underlying issuers, and
market sector illiquidity concerns (in accordance with FSP
SFAS No. 157-3, “Determining the Fair Value of a Financial Asset When
The Market for That Asset Is Not Active”(“FSP 157-3”)).  Under FSP
157-3, when an active market for a security does not exist, the use of
management estimates that incorporate current market participant expectations of
future cash flows, and include appropriate risk premiums, is
acceptable.  Management’s judgment was that, as of March 31, 2009, the
facts and circumstances indicated significant illiquidity and an inactive market
for these types of investments when other relevant observable inputs were not
available; therefore, expected cash flows were a reasonable basis in determining
the fair value of the corporate investment securities.  Prior to
September 30, 2008, management used other observable inputs to determine the
fair value of the corporate investment securities including broker indicated
prices and quoted prices in limited trading activity of the
issuances.





As of
March 31, 2009, all four of the impaired investment securities were rated as
below “investment-grade”.  One of the impaired securities was a
private-issuer mortgage backed security and the other three impaired investment
securities are pooled trust preferred debt securities.





Management
determined that further impairments as of March 31, 2009 were not warranted
based upon the following considerations:





·
            The
      financial condition and near-term prospects of the issuers reflect only
      one default, which was fully considered when determining the
      other-than-temporary impairment charge
taken.


·
            The
      other three of the four impaired investment securities were current, as of
      March 31, 2009, for scheduled investment interest payments since
      issuance.  The financial condition and near-term prospects of
      the issuers do not reflect any specific events which may have influenced
      the operations of the issuers, such as changes in technology 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
      securities experienced very limited trading activity during the last 12
      months as the securities are in a market sector with a high degree of
      illiquidity and dislocation; therefore the determined fair value based
      upon discounted cash flows is
reasonable.


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





Loans
and Leases, Credit Quality and Credit Risk


Loans and
leases at March 31, 2009 were $356,289,000 as compared to $358,280,000 at
December 31, 2008.  Union National continues to focus lending on
creditworthy consumers and businesses, with necessary consideration given to
increased credit risks posed by the weak economy and the housing
market.  The economy and housing market, and increased unemployment,
has affected some of Union National’s borrowers, resulting in increased
nonperforming loans and credit losses.





Allowance for Credit
Losses.The allowance for
credit losses is maintained at a level believed adequate by management to absorb
estimated probable loan and lease losses.  Management is responsible for
the adequacy of the allowance for credit losses, which is formally reviewed by
management on a quarterly basis. The allowance is increased by provisions
charged against net interest income and reduced by net charge-offs.  Our
evaluation of the adequacy of the allowance is based on our past loan and lease
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower’s ability to repay (including the timing of future
payments), the estimated value of any underlying collateral, composition of the
loan portfolio, current economic conditions and other relevant qualitative
factors. 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 used in making the evaluation.  In
addition, various regulatory agencies, as an integral part of their examination
process, review our allowance for credit 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 credit losses was necessary
as a result of the Office of the Comptroller of the Currency’s (“OCC’s”) most
recent examination.





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


17


The
provision for credit losses was $313,000 for the first quarter of 2009 as
compared to $140,000 for the same period in 2008.  Union National
continues to closely monitor the loan portfolio, and the underlying borrower
financial performance and collateral values, identifying credit concerns and
risks, including those resulting from the current weak
economy.  Future adjustments may be necessary to the allowance for
credit losses, and consequently the provision for credit losses, if economic
conditions or loan credit quality differ substantially from the assumptions we
used in making our evaluation of the level of the allowance as compared to the
balance of outstanding loans and leases.  The ratio of the allowance
for credit losses to gross loans and leases was 1.21% at March 31, 2009, as
compared to 1.22% at December 31, 2008.  Management believes, based on
information currently available, that the allowance for credit losses as of
March 31, 2009 of $4,319,000 is adequate to meet potential credit
losses.





The
following table summarizes the changes in the allowance for credit losses as of
the three months ended March 31, 2009 and 2008 (dollars in
thousands):


Three Months Ended
                    March 31,2009
                  
                  
                  2008Allowance
      for Credit Losses, Beginning of Period
                  
                  $
                  4,358
                  
                  
                  $
                  3,675Charge-Offs
                  
                  
                  (363
                  )
                  
                  
                  (81
                  )Recoveries
                  
                  
                  11
                  
                  
                  
                  8Net
      Charge-Offs
                  
                  
                  (352
                  )
                  
                  
                  (73
                  )Addition
      to Provision for Credit Losses
                  
                  
                  313
                  
                  
                  
                  140Allowance
      for Credit Losses, End of Period
                  
                  $
                  4,319
                  
                  
                  $
                  3,742Loans
      and Leases – Average
                  
                  $
                  356,118
                  
                  
                  $
                  365,637Gross
      Loans and Leases – Actual
                  
                  $
                  356,289
                  
                  
                  $
                  366,852Ratio
      of Gross Loans and Leases Charged Off to Average Loans and Leases
      (Annualized)
                  
                  
                  0.41
                  %
                  
                  
                  0.09
                  %Ratio
      of Allowance for Credit Losses to Gross Loans and Leases
                  
                  
                  1.21
                  %
                  
                  
                  1.02
                  %





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





The
balance of loans and leases that were considered to be impaired under GAAP was
$9,876,000 and $9,360,000, which consisted of sixteen loan and lease
relationships to unrelated borrowers, at March 31, 2009 and December 31,
2008.  At March 31, 2009, four of the impaired loans represented 73%
of the total impaired loans and leases of $9,876,000.  The increase in
impaired loans and leases reflected management’s continued emphasis on
diligently monitoring and evaluating the existing portfolio, and identifying
credit concerns and risks, including those resulting from the current weak
economy.The
measure of impairment is based primarily on the fair value of collateral
securing these loans, which is primarily real estate and equipment.





Impaired Loans With a
Related Allowance.  Union National had $8,302,000 and
$5,058,000 of impaired loans and leases, which consisted of eight loan
relationships to unrelated borrowers, with a related allowance for credit losses
of $1,449,000 and $1,499,000 at March 31, 2009 and December 31, 2008,
respectively.  This group of impaired loans and leases has a related
allowance due to the probability of the borrower not being able to continue to
make principal and interest payments due under the contractual terms of the loan
or lease.  These loans and leases appear to have insufficient
collateral and Union National’s principal may be at risk; as a result, a related
allowance is necessary to cover future potential losses.


