UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      DC 20549





**FORM
      10-Q**





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





For
      the
      quarterly period ended June 30, 2007





OR





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





For
      the
      transition period from __________________ to __________________





Commission
      file number  0-19214





**UNION
      NATIONAL FINANCIAL CORPORATION**


(Exact
      Name of Registrant as Specified in its Charter)





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





(717)
      653-1441


(Registrant's
      Telephone Number, Including Area Code)




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


Yes
x No o





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





Large accelerated filer o
            Accelerated filer o
            Non-accelerated filer x




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


Yes
o
      No x





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





2,542,289
      shares of ($.25 par) common stock were outstanding as of August 10,
      2007.







**UNION
      NATIONAL FINANCIAL CORPORATION**


**FORM
      10-Q**


**INDEX**





PAGE
                NO.**PART
                I -****FINANCIAL
                INFORMATION******Item
                1 -
            Financial
                Statements (Unaudited)Consolidated
                Statements of Financial Condition
            
            1Consolidated
                Statements of Income
            
            2
                -
                3Consolidated
                Statements of Comprehensive Income
            
            3Consolidated
                Statements of Cash Flows
            
            4Notes
                to Consolidated Financial Statements
            
            5
                -
                9Item
                2 -
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            10
                - 21Item
                3 -
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            22Item
                4 -
            Controls
                and Procedures
            
            23Item
                4T -
            Controls
                and Procedures
            
            23**PART
                II -****OTHER
                INFORMATION**Item
                1 -
            Legal
                Proceedings
            
            24Item
                1A -
            Risk
                Factors
            
            24Item
                2 -
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            24Item
                3 -
            Defaults
                Upon Senior Securities
            
            24Item
                4 -
            Submission
                of Matters to a Vote of Security Holders
            
            24Item
                5 -
            Other
                Information
            
            24Item
                6 -
            Exhibits
            
            25Signature
                Page
            
            26Exhibit
                31.1 -
            Certification
                of Principal Executive Officer Pursuant to Exchange Act Rules
                13a-14(a)/15d-14(a) as added by Section 302 of the Sarbanes-Oxley
                Act of
                2002Exhibit
                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
                2002Exhibit
                32 -
            Certification
                of Principal Executive Officer and Principal Financial Officer Pursuant
                to
                18 U.S.C. Section 1350 as Added by Section 906 of the Sarbanes-Oxley
                Act
                of 2002




*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)
            
            6/30/2007
            
            12/31/2006**ASSETS**Cash
                and Due from Banks
            
            $
            15,330
            
            $
            15,129Interest-Bearing
                Deposits in Other Banks
            
            
            159
            
            
            333Fed
                Funds Sold
            
            
            14,234
            
            
            -Total
                Cash and Cash Equivalents
            
            
            29,723
            
            
            15,462Investment
                Securities Available for Sale
            
            
            62,830
            
            
            129,810Loans
                Held for Sale
            
            
            1,493
            
            
            1,662Loans
                and Leases, Net of Unearned Income
            
            
            358,553
            
            
            341,113Less:
                Allowance for Loan and Lease Losses
            
            
            (3,449
            )
            
            (3,070
            )Net
                Loans and Leases
            
            
            355,104
            
            
            338,043Premises
                and Equipment, Net
            
            
            9,482
            
            
            9,580Restricted
                Investment in Bank Stocks
            
            
            4,013
            
            
            5,994Bank-Owned
                Life Insurance
            
            
            10,452
            
            
            10,243Other
                Assets
            
            
            6,285
            
            
            6,803TOTAL
                ASSETS
            
            $
            479,382
            
            $
            517,597**LIABILITIES**Deposits:Noninterest-Bearing
            
            $
            47,893
            
            $
            48,311Interest-Bearing
            
            
            308,688
            
            
            291,764Total
                Deposits
            
            
            356,581
            
            
            340,075Short-Term
                Borrowings
            
            
            3,877
            
            
            10,544Long-Term
                Debt
            
            
            68,816
            
            
            117,571Junior
                Subordinated Debentures
            
            
            17,341
            
            
            17,341Other
                Liabilities
            
            
            4,408
            
            
            3,443TOTAL
                LIABILITIES
            
            
            451,023
            
            
            488,974Minority
                Interest in Consolidated Subsidiaries
            
            
            (21
            )
            
            75**STOCKHOLDERS’
                EQUITY**Common
                Stock (Par Value $.25 per share)
            
            
            740
            
            
            735Shares:
                Authorized - 20,000,000;Issued
                - 2,960,168 and 2,941,808 shares at June 30,2007
                and December 31, 2006, respectivelyOutstanding
                - 2,542,293 and 2,523,983 shares atJune
                30, 2007 and December 31, 2006, respectivelySurplus
            
            
            13,240
            
            
            12,918Retained
                Earnings
            
            
            23,037
            
            
            23,460Accumulated
                Other Comprehensive Loss
            
            
            (312
            )
            
            (242
            )Treasury
                Stock, at cost - 417,875 and 417,825 sharesat
                June 30, 2007 and December 31, 2006, respectively
            
            
            (8,325
            )
            
            (8,323
            )TOTAL
                STOCKHOLDERS’ EQUITY
            
            
            28,380
            
            
            28,548TOTAL
                LIABILITIES and STOCKHOLDERS’ EQUITY
            
            $
            479,382
            
            $
            517,597




See
      notes
      to consolidated financial statements.




1


**Union
      National Financial Corporation**


**CONSOLIDATED
      STATEMENTS OF INCOME (UNAUDITED)**


Three
                  Months Ended June 30,
              
              Six
                  Months Ended June 30,(Dollars
                  in thousands, except per share data)
              
              2007
              
              2006
              
              2007
              
              2006**INTEREST
                  INCOME**Interest
                  and Fees on Loans and Leases
              
              $
              6,759
              
              $
              5,720
              
              $
              13,214
              
              $
              11,075Investment
                  Securities:Taxable
                  Interest
              
              
              701
              
              
              1,175
              
              
              1,618
              
              
              2,164Tax-Exempt
                  Interest
              
              
              187
              
              
              355
              
              
              404
              
              
              719Dividends
              
              
              66
              
              
              100
              
              
              151
              
              
              176Other
              
              
              101
              
              
              1
              
              
              117
              
              
              9Total
                  Interest Income
              
              
              7,814
              
              
              7,351
              
              
              15,504
              
              
              14,143**INTEREST
                  EXPENSE**Deposits
              
              
              2,558
              
              
              1,932
              
              
              4,970
              
              
              3,601Short-Term
                  Borrowings
              
              
              56
              
              
              103
              
              
              163
              
              
              188Long-Term
                  Debt
              
              
              843
              
              
              1,411
              
              
              1,922
              
              
              2,667Junior
                  Subordinated Debentures
              
              
              321
              
              
              203
              
              
              639
              
              
              397Total
                  Interest Expense
              
              
              3,778
              
              
              3,649
              
              
              7,694
              
              
              6,853Net
                  Interest Income
              
              
              4,036
              
              
              3,702
              
              
              7,810
              
              
              7,290**PROVISION
                  for LOAN and LEASE LOSSES**
              
              
              270
              
              
              307
              
              
              477
              
              
              337Net
                  Interest Income after Provisionfor
                  Loan and Lease Losses
              
              
              3,766
              
              
              3,395
              
              
              7,333
              
              
              6,953**OTHER
                  OPERATING INCOME**Income
                  from Fiduciary Activities
              
              
              143
              
              
              66
              
              
              210
              
              
              143Service
                  Charges on Deposit Accounts
              
              
              467
              
              
              417
              
              
              866
              
              
              805Other
                  Service Charges, Commissions, Fees
              
              
              300
              
              
              249
              
              
              536
              
              
              463Alternative
                  Investment Sales Commissions
              
              
              217
              
              
              184
              
              
              416
              
              
              353Net
                  Investment Securities Gains
              
              
              597
              
              
              19
              
              
              78
              
              
              41Impairment
                  Charge on Investment Security
              
              
              (450
              )
              