18


Impaired Loans Without a
Related Allowance.  Union National had $1,574,000 and
$4,302,000 of impaired loans and leases, which consisted of eight loan
relationships to unrelated borrowers, without a related allowance for credit
losses at March 31, 2009 and December 31, 2008, respectively.  This
group of impaired loans and leases is considered impaired due to the likelihood
of the borrower not being able to continue to make principal and interest
payments due under the contractual terms of the loan or
lease.  Additionally, these loans and leases appear to have sufficient
collateral and Union National’s principal does not appear to be at risk; as a
result, management believes a related allowance is not necessary.





Substandard Loans and
Leases.  Under our current internal risk rating system, loans
and leases with a rating of “substandard” that were performing, and not
determined to be impaired amounted to $22,197,000 and $7,826,000 at March 31,
2009 and December 31, 2008, respectively.  We consider both impaired
and these substandard loans to be potential problem loans, and believe that the
current economic conditions may result in additional loans being classified or
nonperforming throughout 2009.





Non-Performing
Assets.  Nonperforming loans and leases increased to 1.52% of
total loans and leases at March 31, 2009, as compared to 1.38% at December 31,
2008.  Historically, the percentage of nonperforming loans to net
loans for the five-year period ending December 31, 2008, was an average of
0.9%.  Nonperforming loans and leases consist of loans and leases that
are nonaccruing, and those that are 90 days or more past due. Nonaccruing loans
and leases are no longer accruing interest income because of apparent financial
difficulties of the borrower.  Interest received on nonaccruing loans
and leases is recorded as income only after the past due principal is brought
current and deemed collectible in full.





The
following table is a summary of our nonperforming assets as of March 31, 2009
and December 31, 2008 (dollars in thousands):





March 31,
                    2009
                  
                  
                  December 31,
                    2008Nonaccruing
      Loans
                  
                  $
                  4,758
                  
                  
                  $
                  3,271Accruing
      Loans – 90 days or more past due
                  
                  
                  673
                  
                  
                  
                  1,685Total
      Nonperforming Loans and Leases
                  
                  
                  5,431
                  
                  
                  
                  4,956Repossessed
      Assets
                  
                  
                  1,024
                  
                  
                  
                  479Total
      Nonperforming Assets
                  
                  $
                  6,455
                  
                  
                  $
                  5,435Gross
      Loans and Leases
                  
                  $
                  356,289
                  
                  
                  $
                  358,280Allowance
      for Credit Losses
                  
                  $
                  4,319
                  
                  
                  $
                  4,358Nonperforming
      Loans and Leases as a % of Gross Loans and
      Leases
                  
                  
                  1.5
                  %
                  
                  
                  1.4
                  %Nonperforming
      Assets as a % of Total Assets
                  
                  
                  1.3
                  %
                  
                  
                  1.1
                  %Allowance
      for Credit Losses as a % of Nonperforming Loans and Leases
                  
                  
                  80
                  %
                  
                  
                  88
                  %





Repossessed
assets consist of (a) foreclosed real estate which includes collateral assets
acquired through foreclosure and loans identified as in-substance foreclosures,
(b) vehicles and other equipment acquired from lessees who defaulted on their
contractual lease obligation, and (c) mobile homes where the Bank does not own
the real estate.





A loan is
classified as an in-substance foreclosure when Union National has taken
possession of the collateral regardless of whether formal foreclosure
proceedings have taken place.  Foreclosed real estate is held for sale
and is initially recorded at fair value less cost to sell at the date of
foreclosure, establishing a new cost basis.  Subsequent to
foreclosure, valuations are periodically performed by management and the assets
are carried at the lower of carrying amount or fair value less cost to
sell.  Revenue and expenses from operations and changes in the
valuation allowance are included in net expenses from foreclosed assets as part
of other expenses.





Union
National had repossessed assets of $1,024,000 and $479,000 at March 31, 2009 and
December 31, 2008, respectively.  Included in repossessed assets at
March 31, 2009, was $349,000 of foreclosed real estate. Union National did not
have any foreclosed real estate at December 31, 2008.





Stockholders’
Equity


Stockholders’
equity increased to $30,929,000 at March 31, 2009 compared to $30,794,000 at
December 31, 2008.  The increase  in stockholders’ equity
was primarily the result of other comprehensive income during the period offset
by decreases to retained earnings resulting from the first quarter net
loss.  Union National’s common equity position at March 31, 2009
exceeds the current regulatory required minimums as disclosed on page
25.


19





Results of Operations for
the Three Months Ended March 31, 2009 and 2008





Overview


Union
National Financial Corporation reported a net loss of ($509,000) for the first
quarter of 2009 as compared to net income of $413,000 for the same period in
2008.  Basic and diluted losses per share for the first quarter of
2009 were ($0.19), as compared to basic and diluted earnings per share of $0.16
for the same period in 2008.  Union National’s first quarter 2009 operating
results were adversely impacted by net interest margin compression and
additional charges related to other-than-temporary impairments in the values of
certain available-for-sale investment securities.  The discussion that
follows further explains the changes in the components of the operating results
when comparing the three months ended March 31, 2009 to the same period in
2008.





Net
Interest Income


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





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





Net
interest income as adjusted for tax-exempt financial instruments was $2,933,000
for the three months ended March 31, 2009, as compared to $3,496,000 for the
three months ended March 31, 2008.  The reduction in net interest
income was the result of net interest margin compression from significant
interest rate reductions in 2008.  Union National’s interest rates on
loans re-priced lower and more quickly than retail interest-bearing deposits,
while the Corporation’s debt was at a fixed rate of interest, resulting in a
lower net interest margin for the first quarter of 2009 versus
2008.  The taxable-equivalent net interest margin for the first
quarter of 2009 was 2.58% as compared to 3.06% for the same period in
2008.  The yield on interest-earning assets decreased by 110 basis
points to 5.38% for the first quarter of 2009, as compared to 6.48% for first
quarter of 2008.  The interest rate paid on average interest-bearing
liabilities decreased by 71 basis points to 3.07% for the first quarter of 2009,
as compared to 3.78% for the first quarter of 2008.