              -
              
              
              (450
              )
              
              -Mortgage
                  Banking/Brokerage Activities
              
              
              619
              
              
              824
              
              
              1,405
              
              
              1,514Title
                  Insurance/Settlement Income
              
              
              100
              
              
              158
              
              
              223
              
              
              290Earnings
                  from Bank-Owned Life Insurance
              
              
              106
              
              
              90
              
              
              209
              
              
              181Other
                  Income
              
              
              85
              
              
              107
              
              
              285
              
              
              200Total
                  Other Operating Income
              
              
              2,184
              
              
              2,114
              
              
              3,778
              
              
              3990**OTHER
                  OPERATING EXPENSES**Salaries
                  and Wages
              
              
              2,063
              
              
              2,012
              
              
              4,251
              
              
              3,975Retirement
                  Plan and Other Employee Benefits
              
              
              513
              
              
              539
              
              
              1,113
              
              
              1,109Net
                  Occupancy
              
              
              746
              
              
              375
              
              
              1,291
              
              
              699Furniture
                  and Equipment
              
              
              272
              
              
              224
              
              
              532
              
              
              408Professional
                  Fees
              
              
              495
              
              
              163
              
              
              868
              
              
              348Data
                  Processing Services
              
              
              223
              
              
              209
              
              
              439
              
              
              411Pennsylvania
                  Shares Tax
              
              
              94
              
              
              81
              
              
              156
              
              
              108Advertising
                  and Marketing
              
              
              211
              
              
              460
              
              
              435
              
              
              715ATM
                  Processing
              
              
              86
              
              
              107
              
              
              173
              
              
              201Minority
                  Interest in Earnings (Losses) of Subsidiaries
              
              
              (138
              )
              
              139
              
              
              (67
              )
              
              130Restructuring
                  Charge
              
              
              181
              
              
              -
              
              
              717
              
              
              -Other
                  Expenses
              
              
              911
              
              
              783
              
              
              1,606
              
              
              1,559Total
                  Other Operating Expenses
              
              
              5,657
              
              
              5,092
              
              
              11,514
              
              
              9,663Income
                  (Loss) before Income Taxes
              
              
              293
              
              
              417
              
              
              (403
              )
              
              1,280**PROVISION
                  (BENEFIT) for INCOME TAXES**
              
              
              (44
              )
              
              (55
              )
              
              (384
              )
              
              38**NET
                  INCOME (LOSS)**
              
              $
              337
              
              $
              472
              
              $
              (19
              )
              $
              1,242




See
      notes
      to consolidated financial statements.




2





**Union
      National Financial Corporation**


**CONSOLIDATED
      STATEMENTS OF INCOME (UNAUDITED) - Continued**


Three
                  Months Ended June 30,
              
              Six
                  Months Ended June 30,(Dollars
                  in thousands, except per share data)
              
              2007
              
              2006
              
              2007
              
              2006**PER
                  SHARE INFORMATION**Net
                  Income (Loss)-Basic
              
              $
              0.13
              
              $
              0.19
              
              $
              (0.01
              )
              $
              0.49Net
                  Income (Loss)-Assuming Dilution
              
              
              0.13
              
              
              0.19
              
              
              (0.01
              )
              
              0.49Cash
                  Dividends
              
              
              0.06
              
              
              0.16
              
              
              0.16
              
              
              0.32


**CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)**


Three
                  Months Ended June 30,
              
              Six
                  Months Ended June 30,2007
              
              2006
              
              2007
              
              2006(Dollars
                  in thousands)**Net
                  Income (Loss)**
              
              $
              337
              ****
              $
              472
              ****
              $
              (19
              )
              $
              1,242**Other
                  Comprehensive Income (Loss):**Unrealized
                  Holding Losses on Available-for-Sale
                  Investment Securities Arising During thePeriod,
                  Net of Tax Benefit of $237 and $668 forthe
                  three months ended and $190 and $685 forthe
                  six months ended June 30, 2007 and 2006,respectively
              
              
              (460
              )
              
              (1,298
              )
              
              (369
              )
              
              (1,331
              )Reclassification
                  Adjustment for (Gains) Lossesincluded
                  in Net Income (Loss), Net of Tax(Expense)
                  Benefit of ($49) and ($6) for the threemonths
                  ended and $127 and ($13) for the sixmonths
                  ended June 30, 2007 and 2006, respectively
              
              
              (98
              )
              
              (13
              )
              
              245
              
              
              (28
              )Unrealized
                  Losses on Cash Flow Hedges ArisingDuring
                  the Period, Net of Tax Benefit of $23 and $10for
                  the three months ended and $20 and $20 for the sixmonths
                  ended June 30, 2007 and 2006, respectively
              
              
              (44
              )
              
              (19
              )
              
              (39
              )
              
              (39
              )Reclassification
                  Adjustment for Hedging Lossesincluded
                  in Net Income (Loss), Net of Tax Benefitof
                  $38 for the three months ended and $48 for the sixmonths
                  ended June 30, 2007, respectively
              
              
              73
              
              
              -
              
              
              93
              
              
              -Total
                  Other Comprehensive Loss
              
              
              (529
              )
              
              (1,330
              )
              
              (70
              )
              
              (1,398
              )TOTAL
                  COMPREHENSIVE LOSS
              
              $
              (192
              )
              $
              (858
              )
              $
              (89
              )
              $
              (156
              )





See
      notes
      to consolidated financial statements.




3


**Union
      National Financial Corporation** ****


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (UNAUDITED)**





(Dollars
                in thousands)
            
            Six
                Months Ended June 30,2007
            
            2006**CASH
                FLOWS from OPERATING ACTIVITIES**Net
                Income (Loss)
            
            $
            (19
            )
            $
            1,242Adjustments
                to Reconcile Net Income (Loss) to NetCash
                Provided by Operating Activities:Depreciation
                and Amortization
            
            
            653
            
            
            512Provision
                for Loan and Lease Losses
            
            
            477
            
            
            337Restructuring
                Charge, net of Cash Payments
            
            
            511
            
            
            -Impairment
                Charge on Investment Security
            
            
            450
            
            
            -Stock-Based
                Compensation Expense
            
            
            67
            
            
            -Net
                (Accretion) Amortization of InvestmentSecurities’
                (Discounts) Premiums
            
            
            (18
            )
            
            309Net
                Investment Securities Gains
            
            
            (78
            )
            
            (41
            )(Decrease)
                Increase in Minority Interest Liability
            
            
            (67
            )
            
            119Earnings
                from Bank-Owned Life Insurance
            
            
            (209
            )
            
            (181
            )Gains
                on Loans Sold
            
            
            (1,024
            )
            
            (953
            )Net
                Gain on Sale of Foreclosed Real Estate
            
            
            (128
            )
            
            -Proceeds
                from Sales of Loans
            
            
            37,713
            
            
            34,901Loans
                Originated for Sale
            
            
            (36,520
            )
            
            (32,188
            )Decrease
                in Accrued Interest Receivable
            
            
            506
            
            
            4Increase
                in Other Assets
            
            
            (127
            )
            
            (760
            )Increase
                in Other Liabilities
            
            
            454
            
            
            571Net
                Cash Provided by Operating Activities
            
            
            2,641
            
            
            3,872**CASH
                FLOWS from INVESTING ACTIVITIES**Proceeds
                from Sales of Available-for-Sale Securities
            
            
            81,885
            
            
            6,497Proceeds
                from Maturities of Available-for-Sale Securities
            
            
            4,766
            
            
            7,172Purchases
                of Available-for-Sale Securities
            
            
            (20,213
            )
            
            (27,677
            )Net
                Sales (Purchases) of Restricted Investments in Bank Stocks
            
            
            1,981
            
            
            (269
            )Proceeds
                from Sale of Foreclosed Real Estate, net
            
            
            314
            
            
            -Net
                Loans and Leases Made to Customers
            
            
            (17,538
            )
            
            (23,616
            )Purchases
                of Premises, Equipment and Software
            
            
            (513
            )
            
            (2,813
            )Net
                Cash Provided by (Used in) Investing Activities
            
            
            50,682
            
            
            (40,706
            )**CASH
                FLOWS from FINANCING ACTIVITIES**Net
                (Decrease) Increase in Demand Deposits and Savings
                Accounts
            
            
            (419
            )
            
            4,738Net
                Increase in Time Deposits
            
            
            16,925
            
            
            29,135Net
                Decrease in Short-Term Borrowings
            
            
            (6,667
            )
            
            (8,707
            )Proceeds
                from Issuance of Long-Term Debt
            
            
            4,254
            
            
            22,267Payments
                on Long-Term Debt
            
            
            (53,009
            )
            
            (8,587
            )Acquisition
                of Treasury Stock
            
            
            (2
            )
            
            (106
            )Issuance
                of Common Stock
            
            
            260
            
            
            233Cash
                Dividends Paid
            
            
            (404
            )
            
            (804
            )Net
                Cash (Used in) Provided by Financing Activities
            
            
            (39,062
            )
            
            38,169**Net
                Increase in Cash and Cash Equivalents**
            
            
            14,261
            
            
            1,335CASH
                and CASH EQUIVALENTS - Beginning of Period
            
            
            15,462
            
            
            14,501**CASH
                and CASH EQUIVALENTS - End of Period**
            
            $
            29,723
            
            $
            15,836**SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATION**Cash
                Payments (Refunds) for:Interest
            
            $
            7,858
            
            $
            6,691Income
                Taxes
            
            
            (200
            )
            
            300




See
      notes
      to consolidated financial statements.




4


**UNION
      NATIONAL FINANCIAL CORPORATION**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**





**1.
      Financial Statements**





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





**2.
      Basis of Presentation**





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





**3.
      Earnings per Share**





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


Three
                  Months Ended June 30,
              
              Six
                  Months Ended June 30,2007
              
              2006
              
              2007
              
              2006Weighted-average
                  common sharesoutstanding
                  used in the computationof
                  basic earnings (loss) per share
              
              
              2,528,321
              
              
              2,515,278
              
              
              2,527,090
              
              
              2,513,665Effect
                  of dilutive stock options
              
              
              6,283
              
              
              20,028
              
              
              -
              
              
              19,832Weighted-average
                  common shares andequivalents
                  used in the computationof
                  diluted earnings (loss) per share
              
              
              2,534,604
              
              
              2,535,306
              
              
              2,527,090
              
              
              2,533,497Stock
                  options not included in theearnings
                  (loss) per share computationas
                  their effect would have been anti-dilutive
              
              
              107,008
              
              
              87,563
              
              
              144,681
              
              
              90,756




**4.
      Share-Based Payments**





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




5





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


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




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


Three
                  Months Ended June 30,
              
              Six
                  Months Ended June 30,(Dollars
                  in thousands)
              
              2007
              
              2006
              
              2007
              
              2006Pre-tax
                  compensation expense
              
              $
              31
              
              $
              -
              
              $
              67
              
              $
              -Tax
                  benefit
              
              
              -
              
              
              -
              
              
              -
              
              
              -Stock
                  option expense, net of tax
              
              $
              31
              
              $
              -
              
              $
              67
              
              $
              -





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





Stock
      option transactions for the six months ended June 30, 2007 are summarized below:


Stock
              
              Weighted-AverageOptions
              
              Exercise
                  PriceOptions
                  Outstanding at December 31, 2006(Prices
                  range from $11.52 to $22.14)
              
              
              177,330
              
              $
              18.14Options
                  Granted
              
              
              31,900
              
              
              18.50Options
                  Exercised
              
              
              (13,272
              )
              
              12.92Options
                  Forfeited
              
              
              (48,724
              )
              
              18.76Options
                  Expired
              
              
              (2,553
              )
              
              20.10Options
                  Outstanding at June 30, 2007(Prices
                  range from $11.52 to $22.14)
              
              
              144,681
              
              $
              18.30
   6


The
      following table presents information regarding options outstanding as of June
      30, 2007:




Weighted-average
                contractual remaining term - options outstanding
            
            
            5.5
                YearsAggregate
                intrinsic value - in-the-money options outstanding
            
            $
            103,000Options
                exercisable
            
            
            119,981Weighted-average
                exercise price - options exercisable
            
            $
            18.26Weighted-average
                contractual remaining term - options exercisable
            
            
            5.0
                YearsAggregate
                intrinsic value - in-the-money options exercisable
            
            $
            103,000




As
      of
      June 30, 2007, $14,000 of unrecognized compensation cost related to stock
      options is expected to be recognized over a period of one month. During the
      six
      months ended June 30, 2007 and 2006, Union National received proceeds of
      $171,000 and $41,000, respectively, for the exercise of options with an
      intrinsic value of $25,000 and $16,000, respectively. Aggregate intrinsic value
      represents the amount by which the market price of the stock on the measurement
      date exceeded the exercise price of the option, multiplied by the number of
      in-the-money options.


**5.
      Guarantees**





Union
      National does not issue any guarantees that would require liability recognition
      or disclosure, other than its standby letters of credit. Standby letters of
      credit written are conditional commitments issued by Union National to guarantee
      the performance of a customer to a third party. Generally, all letters of credit
      when issued have expiration dates within one year. The credit risk involved
      in
      issuing letters of credit is essentially the same as that involved in extending
      loan facilities to customers. Union National generally holds collateral and/or
      personal guarantees supporting these commitments. Union National had $8,756,000
      and $8,694,000 of standby letters of credit outstanding as of June 30, 2007
      and
      December 31, 2006, respectively. Management believes that the proceeds obtained
      through a liquidation of collateral and the enforcement of guarantees would
      be
      sufficient to cover the potential amount of future payments required under
      the
      corresponding guarantees. The current amount of the liability as of June 30,
      2007 and December 31, 2006, for guarantees under standby letters of credit
      issued is not material.





**6.
      Deleveraging and Restructuring Initiatives**





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





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





**7.
      Impairment Charge on Investment Security**





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




7





**8.
      Memorandum of Understanding**





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


Currency
      ("OCC"). Specifically, the MOU requires the Bank to (1) implement a three-year
      strategic plan in accordance with specific guidelines set forth in the MOU,
      (2)
      develop and implement a three-year capital plan, in accordance with specific
      guidelines set forth in the MOU, including a dividend policy for the payment
      of
      dividends provided the Bank is in compliance with the capital plan, applicable
      law 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 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.





**9.
      Recent Accounting Pronouncements**





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





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





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





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




8





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





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





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





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





9


**Item
      2 - Management's Discussion and Analysis of Financial Condition and Results
      of
      Operations**





The
      following is management’s discussion and analysis of the significant changes in
      the results of operations, capital resources and liquidity 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. Home Team Financial, LLC, a subsidiary of
      the
      Bank, and its subsidiary, TA of Lancaster, LLC (together, “Home Team”) began
      operations in July 2005. Home Team operates a mortgage banking and brokerage
      business and also offers title insurance and settlement services. The Bank’s
      ownership interest in Home Team is 98% with an initial interest in net profits
      of 30%, which increases over succeeding years. This discussion should be read
      in
      conjunction with the financial tables, statistics, financial statements and
      notes to financial statements appearing in our 2006 annual report. Current
      performance does not guarantee, assure or indicate similar performance in the
      future.