Interest
and fees on loans and leases on a taxable-equivalent basis decreased by $990,000
to $5,432,000 for the three months ended March 31, 2009, as compared to
$6,422,000 for the same period in 2008.  The decrease in interest and
fees on loans and leases resulted from a decrease in the average yield of 84
basis points due to interest rate cuts during 2008, and a decrease of $9,519,000
in the average balance of the loan and lease portfolio.  The yield on
loans and leases for the first quarter of 2009 was 6.19% as compared to 7.03%
for the same period in 2008.





Interest
and dividends earned on investment securities on a taxable-equivalent basis
decreased by $160,000 to $629,000 for the three months ended March 31, 2009, as
compared to $789,000 for the same period in 2008.  A decrease in the
average yield of 85 basis points due to both market rate reductions and
generally lower risk investments, coupled with a $586,000 decrease in the
average balance of investment securities, resulted in less interest earned on
investment securities in comparison to the same period in 2008.  The
yield on investment securities for the first quarter of 2009 was 3.78% as
compared to 4.63% for the same period in 2008.





Interest
expense on deposits decreased by $494,000 to $2,302,000 for the three months
ended March 31, 2009, as compared to $2,796,000 for the same period in
2008.  A decrease in average rate of 74 basis points due to interest
rate cuts in the past year more than offset additional interest expense from a
$21,452,000 increase in the average balance of deposits. Union National’s
average rate on interest-bearing deposits was 2.65% for the three months ended
March 31, 2009 as compared to 3.39% for the same period in
2008.


20


Interest
expense on long-term debt was $645,000 for the three months ended March 31,
2009, as compared to $746,000 for the same period in 2008.  In 2008,
Union National continued with certain cost-reducing de-leveraging activities by
using funds from low-interest earning assets and low-interest cost short-term
borrowings to pay down $18,482,000 of higher interest cost long-term
debt.  This resulted in a $9,488,000 decrease in the average balance
of long-term debt for the first quarter of 2009 versus the same period in
2008.  The average rate on long-term debt was 5.19% for the three
months ended March 31, 2009 as compared to 5.00% for the same period in
2008.





Provision
for Credit Losses


The provision for credit losses is an
estimated expense charged to earnings to provide for losses attributable to
uncollectible loans and leases.  The provision is based on our
analysis of the adequacy of the allowance for credit losses.  The
provision for credit losses was $313,000 for the three months ended March 31,
2009, as compared to $140,000 for the same period in 2008.  Future
adjustments may be necessary to the provision for credit losses, and
consequently the allowance for credit losses, if economic conditions or loan
credit quality differ substantially from the assumptions we used in making our
evaluation of the level of the allowance for credit losses as compared to the
balance of outstanding loans and leases(See additional
discussion on Loans and Leases, Credit Quality and Credit Risk in the Financial
Condition section of this Management Discussion and Analysis).





Non-Interest
Income


For the
three months ended March 31, 2009, non-interest income decreased by $793,000 or
56% as compared to the same period in 2008.  The decrease was a result
of net increases (decreases) in the following components of non-interest income
(in thousands):





Three Months Ended
                            March 31,2009 vs. 2008Non-Interest IncomeIncome
      from Fiduciary Activities
                          
                          $
                          (34
                          )Service
      Charges on Deposit Accounts
                          
                          
                          20Other
      Service Charges, Commissions, and Fees
                          
                          
                          8Alternative
      Investment Sales Commissions
                          
                          
                          (88
                          )Net
      Investment Securities Gains
                          
                          
                          220Impairment
      Charge on Investment Securities
                          
                          
                          (839
                          )Mortgage
      Banking/Brokerage Activities
                          
                          
                          14Earnings
      from Bank-Owned Life Insurance
                          
                          
                          1Other
      Income
                          
                          
                          (95
                          )Total
      Decrease in Non-Interest Income
                          
                          $
                          (793
                          )





Much of
the decrease in non interest income was due to $839,000 in other-than-temporary
investment impairment charges related to three pooled trust preferred debt
securities that were downgraded to below investment grade during the first
quarter of 2009.  There were no impairment charges on investment
securities in the first quarter of 2008.





Union
National realized net gains on the sale of investment securities of $411,000 for
the first quarter of 2009 as compared to $191,000 for the same period in
2008.  These investment sales activities related to continued
repositioning of the investment portfolio to a lower-risk profile that more
effectively supports liquidity, capital, and interest rate risk management,
while provising realized gains to partially offset the impact of investment
impairment charges.





The
decrease in other income was related to the termination of a cash bailment
agreement on a network of ATM machines.  This agreement was terminated
during the first quarter of 2008 and previously provided transaction fee
income.  Accordingly, operating results for the three months ended
March 31, 2009 does not reflect any income generated from this agreement,
whereas, the operating results for first quarter of 2008 included $96,000 of
income.





The
decrease in alternative investment sales commissions was primarily the result of
a turbulent investment market and a weak economy, which has impacted growth and
sales opportunities for Union National.


21


Non-Interest
Expense


For the
first quarter of 2009, non-interest expense decreased by $172,000 or 4% as
compared to the same period in 2008.  Increases (decreases) in the
components of non-interest expense when comparing the three month periods ended
March 31, 2009 and 2008 are as follows (in thousands):





Three Months Ended
                              March 31,2009 vs. 2008Non-Interest
      ExpenseSalaries,
      Wages and Employee Benefits
                            
                            $
                            27Net
      Occupancy
                            
                            
                            (74
                            )Furniture
      and Equipment
                            
                            
                            (1
                            )Professional
      Fees and Regulatory Assessments
                            
                            
                            (51
                            )Data
      and ATM Processing
                            
                            
                            (31
                            )Pennsylvania
      Shares Tax
                            
                            
                            (11
                            )Advertising
      and Marketing
                            
                            
                            20Supplies
      and Postage
                            
                            
                            (64
                            )FDIC
      Insurance
                            
                            
                            44Other
      Expense
                            
                            
                            (31
                            )Total
      Decrease in Non-Interest Expense
                            
                            $
                            (172
                            )





Union
National has focused on lowering core operating costs and creating efficiencies
in a difficult market when income growth is challenging.  We continue
to explore cost cutting initiatives.  The discussion that follows
explains the changes in the components of non-interest expense when comparing
the three months ended March 31, 2009 to the same period in 2008.