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





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




·
            Operating, legal and regulatory
              risks;  ·
            Economic, political and competitive
              forces;  ·
            Rapidly changing technology;
              and  ·
            The
                risk that our analyses of these risks and forces could be incorrect
                and/or
                that the strategies developed to address them could be
                unsuccessful.





We
      undertake no obligation to publicly revise or update these forward-looking
      statements to reflect events or circumstances that arise after the date of
      this
      report. Readers should carefully review the risk factors described in other
      documents that we periodically file with the Securities and Exchange Commission,
      including our Form 10-K for the year ended December 31, 2006.





**Critical
      Accounting Policies**





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





The
      provision for loan 1  losses
      and the level of the allowance for loan losses involve significant estimates
      by
      management in evaluating the adequacy of the allowance for loan losses based
      on
      our past loan loss experience, known and inherent risks in the portfolio,
      adverse situations that may affect the borrower’s ability to repay (including
      the timing of future payments), the estimated value of any underlying
      collateral, composition of the loan portfolio, current economic conditions
      and
      other relevant factors. While we use available information to make such
      evaluations, future adjustments to the allowance and the provision for loan
      losses may be necessary if economic conditions or loan credit quality differ
      substantially from the assumptions we used in making the
      evaluation.







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




10





All
      of
      our investments are carried at fair value with any unrealized gains, as well
      as
      losses that we consider to be temporary, reported net of tax as an adjustment
      to
      stockholders’ equity. If we determine that impairment in the value of an
      investment security is “other than temporary,” the related loss is recorded in
      the consolidated income statement. In order to determine whether such unrealized
      losses are other than temporary, we must regularly review investment securities
      for possible impairment, analyzing factors including but not limited to the
      underlying creditworthiness of the issuing organization, the length of time
      for
      which the market value has been less than cost, and independent analysts’
opinions about circumstances that could affect the performance of the
      investment. After considering such factors, it is a matter of judgment on the
      part of management to make the determination of whether or not the decline
      in
      market value is other than temporary.





**Results
      of Operations** ****





**Overview**





Consolidated
      net income was $337,000 and $472,000 for the three months ended June 30, 2007
      and 2006, respectively. For the second quarter of 2007, basic and diluted
      earnings per share (“EPS”) amounted to $0.13, as compared to basic and diluted
      earnings per share of $0.19 for the same period of 2006. For the six months
      ended June 30, 2007, we incurred a consolidated net loss of $19,000 or $0.01
      per
      share, versus consolidated net income of $1,242,000 for the six months ended
      June 30, 2006, which amounted to basic and diluted EPS of $0.49. Results for
      2007 include the following income and expense items related to previously
      announced actions undertaken to improve efficiency and
      profitability:





·
            Net
                gains of $597,000 ($394,000 or $0.16 per share after tax) realized
                during
                the second quarter of 2007 by liquidating the portfolio of municipal
                securities yielding 4.97%. These securities were replaced with U.S.
                Agency
                securities yielding 5.31%, to enhance income tax
                effectiveness;





·
            A
                pre-tax loss of $450,000 ($297,000 or $0.12 per share after tax)
                recognized during the second quarter for an other-than-temporary
                impairment in the value of an available-for-sale investment debt
                security.
                Based on our ongoing evaluation of the investment securities portfolio,
                we
                have determined based on the amount and length of time the fair value
                has
                been less than amortized cost that this decline in value was other
                than
                temporary;





·
            Net
                pre-tax losses on the sale of approximately $66 million of investment
                securities and prepayment penalties on debt amounting to $519,000
                and
                $31,000, respectively, (totaling $363,000 or $0.14 per share after
                tax)
                during the first quarter, in conjunction with the previously announced
                deleveraging strategy;





·
            Restructuring
                charges of $717,000 ($473,000 or $0.19 per share after tax) consisting
                of
                severance and related benefits resulting from staff reductions that
                were
                completed during March and April in order to adjust the size and
                makeup of
                staff in order to be more
                competitive;





·
            An
                increase in professional fees amounting to $520,000 ($343,000 or
                $0.14 per
                share after tax) for the six months ended and $332,000 ($218,000
                or $0.09
                per share after tax) for the three months ended June 30, 2007 as
                compared
                to the same periods of 2006, primarily incurred in connection with
                regulatory matters, legal services regarding employee severance,
                and the
                previously announced engagement of the consulting firm of S.R. Snodgrass,
                A.C. to undertake a profit enhancement project;
                and





·
            A
                charge of $259,000 ($171,000 or $0.07 per share after tax), included
                in
                Net Occupancy Expense, for a commitment on a parcel of real estate
                which
                was to be used for a future retail branch site. We have decided not
                to
                pursue the expansion at this time.





Operating
      losses incurred by Home Team Financial, LLC amounted to ($203,000) in the second
      quarter of 2007 as compared to operating income of $115,000 during the same
      period last year, primarily due to severance payments and a general decline
      in
      the overall housing market. Due to this trend in the housing market, Home Team
      experienced a lower number and dollar volume of loan originations during the
      second quarter of 2007, which contributed to a decline in revenue as compared
      to
      the same quarter of last year. Union National’s 30% share of the decrease in
      Home Team’s results lowered Union National’s consolidated income by $95,000
      ($63,000 or $0.02 per share after tax) compared to the second quarter of 2006.
      Effective July 1, 2007, Union National’s share of Home Team’s income or loss
      will increase from 30% to 62.61%.





In
      addition to the above items, the opening of two Gold Café retail office
      locations during the second and fourth quarters of 2006 resulted in increased
      operating expenses during the first six months of 2007 as compared to the first
      six months of 2006, primarily due to occupancy costs and salaries, wages, and
      benefits for Gold Café staff. Further cost increases resulted from annual salary
      increases, and higher occupancy costs associated with the relocation of our
      corporate headquarters. We have implemented staff reductions and redeployments
      during March and April 2007 in order to reduce overall future operating
      expenses.




11





Net
      interest margin for the three months ended June 30, 2007 increased to 3.90%
      on a
      taxable-equivalent basis, up from 3.58% a year ago and from 3.61% during the
      first quarter of 2007. For the year to date, Union National’s 2007 net interest
      margin percentage on a taxable equivalent basis has increased by 16 basis points
      over the prior year, to 3.75%. The de-leveraging of our balance sheet (see
      Note
      6 to the Financial Statements, above) coupled with strong loan growth and a
      shift toward core funding through deposit growth have contributed to this margin
      expansion.





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


Three
                  Months Ended June 30,
              
              Six
                  Months Ended June 30,2007
              
              2006
              
              2007
              
              2006ROE
              
              
              4.74
              %
              
              6.71
              %
              
              (0.13
              %)
              
              9.02
              %ROE
                  (Realized Equity)
              
              
              4.70
              %
              
              6.51
              %
              
              (0.13
              %)
              
              8.78
              %


Our
      accumulated other comprehensive loss consists of the amount of net unrealized
      losses on available-for-sale investment securities, net of tax.





During
      the second quarter of 2007, overall loan balances increased by $7,951,000 or
      2.3% over loans outstanding at the preceding quarter-end, primarily resulting
      from an increase in consumer loans and commercial and agricultural loans and
      leases, partially offset by a decrease in residential mortgage loans. This
      rate
      of increase was slightly below the overall loan growth rate of 2.8% that we
      experienced during the first quarter of 2007.




**Outlook**





The
      economy in the Bank’s market may be positively or negatively impacted by
      national events and may be subject to overall national economic trends. The
      overall effects of past economic conditions, as well as other factors, can
      be
      seen by a mild lessening of certain borrowers' financial strength and higher
      interest rates. We are monitoring these general and specific trends closely.
      Their various effects are discussed later under the section on Loan Quality
      and
      Credit Risk. Our subsidiary, Home Team Financial, originates mortgages for
      resale. Trends in the housing market that affect the number of loan
      originations, and the willingness of investors to purchase loans originated
      by
      Home Team, may positively or negatively impact Home Team’s results. Effective
      July 1, 2007, Union National’s share of Home Team’s income or loss will increase
      from 30% to 62.61%.