Net
occupancy expense decreased by $74,000, of which, $56,000 of the decrease was
the result of subleasing a portion of Union National’s corporate office
facility.  The operating results for the first quarter of 2009
reflected the full impact of $77,000 of sub-lease income, whereas the first
quarter of 2008 reflected only a partial impact of $21,000 of sub-lease
income.





Most of
the decrease in supplies and postage expense was primarily due to a physical
inventory adjustment made in supplies during the first quarter of
2008.  The expense was recognized during the first quarter of
2008.  There were no significant adjustments made to inventory for the
first quarter of 2009.





Most of
the decrease in professional fees and regulatory assessments was primarily due
to the operating results for 2008 including consulting fees paid to a third
party.  Subsequent to the first quarter of 2008, the third party was
hired by Union National, and the corresponding expense was included in salaries,
wages and employee benefits for the first quarter of 2009.





The
comparative increase in FDIC insurance premiums was primarily due to a reduction
of FDIC expenses for the first quarter of 2008 resulting from the Bank’s use of
remaining assessment credits.  The Federal Deposit Insurance Reform
Act of 2005 (“the Act”) allowed eligible insured depository institutions to
share in a one-time assessment credit, $52,000 of this credit was used in the
first quarter of 2008.  There were no credits used in
2009.  Due to recent changes and assessments by the FDIC, Union
National expects FDIC insurance assessments to be $592,000 for the second
quarter of 2009 and $1,607,000 for the entire year, representing a 434% increase
over the second quarter of 2008 and 298% increase over the entire year of
2008.  The increase in FDIC insurance premiums is the direct result of
increased assessment rates, as determined by the FDIC.  However, this
is subject to change by the FDIC and may change during the year (see related
discussion titled Federal
Deposit Insurance Corporation (“FDIC”) Activity on page 27.





Income
Taxes


For the
three months ended March 31, 2009, Union National recorded an income tax benefit
of $328,000, which primarily resulted from a pre-tax loss, as compared to
recording an income tax expense of $107,000 for the same period in
2008.  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.   We
currently anticipate that future earnings will be adequate to fully utilize
deferred tax assets.


22


Recent
Developments





The
global and U.S. economies are experiencing significantly reduced business
activity as a result of, among other factors, disruptions in the financial
system during the past year. Dramatic declines in the housing market during the
past year, with falling home prices and increasing foreclosures and
unemployment, have resulted in significant write-downs of asset values by
financial institutions, including government-sponsored entities and major
commercial and investment banks. These write-downs have caused many financial
institutions to seek additional capital or to merge with larger or stronger
institutions.





Reflecting
concern about the volatility in the financial markets generally and concerns
about counterparties, many lenders and institutional investors have reduced, and
in some cases, ceased to provide funding to borrowers, including other financial
institutions. The availability of credit, confidence in the financial sector,
and stability in the financial markets have been significantly adversely
affected as a result. In recent months, volatility and disruption in the capital
and credit markets has reached unprecedented levels. In some cases, the markets
have produced downward pressure on stock prices and credit capacity for certain
issuers without regard to those issuers’ underlying financial
strength.





In
response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, on October 3, 2008, the Emergency Economic Stabilization Act of
2008 (the “EESA”) was signed into law. Pursuant to the EESA, the U.S. Treasury
will have the authority to, among other things, purchase up to $700 billion of
mortgages, mortgage-backed securities and certain other financial instruments
from financial institutions for the purpose of stabilizing and providing
liquidity to the U.S. financial markets.  The EESA included a
provision for a temporary increase in FDIC insurance from $100,000 to $250,000
per depositor through December 31, 2009.





The FDIC
has also established a program under which all non-interest-bearing accounts at
FDIC insured institutions (including Union National) will be fully insured,
regardless of dollar amount, until December 31, 2009, unless an eligible
institution formally opts out of this program.  Under the terms of the
program, a 10 basis point surcharge will be applied to the balances of
non-interest-bearing deposit accounts not otherwise covered by the increased
deposit insurance limit of $250,000.  The surcharge will be added to
the participating bank’s existing risk-based deposit insurance premium paid on
those deposits.  Union National has opted to participate in this
program to ensure its current and prospective deposit customers are provided the
maximum amount of insurance coverage provided by the FDIC.





Pursuant
to his authority under EESA, the Secretary of the Treasury has created the TARP
Capital Purchase Plan (“CPP”) under which the Treasury Department may invest up
to $250 billion in senior preferred stock of U.S. banks and savings associations
or their holding companies.  Under the CPP, qualifying financial
institutions may apply to the Treasury for capital funding, in the form of
senior preferred stock issued to the Treasury, with a value equal to not less
that 1% of risk-weighted assets and not more than the lesser of $25 billion or
3% of risk-weighted assets.  The senior preferred stock will pay
dividends at the rate of 5% per annum until the fifth anniversary of the
investment and thereafter at the rate of 9% per annum.  The senior
preferred stock may not be redeemed for three years except with the proceeds
from an offering of common stock or preferred stock qualifying as Tier 1 capital
in an amount equal to not less than 25% of the amount of the senior
preferred.  After three years, the senior preferred may be redeemed at
any time in whole or in part by the financial institution.  No
dividends may be paid on common stock unless dividends have been paid on the
senior preferred stock.  Until the third anniversary of the issuance
of the senior preferred, the consent of the U.S. Treasury will be required for
any increase in the dividends on the common stock or for any stock repurchases
unless the senior preferred has been redeemed in its entirety or the Treasury
has transferred the senior preferred to third parties.  The senior
preferred will not have voting rights other than the right to vote as a class on
the issuance of any preferred stock ranking senior, any change in its terms or
any merger, exchange or similar transaction that would adversely affect its
rights.  The senior preferred will also have the right to elect two
directors if dividends have not been paid for six periods.  The senior
preferred will be freely transferable and participating institutions will be
required to file a shelf registration statement covering the senior
preferred.  The issuing institution must grant the Treasury piggyback
registration rights.  Prior to issuance, the financial institution and
its senior executive officers must modify or terminate all benefit plans and
arrangements to comply with EESA.  Senior executives must also waive
any claims against the Department of Treasury.  In connection with the
issuance of the senior preferred, participating institutions must issue to the
Secretary immediately exercisable 10-year warrants to purchase common stock with
an aggregate market price equal to 15% of the amount of senior preferred. The
exercise price of the warrants will equal the market price of the common stock
on the date of the investment.  The Secretary may only exercise or
transfer one-half of the warrants prior to the earlier of December 31, 2009 or
the date the issuing financial institution has received proceeds
equal  to the senior preferred investment from one or more offerings
of common or preferred stock qualifying as Tier 1 capital.  The
Secretary will not exercise voting rights with respect to any shares of common
stock acquired through exercise of the warrants.  The financial
institution must file a shelf registration statement covering the warrants and
underlying common stock as soon as practicable after issuance and grant
piggyback registration rights.  The number of warrants will be reduced
by one-half if the financial institution raises capital equal to the amount of
the senior preferred through one or more offerings of common stock or preferred
stock qualifying as Tier 1 capital.  If the financial institution does
not have sufficient authorized shares of common stock available to satisfy the
warrants or their issuance otherwise requires shareholder approval, the
financial institution must call a meeting of shareholders for that purpose as
soon as practicable after the date of investment.  The exercise price
of the warrants will be reduced by 15% for each six months that lapse before
shareholder approval subject to a maximum deduction of 45%.  In
connection with the program, Union National chose not to participate in the TARP
CCP and did not file an application.