We
      currently expect moderate growth in loans and deposits for 2007, driven largely
      by our continued emphasis on development of new commercial business
      relationships, the 2006 opening of two Gold Cafe branch offices, and promotion
      of our deposit products through marketing and special pricing. The Gold Cafes
      feature innovative delivery of branch banking services in an upscale coffee
      house setting. Based upon projected incremental loan generation, fee and
      commission income, and deposit growth resulting from the additional branches,
      each branch is expected to begin operating at breakeven in approximately its
      third year of operation. We also added a new business banking center located
      in
      Ephrata, Pennsylvania, during the second quarter. Due to its small size and
      focused activities, this branch is expected to begin operating at breakeven
      after approximately 18 months of operation. We are continuing to develop and
      promote additional loan and deposit products, to implement various sales
      strategies and to offer incentives to employees to generate loan and deposit
      growth. Increased lending volume from these activities and from the additional
      branch locations is expected to have a positive impact on net interest income
      and other operating income for the remainder of 2007.





Our
      engagement of Snodgrass relative to the profit enhancement project is nearing
      completion. Snodgrass utilized a unique diagnostic methodology to aggressively
      locate opportunities for profit improvement, coupled with a detailed
      implementation plan and change management techniques to build an ongoing process
      for innovation and efficiency with sustainable results. Each specific profit
      project that was identified has resulted in measurable targets for increases
      to
      pre-tax income. This engagement resulted in higher cash requirements for
      professional fees during the first half of 2007, which we believe will be
      largely offset by the identified increases in income during the second half
      of
      the year.




12





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


Currency
      ("OCC"), as described in Note 8 to the Financial Statements. We believe that
      the
      MOU will have no material impact on our operating results or financial condition
      and that the MOU will not constrain our business. We believe we have already
      made substantial progress in satisfying the MOU. We are committed to addressing
      and resolving the issues presented in the MOU.





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





**Net
      Interest Income/Funding Sources**





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





During
      the three previous calendar years, we have experienced growth in assets that
      outpaced growth in deposits, requiring the increased use of alternative sources
      of funding. As of December 31, 2006, approximately $130 million or 25% of our
      total assets consisted of available-for-sale investment securities, which
      contributed to our reliance on relatively high-cost financing sources such
      as
      borrowings from the Federal Home Loan Bank of Pittsburgh (“FHLB”), brokered
      certificates of deposit (“brokered CDs”), and issuance of junior subordinated
      debentures. During January 2007, we deleveraged our balance sheet by reducing
      the size of our investment portfolio while paying down FHLB debt and other
      short-term borrowings, reversing this trend. See Note 6 to the Consolidated
      Financial Statements, above. As of June 30, 2007, our outstanding long-term
      FHLB
      advances were $68,816,000 with an average interest rate of 4.91%, as compared to
      borrowings of $117,571,000 and $119,495,000 with average interest rates of
      5.03%
      and 4.81% as of December 31 and June 30, 2006, respectively. The long-term
      advances have maturities that range from October 2008 to December 2013. Prior
      to
      the deleveraging, we had also obtained funding through the use of brokered
      CDs,
      which can be obtained by bidding for funds through various sources. As of June
      30, 2007 and December 31, 2006, we had $26,008,000 and $31,975,000 in brokered
      CDs outstanding with average interest rates of 5.04% and 4.96%, respectively,
      compared to $30,140,000 with an average interest rate of 4.78% as of June 30,
      2006. As noted above, the deleveraging transaction has begun to have a positive
      impact on our net interest margin for 2007 and we expect this to continue in
      future periods.





During
      2004 and 2003, we obtained net funding of $11,000,000 from the issuance of
      junior subordinated debentures to trust subsidiaries that then issued trust
      capital securities. In December 2003, $8,000,000 of net funding was obtained
      through the issuance of floating-rate debentures that provide for quarterly
      distributions at a variable annual coupon rate that is reset quarterly, based
      on
      three-month London Interbank Offered Rate (“LIBOR”) plus 2.85%. The coupon rate
      was 8.205% at June
      30, 2007, 8.23% at December 31, 2006, and 8.0% at June 30, 2006. In October
      2004, $3,000,000 of net funding was obtained through the issuance of debentures
      that are at a fixed rate of 5.28% for an initial period through November 2007,
      and then at an annual coupon rate, reset quarterly, based on three-month LIBOR
      plus 2.0%. On July 28, 2006, the Bank issued $6,000,000 of subordinated
      debentures with a five-year initial fixed rate of 7.17% that will remain in
      effect through July 2011, and then an annual coupon rate, reset quarterly,
      based
      on three-month LIBOR plus 1.65%. All of the above debentures are callable at
      our
      option five years after issuance.





The
      terms
      and amounts of the FHLB borrowings, brokered CDs, and the issuance of the junior
      subordinated debentures, when combined with our overall balance sheet structure,
      maintain Union National within its interest rate risk policies.





The
      change in the makeup of our balance sheet and the mix of funding sources,
      together with changes in the cost of those funding sources, contributed to
      an
      increase in the second quarter 2007 net interest margin to 3.90% from 3.31%
      in
      the fourth quarter of 2006 and 3.58% in the second quarter of 2006. In comparing
      the three months ended June 30, 2007, to the same period of 2006, the net effect
      of changes in volume of average earning assets and interest-bearing liabilities
      on net interest income was an increase of $300,000. Average earning assets
      decreased by 2.7% for the three months ended June 30, 2007, as compared to
      the
      same period of 2006. Average loans grew by 14.8%, funded by an 11.5% increase
      in
      average deposits and a reduction in investment securities. Proceeds from the
      sale of investment securities were also used to reduce borrowings and to invest
      in Fed funds sold. These favorable volume effects were partially offset by
      an
      increase in overall interest rates and a change in the mix of earning assets
      and
      funding sources, which reduced net interest income by $69,000 for the three
      months ended June 30, 2007, compared to the same period of 2006. The net effect
      of the above factors on net interest income on a taxable-equivalent-yield basis
      for the first quarter of 2007 was an increase of $231,000 as compared to the
      same period of 2006.




13





For
      the
      six months ended June 30, 2007, net interest margin increased to 3.75% from
      3.26% in the six months ended June 30, 2006. The net effect of changes in volume
      of average earning assets and interest-bearing liabilities on net interest
      income during the first half of 2007 was an increase of $562,000 as compared
      to
      the same period of 2006. Average earning assets during the six months ended
      June
      30, 2007 were flat with the prior year, as a 14.7% increase in average loans
      was
      offset by a reduction in investment securities. Proceeds from the sale of
      investment securities were also used to reduce borrowings and invest in Fed
      funds sold. These favorable volume effects were partially offset by an increase
      in overall interest rates and a change in the mix of earning assets and funding
      sources, which reduced net interest income by $232,000 for the six months ended
      June 30, 2007, compared to the same period of 2006. The net effect of the above
      factors on net interest income on a taxable-equivalent-yield basis for the
      first
      six months of 2007 was an increase of $330,000 as compared to the same period
      of
      2006.





For
      the
      remainder of 2007, we anticipate that our net interest margin percentage will
      continue to show modest improvement over prior year levels due to the effects
      of
      changes in the mix of earning assets and funding sources described above,
      partially offset by the inverted treasury yield curve. Current year expected
      growth in earning assets and a continued shift from wholesale funding to core
      deposit growth should further increase our net interest margin for 2007. Our
      net
      interest income may be impacted by future actions of the Federal Reserve Bank.