23





Also on
October 14, 2008, after receiving a recommendation from the boards of the FDIC
and the Federal Reserve, and consulting with the President, Secretary Paulson
signed the systemic risk exception to the FDIC Act, enabling the FDIC to
temporarily provide a 100% guarantee of the senior debt of all FDIC-insured
institutions and their holding companies, as well as deposits in non-interest
bearing transaction deposit accounts under a Temporary Liquidity Guarantee
Program. Coverage under the Temporary Liquidity Guarantee Program was available
until November 12, 2008 without charge and thereafter at a cost of 75 basis
points per annum for senior unsecured debt and 10 basis points per annum for
non-interest bearing transaction deposits.





Union
National’s management and Board of Directors evaluated the considerations
regarding participation in the CPP and opted not to apply for CPP
funding.





It is not
clear at this time what impact the EESA, TARP Capital Purchase Program, the
Temporary Liquidity Guarantee Program, other liquidity and funding initiatives
of the Federal Reserve and other agencies that have been previously announced,
and any additional programs that may be initiated in the future, will have on
the financial markets and the other difficulties described above, including the
extreme levels of volatility and limited credit availability in the U.S. banking
and financial industries and the broader U.S. and global economies. Further
adverse effects could have an increasingly negative impact on Union National and
its business.





Outlook for
2009





We expect
2009 to reflect more of the same issues as we experienced through much of 2008,
with the distinct possibility of an increasingly weak economy, further
turbulence in investment markets, and unfavorable interest income growth
prospects.  We continue to take the necessary, conservative measures
to ensure Union National maintains its safe and sound position, including
strengthening our liquidity and capital positions, managing increasing risks,
and operating prudently.  We have continued to lower our core
operating costs, allowing us to be more efficient in a difficult market when
income growth is challenging, and continue to explore revenue generation, cost
cutting initiatives, and capital enhancement methods and
alternatives.





Though
the significant interest rate cuts through 2008 lowered our interest income and
yields on loans, we generated savings in our funding costs by growing our
lower-cost retail deposit base and paying down higher-cost
borrowings.  We believed it prudent for Union National to fully
maintain its strong, well-capitalized position in these uncertain economic
times, so we made the difficult decision to not pay dividends to shareholders
throughout 2008, and did not declare a dividend to be paid in the first quarter
of 2009.





The weak
economy and housing market, and increased unemployment both nationally and
locally, will likely create cash flow difficulties and collateral de-valuation
for some of Union National’s borrowers, resulting in increased nonperforming
loans and possible increased loan and lease losses.  We continue to
closely monitor our portfolio, and the underlying borrower financial performance
and collateral values.





As we
continue in this difficult economy when growth is challenging and must be
managed conservatively, Union National remains committed to maintaining the
safety, soundness, and strength of our institution for our customers, while
improving earnings and enhancing our Corporation’s value for our
shareholders.





Capital
Adequacy





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


24


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
March 31, 2009 and December 31, 2008, Union National and the Bank exceeded the
current regulatory requirements to be considered a “well capitalized” financial
institution, i.e. a leverage ratio exceeding 5%, Tier 1 risk-based capital
exceeding 6% and total risk-based capital exceeding 10%.




Union
National and the Bank’s regulatory capital levels as of March 31, 2009, and
December 31, 2008 are as follows (dollars in thousands):


Actual
                      
                      
                      Minimum Required
                        For Capital Adequacy
                        Purposes
                      
                      
                      To Be Well-Capitalized
                        Under Prompt Corrective
                        Action ProvisionsAmount
                      
                      
                      Ratio
                      
                      
                      Amount
                      
                      
                      Ratio
                      
                      
                      Amount
                      
                      
                      RatioUnion National Financial
      CorporationMarch
      31, 2009:Tier 1 (leverage)
      capital
                      
                      $
                      40,298
                      
                      
                      
                      8.07
                      %
                      
                      $
                      19,963
                      
                      
                      
                      4.00
                      %
                      
                      
                      N/A
                      
                      
                      
                      N/ATier 1 risk-based
      capital
                      
                      
                      40,298
                      
                      
                      
                      9.97
                      
                      
                      
                      16,175
                      
                      
                      
                      4.00
                      
                      
                      
                      N/A
                      
                      
                      
                      N/ATotal risk-based
      capital
                      
                      
                      51,541
                      
                      
                      
                      12.75
                      
                      
                      
                      32,351
                      
                      
                      
                      8.00
                      
                      
                      
                      N/A
                      
                      
                      
                      N/ADecember
      31, 2008:Tier 1 (leverage)
      capital
                      
                      $
                      40,982
                      
                      
                      
                      8.44
                      %
                      
                      $
                      19,414
                      
                      
                      
                      4.00
                      %
                      
                      
                      N/A
                      
                      
                      
                      N/ATier 1 risk-based
      capital
                      
                      
                      40,982
                      
                      
                      
                      10.03
                      
                      
                      
                      16,340
                      
                      
                      
                      4.00
                      
                      
                      
                      N/A
                      
                      
                      
                      N/ATotal risk-based
      capital
                      
                      
                      52,092
                      
                      
                      
                      12.75
                      
                      
                      
                      32,680
                      
                      
                      
                      8.00
                      
                      
                      
                      N/A
                      
                      
                      
                      N/AUnion National Community
    BankMarch
      31, 2009:Tier 1 (leverage)
      capital
                      
                      $
                      40,025
                      
                      
                      
                      8.05
                      %
                      
                      $
                      19,884
                      
                      
                      
                      4.00
                      %
                      
                      $
                      24,855
                      
                      
                      
                      5.00
                      %Tier 1 risk-based
      capital
                      
                      
                      40,025
                      
                      
                      
                      9.93
                      
                      
                      
                      16,126
                      
                      
                      
                      4.00
                      
                      
                      
                      24,189
                      
                      
                      
                      6.00Total risk-based
      capital
                      
                      
                      50,344
                      
                      
                      
                      12.49
                      
                      
                      
                      32,252
                      
                      
                      
                      8.00
                      
                      
                      
                      40,315
                      
                      
                      
                      10.00December
      31, 2008:Tier 1 (leverage)
      capital
                      
                      $
                      40,601
                      
                      
                      
                      8.41
                      %
                      
                      $
                      19,306
                      
                      
                      
                      4.00
                      %
                      
                      $
                      24,133
                      
                      
                      
                      5.00
                      %Tier 1 risk-based
      capital
                      
                      
                      40,601
                      
                      
                      
                      9.97
                      
                      
                      
                      16,292
                      
                      
                      
                      4.00
                      
                      
                      
                      24,438
                      
                      
                      
                      6.00Total risk-based
      capital
                      
                      
                      50,959
                      
                      
                      
                      12.51
                      
                      
                      
                      32,584
                      
                      
                      
                      8.00
                      
                      
                      
                      40,731
                      
                      
                      
                      10.00





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 March 31, 2009, this limitation
amounted to approximately $5,034,000. 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 $10,076,000 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, $924,000, is included in Tier II
regulatory capital of Union National Financial Corporation
above.  Additionally, included in Tier II regulatory capital of the
Bank and Union National Financial Corporation is $6,000,000 of junior
subordinated debentures issued by the Bank.  These securities would
become callable if the Federal Reserve makes a determination that trust capital
securities can no longer be considered in regulatory capital.





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




25




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 and the Federal Reserve
    Bank.





We
believe that our core deposits are fairly stable even in periods of changing
interest rates like we are currently experiencing.  Liquidity and
funds management is governed by policies and measured on a monthly
basis.  These measurements indicate that liquidity generally remains
stable and exceeds our minimum defined levels of adequacy. Other than the trends
of continued competitive pressures and volatile interest rates, there are no
known demands, commitments, events or uncertainties that will result in, or that
are reasonably likely to result in, liquidity increasing or decreasing in any
material way.





Off-Balance Sheet
Commitments





In the
normal course of business, we are party to financial instruments with
off-balance sheet risk to meet the financing needs of our
customers.  These financial instruments include commitments to extend
credit and standby letters of credit.  Total commitments to extend
credit amounted to $101,880,000 at March 31, 2009 as compared to $109,907,000 at
December 31, 2008. Total standby letters of credit amounted to $5,558,000 at
March 31, 2009 as compared to $5,474,000 at December 31, 2008.





In
addition, in the normal course of business operations, we routinely enter into
contracts for services. These contracts may require payment for services to be
provided in the future and may also contain penalty clauses for the early
termination of the contracts. In January 2007, the contract with our core data
processor was renegotiated, resulting in a new maturity date of November
2013.  Any early termination will require the payment of a substantial
penalty.  There has been no material change in contracts for services
since this contract was renegotiated in January 2007 through March 31,
2009.





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 (See the related discussion of the Emergency Economic
Stabilization Act of 2008 in the preceding Recent Developments
section).  Also, Union National is susceptible to changes in tax law
that may increase the cost of doing business or impact Union National’s ability
to realize the value of deferred tax assets.  Further, the business of
Union National is affected by the state of the financial services industry in
general.





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


26


Management
believes we have made substantial progress in addressing 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 first quarter of 2009.  We believe
that the MOU will have no material impact on our operating results or financial
condition, except for related increases to our FDIC base insurance premiums,
currently estimated to be $231,000 in 2009, and that the MOU will not constrain
our businesses.  We are committed to addressing and resolving the
issues identified in the MOU.





The Sarbanes-Oxley
Act.  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 2008, including providing a report on our internal control over
financial reporting as of December 31, 2008.  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.  In 2009, we expect to incur additional
external audit costs associated with complying with the provisions of
Sarbanes-Oxley requiring a report by the independent external auditors on the
effectiveness of internal control over financial reporting.  We expect
the additional costs associated with this requirement to be $30,000 pretax for
the year-ended December 31, 2009.





Federal Deposit Insurance
Corporation (“FDIC”) Activity.  The Federal Deposit Insurance
Reform Act of 2005 (“the Act”) amended regulations to create a new risk
differentiation system, to establish a new base assessment rate schedule, and to
set assessment rates effective January 1, 2007.  Also, eligible
insured depository institutions shared in a one-time assessment credit, which
was approximately $228,000 for the Bank.  The Bank used $150,000 of
this credit for the year ended December 31, 2007, and the remaining $78,000 for
the year ended December 31, 2008 ($52,000 during the first quarter of
2008).