**Provision
      for Loan Losses**





The
      loan
      loss provision is an estimated expense charged to earnings to provide for losses
      attributable to uncollectible loans, based on our analysis of the adequacy
      of
      the allowance for loan losses. For the three months ended June 30, 2007, the
      provision for loan losses was $270,000, down from $307,000 during the three
      months ended June 30, 2006. For the six-month periods ended June 30, 2007 and
      2006, the provision for loan losses was $477,000 and $337,000, respectively.
      The
      higher provision in 2007 can be primarily attributed to loan growth and
      increased delinquencies in the lease portfolio, partially offset by a decrease
      in net charge-offs to $98,000 during the first six months of 2007 compared
      to
      $195,000 during the same period last year. We may need to make future
      adjustments to the allowance, and consequently the provision for loan losses,
      if
      economic conditions or loan credit quality differ substantially from the
      assumptions we used in making our evaluation of the level of the allowance
      for
      loan losses as compared to the balance of outstanding loans. See the discussion
      on Credit Risk and Loan Quality/Allowance for Loan Losses.





**Other
      Operating Income**





Other
      Operating Income was $2,184,000, an increase of $70,000 or 3.30% during the
      second quarter of 2007 versus the second quarter of 2006. For the six months
      ended June 30, 2007, Other Operating Income decreased by $212,000 to $3,778,000
      as compared to the first six months of 2006. The variances for the three-month
      and six-month periods resulted from increases (decreases) in the following
      items:


Three
                  Months Ended
              
              Six
                  Months Ended(Dollars
                  in thousands)
              
              June
                  30, 2007 vs. 2006
              
              June
                  30, 2007 vs. 2006Gain
                  on Sale of Foreclosed Real Estate
              
              $
              1
              
              $
              128Income
                  from Fiduciary Activities
              
              
              77
              
              
              67Mortgage
                  Banking/Brokerage Activities
              
              
              (205
              )
              
              (109
              )Title
                  Insurance/Settlement Income
              
              
              (58
              )
              
              (67
              )Debit
                  and Credit Card-Related Income
              
              
              36
              
              
              68Alternative
                  Investment Sales Commissions
              
              
              33
              
              
              63Overdraft
                  Fees
              
              
              52
              
              
              71Earnings
                  from Bank-Owned Life Insurance
              
              
              16
              
              
              28Net
                  Investment Securities Gains
              
              
              578
              
              
              37Impairment
                  Charge on Investment Security
              
              
              (450
              )
              
              (450
              )ATM
                  Cash Service Fees
              
              
              (14
              )
              
              (36
              )Other,
                  net
              
              
              4
              
              
              (12
              )Total
                  Increase (Decrease) in Other Operating Income
              
              $
              70
              
              $
              (212
              )
   14




Mortgage
      Banking/Brokerage Activities and Title Insurance/Settlement Income reflect
      decreased loan originations and settlements, as well as lower gains on sales
      of
      loans by Home Team. Debit and Credit Card-Related Income consists of commissions
      and interchange income, which has increased due to our continued marketing
      emphasis on card usage by our customers and increased merchant card fee income.
      Alternative Investment Sales Commissions increased due to heightened sales
      activity, an increase in assets under management, and a higher commission rate.
      Overdraft Fees have increased as a result of our “Overdraft Privilege” product,
      which permits customers to overdraw their accounts subject to certain limits,
      and an increase in the fee that we charge for insufficient funds to a level
      comparable with competitors in our market. Earnings from Bank-Owned Life
      Insurance fluctuates with interest rates. ATM Cash Service Fees, which relate
      to
      an arrangement with a local ATM company where we provide cash for its ATM
      machines, have decreased due to lower amounts of cash on hand at the ATM
      company. **** There
      were also various smaller decreases in other income categories during 2007
      as
      compared with 2006.





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





**Other
      Operating Expenses**





Other
      Operating Expenses totaled $5,657,000, an increase of $565,000 or 11.1% during
      the second quarter of 2007 versus the second quarter of 2006. For the six months
      ended June 30, 2007, Other Operating Expenses increased by $1,851,000 to
      $11,514,000 as compared to the first six months of 2006. The variances for
      the
      three-month and six-month periods resulted from increases (decreases) in the
      following items:


Three
                  Months Ended
              
              Six
                  Months Ended(Dollars
                  in thousands)
              
              June
                  30, 2007 vs. 2006
              
              June
                  30, 2007 vs. 2006Restructuring
                  Charge
              
              $
              181
              
              $
              717Salaries,
                  Wages, and Benefit Costs
              
              
              25
              
              
              280Net
                  Occupancy and Furniture & Equipment
              
              
              419
              
              
              716Professional
                  Fees
              
              
              332
              
              
              520Minority
                  Interest in Losses of Subsidiaries
              
              
              (277
              )
              
              (197
              )Advertising
                  and Marketing
              
              
              (249
              )
              
              (280
              )Other,
                  net
              
              
              134
              
              
              95Total
                  increase in Other Operating Expenses
              
              $
              565
              
              $
              1,851





The
      Restructuring Charge, described in Note 6 to the Consolidated Financial
      Statements, consisted of severance and related costs. The increase in Salaries,
      Wages, and Benefit Costs resulted from Gold Café staff additions, annual salary
      increases, and staff additions, partially offset by a decrease in per-employee
      health insurance costs resulting from the addition of Home Team’s employees to
      our health insurance plan. Net Occupancy increased primarily due to a charge
      of
      $259,000 for a commitment
      on a parcel of real estate described in the section titled “Overview”, above; the occupancy of the Lausch
      Lane office facility and the Gold Café retail branch offices; and an addition to
      the administrative services center (“ASC”) in Mount Joy, PA. These costs were
      partially offset by the termination of an office lease enabled by the move
      of
      Bank employees into the Lausch Lane office, and the relocation of Home Team
      operations into a portion of our Mount Joy office formerly occupied by our
      corporate headquarters. Furniture and Equipment expense increased primarily
      due
      to depreciation of the furniture and equipment at Lausch Lane, the Gold Cafés,
      and the ASC addition. Professional fees increased primarily in connection with
      regulatory matters, legal services regarding employee severance, and the
      Snodgrass consulting engagement described above. Minority Interest in Losses
      of
      Subsidiaries reflects the minority interest in the losses of Home Team
      Financial, LLC and its subsidiary, TA of Lancaster, LLC as compared to their
      interest in earnings of those entities in the prior year. Advertising and
      Marketing were higher in 2006 primarily due to branding costs related to the
      Gold Café. There were also smaller increases in various other expense categories
      in 2007 as compared with 2006.




15





**Income
      Taxes**





The
      benefit from income taxes was $44,000 and $55,000 for the three months ended
      June 30, 2007 and 2006, respectively. For the six months ended June 30, 2007,
      the benefit from income taxes was $384,000 as compared to expense of $38,000
      the
      same period of last year. Our effective tax rates were as follows:


Three
                  Months Ended
              
              Six
                  Months EndedJune
                  30, 2007
              
              
              (15.0
              %)
              
              (95.3
              %)June
                  30, 2006
              
              
              (13.2
              %)
              
              3.0
              %




Generally,
      our effective tax rate is below the statutory rate due to tax-exempt earnings
      on
      investments, loans and bank-owned life insurance and the impact of tax credits.
      The negative effective tax rate for 2007 is due the relative size of the
      expenses incurred in connection with the deleveraging, restructuring, and profit
      enhancement initiatives, losses at Home Team, the impairment charge on an
      investment security and the recognition of a commitment on a parcel of real estate, in comparison to book net income
      (loss) .
      The
      realization of the resulting deferred tax assets is dependent on future
      earnings. We currently anticipate that future earnings will be adequate to
      utilize deferred tax assets.





**Financial
      Condition**





**Loan
      Quality and Credit Risk**





Other
      than as described herein, we do not believe there are any trends, events or
      uncertainties affecting loans that are reasonably expected to have a material
      impact on future results of operations, liquidity or capital resources. Further,
      based on known information, we believe that the effects of current and past
      economic conditions and other unfavorable business conditions may impact certain
      borrowers’ abilities to comply with their repayment terms. We continue to
      closely monitor these borrowers' financial strength. At June 30, 2007, total
      nonperforming loans amounted to $2,750,000, or 0.8% of net loans, as compared
      to
      a level of $2,533,000, or 0.7%, at December 31, 2006. Historically, the
      percentage of nonperforming loans to net loans as of December 31 for the
      previous five-year period was an average of 0.7%.




16


Schedule
      of Nonperforming Assets:


June
                  30,
              
              December
                  31,(Dollars
                  in thousands)
              
              2007
              
              2006Nonaccruing
                  Loans
              
              $
              2,254
              
              $
              2,280Accruing
                  Loans - 90 days or more past due
              
              
              496
              
              
              253Total
                  Nonperforming Loans
              
              
              2,750
              
              
              2,533Foreclosed
                  Real Estate
              
              
              -
              
              
              186Foreclosed
                  Purchased Loans
              
              
              125
              
              
              134Total
                  Nonperforming Assets
              
              $
              2,875
              
              $
              2,853Nonperforming
                  Loansas
                  a % of Net Loans
              
              
              0.8
              %
              
              0.7
              %Allowance
                  for Loan Lossesas
                  a % of Nonperforming Loans
              
              
              125
              %
              
              121
              %




**Allowance
      for Loan Losses**





We
      maintain the allowance for loan losses at a level that we believe adequate
      to
      absorb estimated probable loan losses. We are responsible for the adequacy
      of
      the allowance for loan losses, which is formally reviewed on a quarterly basis.





The
      allowance is increased by provisions charged to operating expense and reduced
      by
      net charge-offs. Our evaluation of the adequacy of the allowance is based on
      our
      past loan loss experience, known and inherent risks in the portfolio, adverse
      situations that may affect the borrower's ability to repay (including the timing
      of future payments), the estimated value of any underlying collateral,
      composition of the loan portfolio, current economic conditions and other
      relevant factors. While we use available information to make such evaluations,
      future adjustments to the allowance may be necessary if economic conditions
      differ substantially from the assumptions we used in making the evaluation.
      In
      addition, various regulatory agencies, as an integral part of their examination
      process, review the Bank's allowance for loan losses. Such agencies may require
      us to recognize additions to the allowance based on their judgment of
      information available to them at the time of their examination. We determined
      that no adjustment to the allowance for loan losses was necessary as a result
      of
      the Office of the Comptroller of the Currency ’ s
      ( “ OCC ” )
      most
      recent examination **.** We
      believe, based on information currently available, that the current allowance
      for loan losses of $3,449,000 is adequate to meet potential loan losses.




17


Analysis
      of Allowance for Loan Losses:


Three
                  Months Ended
                June
                    30,
              
              Six
                  Months Ended
                June
                    30,(Dollars
                  in thousands)
              
              2007
              
              2006
              
              2007
              
              2006Average
                  Total Loans Outstanding(Net
                  of Unearned Income)
              
              $
              353,472
              
              $
              307,768
              
              $
              349,812
              
              $
              305,075Allowance
                  for Loan Losses,Beginning
                  of Period
              
              $
              3,188
              
              $
              2,729
              
              $
              3,070
              
              $
              2,675Loans
                  Charged Off During Period
              
              
              9
              
              
              225
              
              
              99
              
              
              245Recoveries
                  of Loans PreviouslyCharged
                  Off
              
              
              -
              
              
              6
              
              
              1
              
              
              50Net
                  Loans Charged Off (Recovered)
              
              
              9
              
              
              219
              
              
              98
              
              
              195Addition
                  to Provision for Loan LossesCharged
                  to Operations
              
              
              270
              
              
              307
              
              
              477
              
              
              337Allowance
                  for Loan Losses,End
                  of Period
              
              $
              3,449
              
              $
              2,817
              
              $
              3,449
              
              $
              2,817Ratio
                  of Net Loans Charged Off (Recovered) toAverage
                  Loans Outstanding (Annualized)
              
              
              0.01
              %
              
              0.28
              %
              
              0.06
              %
              
              0.13
              %Ratio
                  of Allowance for Loan Losses toNet
                  Loans at End of Period
              
              
              
              
              
              
              
              
              0.96
              %
              
              0.87
              %




**Investment
      Securities**





In
      addition to the credit risk present in the loan portfolio, we also have credit
      risk associated with our investment security holdings. As of June 30, 2007,
      we
      had a total of 56 debt securities of various types that had aggregated
      unrealized losses of $1,264,000 that amounted to 2.0% of the amortized cost
      basis of these securities. Included in this total was one debt security with
      an
      amortized cost of $1,000,000 that had an unrealized loss of $450,000. We
      determined that the impairment in the value of this security was “other than
      temporary,” and recorded the related loss in the consolidated statement of
      income as an impairment charge of $450,000 ($297,000 or $0.12 per share after
      tax). In order to determine that the unrealized loss on this security was other
      than temporary, we primarily considered the amount by which, and the length
      of
      time for which, the market value has been less than cost. Based on our
      assessment of the total investment portfolio at June 30, 2007, we did not hold
      any other security that had a fair value decline that is currently expected
      to
      be other than temporary. Consequently, any declines in other securities’ fair
      values below amortized cost have been provided for in other comprehensive income
      (loss). In addition, there are no significant concentrations of investments
      (greater than 10% of stockholders’ equity) in any individual security
      issuer.





**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 deposit base;





·
            Proceeds
                from the sale or maturity of investment
                securities;





·
            Payments
                received on loans and mortgage-backed securities;





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





·
            Acquisition
                of brokered certificates of deposit (“CDs”) and CDs issued through the
                CDARS program as discussed in Net Interest Income/Funding Sources,
                above.






18




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





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





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





**Off-Balance
      Sheet Commitments**





In
      the
      normal course of business, we are party to financial instruments with
      off-balance sheet risk to meet the financing needs of our customers. These
      financial instruments include commitments to extend credit and standby letters
      of credit. Total commitments to extend credit amounted to $123,747,000 at June
      30, 2007 as compared to $132,977,000 at December 31, 2006. Total standby letters
      of credit amounted to $8,756,000 at June 30, 2007 as compared to $8,694,000
      at
      December 31, 2006.





In
      addition, in the conduct of business operations, we routinely enter into
      contracts for services. These contracts may require payment for services to
      be
      provided in the future and may also contain penalty clauses for the early
      termination of the contracts. In January 2007, the contract with our core data
      processor was renegotiated. Formerly, the majority of this contract expired
      in
      November 2008; however, the contract renegotiation resulted in a new maturity
      date of November 2013. Any early termination will require the payment of a
      substantial penalty. The renegotiation and extension of this contract will
      result in a substantial savings of approximately $100,000 in data processing
      and
      ATM processing expenses for 2007 as compared to the costs we would have incurred
      without the renegotiation. Except as noted above, there has been no material
      change in contracts for services since December 2006.





**Stockholders'
      Equity**





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





Union
      National and the Bank are subject to various regulatory capital requirements
      administered by the federal banking agencies. Failure to meet the minimum
      capital requirements can initiate certain mandatory and possibly additional
      discretionary actions by regulators that, if undertaken, could have a direct
      material effect on our financial statements. Under capital adequacy guidelines
      and the regulatory framework for prompt corrective action, Union National and
      the Bank must meet specific capital guidelines that involve quantitative
      measures of their assets, liabilities and certain off-balance sheet items as
      calculated under regulatory accounting practices. The capital amounts and
      classification are also subject to qualitative judgments by the regulators
      about
      components, risk weightings and other factors.




Quantitative
      measures established by regulation to ensure capital adequacy require Union
      National and the Bank to maintain minimum amounts and ratios (set forth below)
      of Tier 1 capital to average assets and of total capital (as defined in the
      regulations) to risk-weighted assets. As of June 30, 2007, Union National and
      the Bank meet all capital adequacy requirements to which they are subject.