On
February 27, 2009, The Board of Directors of the FDIC voted to amend the
restoration plan for the Deposit Insurance Fund (“DIF”). The FDIC Board also
took action to ensure the continued strength of the insurance fund by imposing a
special assessment on insured institutions of 20 basis points, implementing
changes to the risk-based assessment system, and setting rates beginning the
second quarter of 2009.   Under the restoration plan approved in
October 2008, the FDIC Board set a rate schedule to raise the DIF reserve ratio
to 1.15 percent within five years. The February 27, 2009 restoration plan
amendment action extends the restoration plan horizon to seven years in
recognition of the current significant strains on banks and the financial system
and the likelihood of a severe recession.  The amended restoration
plan was accompanied by a final rule that sets assessment rates and makes
adjustments that improve how the assessment system differentiates for risk.
Currently, most banks are in the best risk category and pay anywhere from 12
cents per $100 of deposits to 14 cents per $100 for insurance. Under the final
rule, banks in this category will pay initial base rates ranging from 12 cents
per $100 to 16 cents per $100 on an annual basis, beginning on April 1,
2009.  Changes to the assessment system include higher rates for
institutions that rely significantly on secured liabilities, which may increase
the FDIC's loss in the event of failure without providing additional assessment
revenue. Under the final rule, assessments will be higher for institutions that
rely significantly on brokered deposits but, for well-managed and
well-capitalized institutions, only when accompanied by rapid asset growth.
Brokered deposits combined with rapid asset growth have played a role in a
number of costly failures, including recent failures. The final rule also would
provide incentives in the form of a reduction in assessment rates for
institutions to hold long-term unsecured debt and, for smaller institutions,
high levels of Tier 1 capital.





The FDIC
Board also adopted an interim rule imposing a 20 basis point emergency special
assessment on the industry on June 30, 2009. The assessment is to be collected
on September 30, 2009. For Union National, based upon our deposit levels at
March 31, 2009, the additional amount of 2009 FDIC insurance expense related to
this special assessment, if imposed, would be approximately
$816,000.  The interim rule would also permit the FDIC Board to impose
an emergency special assessment after June 30, 2009, of up to 10 basis points if
necessary to maintain public confidence in federal deposit
insurance.  If this emergency special assessment is imposed, it would
add an additional $408,000 to Union National’s 2009 FDIC insurance expense
(based upon deposit levels as of March 31, 2009).





Community Reinvestment
Act.  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.





Pennsylvania Business
Corporation Law.  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 2009 of approximately $556,000, plus an amount
equal to the net profits of the Bank in 2009, up to the date of any such
dividend declaration.  Through March 31, 2009, the Bank paid $188,000
of dividends to Union National in compliance with the regulatory restrictions,
which was used to pay holding company interest expense and operational
costs.


27





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 8.0% 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 2009 by the following:





·
            Managing
      and reducing the interest cost of the Bank’s core retail deposit base
      including deposits obtained in our commercial cash management programs,
      premium money market accounts, and retail time
  deposits.


·
            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





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.


28





Item
4.  Controls and Procedures





Evaluation of Disclosure
Controls and Procedures





Union
National maintains controls and procedures designed to ensure that information
required to be disclosed in the reports that Union National files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures as of March 31, 2009, 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, 2008 in our internal controls over financial
reporting that have materially affected, or are reasonable likely to materially
affect, these controls.





Item
4T.  Controls and Procedures





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





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 8 and 26 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.


29





Item
1A.  Risk Factors





During
the first quarter of 2009, and through the date of this report other than those
noted below, 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,
2008.





Possible
Changes to Capital Requirements and Potential Difficulties Raising
Capital.





Bank
regulatory authorities in the United States issue risk-based capital
standards.  These capital standards relate a bank’s capital to the
risk profile of its assets and provide the basis by which all banks are
evaluated in terms of its capital adequacy.  Union National and the
Bank are subject to various regulatory capital requirements administered by the
federal banking agencies.  Regulatory capital requirements may be
increased in the future.  Union National will closely monitor and
evaluate its capital alternatives as the regulatory capital environment changes,
and if regulatory capital requirements are changed.  Failure to meet
the minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on our consolidated financial statements.





Item
2.  Unregistered Sales Of Equity Securities And Use Of
Proceeds





On May
19, 2008, Union National commenced a private placement stock offering for 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 $4,999,993. There was no minimum offering amount. Upon receipt of proceeds
from the sale of the shares, Union National immediately contributed 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 were 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 were restricted securities for purposes of the
United States securities laws and cannot be transferred except under these
laws.





Although
Union National could withdraw or terminate the offering of the shares at any
time, its intentions were to offer the shares for an initial period of six
months commencing May 19, 2008.  The Board of Directors of Union
National subsequently elected to extend the offering period for the shares until
February 17, 2009.  The Board of Directors further elected to let the
private placement expire on February 17, 2009.





Union
National received gross proceeds of $1,635,000 on the private placement stock
offering representing 172,132 shares.  Issuance costs of $49,000 were
offset against the gross proceeds.





Item
3.  Defaults Upon Senior Securities





None





Item
4.  Submission Of Matters To A Vote Of Security Holders





None





Item
5.  Other Information





None


30


Item
6.  Exhibits





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





3(i)
              Union
      National Community Bank’s Amended
      Articles of Incorporation.  (Incorporated by reference to
      Exhibit 3(i) to Union National Financial Corporation’s
      Registration Statement No. 333-27837 on Form S-8, filed with the
      Commission on May 27, 1997.)3(ii)
              Union
      National Financial Corporation’s Amended
      and Restated By-laws. (Incorporated by reference to Exhibit 3(ii) to Union
      National Financial Corporation’s current
      report on Form 8-K, filed with the Commission on February 27,
      2009.)4
              Rights
      Agreement, dated August 27, 2007, between Registrar and Transfer Company
      and Union National Financial Corporation.  (Incorporated by
      reference to Exhibit 4 to Union National Financial Corporation’s current
      report on Form 8-K, filed August 30, 2007.)10.1
              Union
      National Financial Corporation 1988 Stock Incentive Plan. (Incorporated by
      reference to Exhibit 4.3 to Union National Financial Corporation’s
      Registration Statement No. 333-27837 on Form S-8, filed with the
      Commission on May 27, 1997.)10.2
              Union
      National Financial Corporation 1997 Stock Incentive
      Plan.  (Incorporated by reference to Exhibit 4.5 to Union
      National Financial Corporation’s
      Registration Statement No. 333-27837 on Form S-8, filed with the
      Commission on May 27, 1997 and incorporated by reference to Amendment 1 to
      Union National Financial Corporation’s
      Registration Statement No. 333-107326 on Form S-8 filed with the
      commission on July 25, 2003.)10.3
              Union
      National Financial Corporation’s Employee
      Stock Purchase Plan (Incorporated by Reference to Exhibit 4.4 to Union
      National Financial Corporation’s
      Registration Statement No. 333-27837 on Form S-8, filed with the
      Commission on May 27, 1997).10.4
              Group
      Term Replacement Plan for Certain Officers, CEO, dated January 1, 2004
      between Mark D. Gainer and Union National Community
      Bank.  (Incorporated by reference to Exhibit 10.12 to Union
      National Financial Corporation’s Annual
      Report on Form 10-K, filed with the Commission on March 30,
      2004.)10.5
              Union
      National Financial Corporation, 1999 Independent Directors Stock Option
      Plan.  (Incorporated by Reference to Exhibit 4.3 to Union
      National Financial Corporation’s
      Registration Statement No. 333-80739 on Form S-8, filed with the
      Commission on June 15, 1999.)10.6
              Office
      Lease between Lausch Lane Associates LP as Landlord and
      Union  National Community Bank as Tenant for 570 Lausch Lane,
      Lancaster,  PA 17601. (Incorporated by reference to Exhibit 99.1
      to Union National Financial Corporation’s Current
      Report of Form 8-K, filed with the Commission on May 17,
      2005.)10.7
              Employment
      agreement between Michael A. Frey, Executive Vice President and Chief
      Operating Officer and Union National Financial Corporation and its
      subsidiary, Union National Community Bank. (Incorporated by reference to
      Exhibit 99.1 to Union National Financial Corporation’s Current
      Report of Form 8-K, filed with the Commission on June 23,
      2005.)





31





10.8
                Amended
      and Restated Employment Agreement and Amended and Restated Executive
      Salary Continuation Agreement dated as of December 29, 2006, with Mark D.
      Gainer, Chairman, President and Chief Executive
      Officer.  (Incorporated by reference to Exhibit 10.15 to Union
      National Financial Corporation’s 2006
      Annual Report on Form 10-K, filed with the Commission on March 28,
      2007.)10.9
                Amended
      and Restated Declaration of Trust of Union National Capital Trust II,
      dated as of October 14, 2004, among Union National Financial Corporation,
      as sponsor, the Delaware and institutional trustee named therein, and the
      administrators named therein.  (Incorporated by reference to
      Exhibit 10.15 to Union National Financial Corporation’s 2006
      Annual Report on Form 10-K, filed with the Commission on March 28,
      2007.)10.10
                Indenture,
      dated as of October 14, 2004, between Union National Financial
      Corporation, as issuer, and the trustee named therein, relating to the
      Junior Subordinated Debt Securities due 2034.  (Incorporated by
      reference to Exhibit 10.15 to Union National Financial Corporation’s 2006
      Annual Report on Form 10-K, filed with the Commission on March 28,
      2007.)10.11
                Guarantee
      Agreement, dated as of October 14, 2004, between Union National Financial
      Corporation and the guarantee trustee named
      therein.  (Incorporated by reference to Exhibit 10.15 to Union
      National Financial Corporation’s 2006
      Annual Report on Form 10-K, filed with the Commission on March 28,
      2007.)10.12
                Indenture,
      dated as of July 27, 2006, between Union National Community Bank, as
      issuer, and the trustee named therein, relating to the Junior Subordinated
      Debt Securities due 2036.  (Incorporated by reference to Exhibit
      4 to Union National Financial Corporation’squarterly
      report
      on Form 10-Q, filed with the Commission on August 14,
    2006.)10.13
                Employment
      Agreement, dated March 8, 2007, between Stephen D. Staman, Executive Vice
      President and Chief Revenue Officer and Union National Financial
      Corporation and its subsidiary, Union National Community
      Bank.  (Incorporated by reference to Exhibit 10.16 to Union
      National Financial Corporation’s 2007
      Annual Report on Form 10-K, filed with the Commission on April 1,
      2008.)10.14
                Change
      of Control Agreement, dated September 4, 2007, between Michael D. Peduzzi,
      Executive Vice President, Chief Financial Officer and Union National
      Financial Corporation and its subsidiary, Union National Community
      Bank.  (Incorporated by reference to Exhibit 99.1 to Union
      National Financial Corporation’s current
      report on Form 8-K, filed with the Commission on September 6,
      2007.)10.15
                Change
      of Control Agreement among Union National Financial Corporation, Union
      National Community Bank and each of the following officers: Michael L.
      Maurer and Bradley A. Willow, filed August 13, 2008, as Item10.18
      to Form10-Q
      for the fiscal quarter ended June 30, 2008 (No.0-19214)
      and incorporated herein by reference.10.16
                Change
      of Control Agreement among Union National Financial Corporation, Union
      National Community Bank and each of the following officers: R. Michael
      Mohn, Steve D. Garber and Kevin Hersh, filed August 13, 2008, as Item10.19
      to Form10-Q
      for the fiscal quarter ended June 30, 2008 (No.0-19214)
      and incorporated herein by
reference.


32





10.17
                Stock
      Bonus Plan and the 2009 Stock Purchase Plan, dated November 26, 2008 and
      incorporated by reference to Exhibit 99.1 to Union National Financial
      Corporation’s current
      report on Form 8-K, filed with the Commission on December 3,
      2008.14
                Union
      National Financial Corporation Directors and Senior Management Code of
      Ethics. (Incorporated by reference to Exhibit 14 to Union National
      Financial Corporation’s 2008
      Annual Report on Form 10-K, filed with the Commission on March 30,
      2009.)31.1
                Certification
      of Principal Executive Officer Pursuant to Exchange Act Rules
      13a-14(a)/15d-14(a) as added by Section 302 of the Sarbanes-Oxley Act of
      2002, filed herewith.31.2
                Certification
      of Principal Financial Officer Pursuant to Exchange Act Rules
      13a-14(a)/15d-14(a) as added by Section 302 of the Sarbanes-Oxley Act of
      2002, filed herewith.32
                Certification
      of Principal Executive Officer and Principal Financial Officer Pursuant to
      U.S.C. Section 1350 as added by Section 906 of the Sarbanes-Oxley Act of
      2002, filed
herewith.


33





SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




Union National Financial
      Corporation(Registrant)Date:
      May 15, 2009
                        By
                        /s/ Mark D. GainerMark D. Gainer
                          Chairman, CEO and President
                          (Principal Executive Officer)Date:
      May 15, 2009
                        By
                        /s/ Michael D. PeduzziMichael D. Peduzzi
                          Executive Vice President and Chief Financial Officer
                          (Principal Financial and Accounting
Officer)


34