19




As
      of
      June 30, 2007, the most recent notification from the regulators categorized
      the
      Bank as “well-capitalized” under the regulatory framework for prompt corrective
      action. There are no conditions or events since that notification that
      management believes have changed the Bank’s category.





Union
      National and the Bank maintained the following regulatory capital levels and
      leverage and risk-based capital ratios as of:


June
                  30, 2007
              
              December
                  31, 2006(Dollars
                  in thousands)
              
              Amount
              
              %
              
              Amount
              
              %Union
                  National Financial CorporationLeverage
                  Ratio:Tier
                  I Capital to Average Total Assets
              
              $
              38,094
              
              
              8.18
              %
              $
              38,091
              
              
              7.39
              %Minimum
                  Required for Capital Adequacy Purposes
              
              
              18,638
              
              
              4.00
              
              
              20,611
              
              
              4.00Risk-based
                  Capital Ratios:Tier
                  I Capital Ratio - Actual
              
              
              38,094
              
              
              9.02
              
              
              38,091
              
              
              8.97Minimum
                  Required for Capital Adequacy Purposes
              
              
              16,884
              
              
              4.00
              
              
              16,991
              
              
              4.00Total
                  Capital Ratio - Actual
              
              
              55,060
              
              
              13.04
              
              
              54,786
              
              
              12.90Minimum
                  Required for Capital Adequacy Purposes
              
              
              33,768
              
              
              8.00
              
              
              33,983
              
              
              8.00
  June
                  30, 2007
              
              December
                  31, 2006(Dollars
                  in thousands)
              
              Amount
              
              %
              
              Amount
              
              %Union
                  National Community BankLeverage
                  Ratio:Tier
                  I Capital to Average Total Assets
              
              $
              38,282
              
              
              8.22
              %
              $
              38,048
              
              
              7.45
              %Minimum
                  Required for Capital Adequacy Purposes
              
              
              18,638
              
              
              4.00
              
              
              20,611
              
              
              4.00To
                  Be Well-Capitalized Under Prompt CorrectiveAction
                  Provisions
              
              
              23,297
              
              
              5.00
              
              
              25,764
              
              
              5.00Risk-based
                  Capital Ratios:Tier
                  I Capital Ratio - Actual
              
              
              38,287
              
              
              9.11
              
              
              38,048
              
              
              9.08Minimum
                  Required for Capital Adequacy Purposes
              
              
              16,817
              
              
              4.00
              
              
              16,925
              
              
              4.00To
                  Be Well-Capitalized Under Prompt CorrectiveAction
                  Provisions
              
              
              25,225
              
              
              6.00
              
              
              25,387
              
              
              6.00Total
                  Capital Ratio - Actual
              
              
              47,736
              
              
              11.35
              
              
              47,473
              
              
              11.22Minimum
                  Required for Capital Adequacy Purposes
              
              
              33,634
              
              
              8.00
              
              
              33,849
              
              
              8.00To
                  Be Well-Capitalized Under Prompt CorrectiveAction
                  Provisions
              
              
              42,042
              
              
              10.00
              
              
              42,312
              
              
              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 June 30, 2007, this limitation amounted to
      approximately $4,774,000. These regulations also require that any such
      investment, loan, extension of credit or advance be secured by securities having
      a market value in excess of the amount thereof.





Included
      in Tier 1 regulatory capital of Union National Financial Corporation detailed
      above is $9,557,000 of trust capital securities issued through Union National
      Capital Trust I and Union National Capital Trust II, wholly-owned subsidiaries
      of Union National. The balance of the trust capital securities, $1,443,000,
      is
      included in Tier II regulatory capital of Union National Financial Corporation
      above. Additionally, included in Tier II regulatory capital of the Bank and
      Union National Financial Corporation is $6,000,000 of junior subordinated
      debentures issued by the Bank. These securities would become callable if the
      Federal Reserve makes a determination that trust capital securities can no
      longer be considered in regulatory capital.




**Regulatory
      Activity**





From
      time
      to time, various types of federal and state legislation have been proposed
      that
      could result in additional regulation of, and restrictions on, the business
      of
      Union National and the Bank. As a consequence of the extensive regulation of
      commercial banking activities in the United States, Union National's and the
      Bank's business is particularly susceptible to being affected by federal and
      state legislation and regulations that may increase the cost of doing business.
      Specifically, Union National is susceptible to changes in tax law that may
      increase the cost of doing business or impact Union National’s ability to
      realize the value of deferred tax assets.




20





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, applicable law 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 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.





We
      believe that the MOU will have no material impact on our operating results
      or
      financial condition and that the MOU will not constrain our business. We believe
      we have already made substantial progress in satisfying the MOU. We are
      committed to addressing and resolving the issues presented in the
      MOU.





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





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





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





21


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




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




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





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





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





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





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




22





**Item
      4 - CONTROLS AND PROCEDURES**





**Evaluation
      of Disclosure Controls and Procedures**





Union
      National maintains controls and procedures designed to ensure that information
      required to be disclosed in the reports that the company files or submits under
      the Securities Exchange Act of 1934 is recorded, processed, summarized and
      reported within the time periods specified in the rules and forms of the
      Securities and Exchange Commission. Based upon their evaluation of those
      controls and procedures as of June 30, 2007, Union National’s Chief Executive
      Officer and Chief Accounting Officer concluded that the disclosure controls
      and
      procedures were adequate.





**Changes
      in Internal Controls**





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





**Item
      4T - CONTROLS AND PROCEDURES**





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




23


**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings**





Management
      is not aware of any litigation that would have a material adverse effect on
      the
      consolidated financial position of Union National. There are no proceedings
      pending other than the ordinary routine litigation incident to the business
      of
      Union National and its subsidiary, Union National Community Bank. Other than
      the
      MOU with the OCC and the effects thereof, as discussed earlier on page 8 and
      page 20 of this report, no material proceedings are pending or are known to
      be
      threatened or contemplated against Union National and the Bank by government
      authorities.





**Item
      1A. Risk Factors**





During
      the six months ended June 30, 2007 and through the date of this report, there
      have been no known material changes to the risk factors described in our Annual
      Report on Form 10-K for the year ended December 31, 2006.





**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds**





None.





**Item
      3. Defaults Upon Senior Securities**





None.





**Item
      4. Submission of Matters to a Vote of Security Holders**





(a)
            The
                Annual Meeting of Shareholders was held at 10:00 a.m. on May 2, 2007,
                at
                The Eden Resort Inn, 222 Eden Road, Lancaster, Pennsylvania, 17601-4216.





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





Four
      Class B Directors were elected as follows:


Votes
                  Cast
              
              Votes
                  to “WithholdTerm
                  Expires
              
              “For”
              
              Authority”Donald
                  Cargas, Jr.
              
              
              2010
              
              
              1,744,582
              
              
              144,528Carl
                  R. Hallgren
              
              
              2010
              
              
              1,797,895
              
              
              91,215Barry
                  C. Huber
              
              
              2010
              
              
              1,800,615
              
              
              88,495Lloyd
                  C. Pickell
              
              
              2010
              
              
              1,779,907
              
              
              109,203





Directors
      whose term continued after the meeting:




Class
      A Directors


Mark
                  D. Gainer
              
              
              2009Darwin
                  A. Nissley
              
              
              2009James
                  R. Godfrey
              
              
              2009Nancy
                  Shaub Colarik
              
              
              2009





Class
      C Directors


Kevin
                  D. Dolan
              
              
              2008Thomas
                  J. McGrath
              
              
              2008William
                  M. Nies
              
              
              2008




**Item
      5. Other Information**





None.




24


**Item
      6. Exhibits** :





(a)
            Exhibits





Exhibit
      No. 31.1 - Certification of Principal Executive Officer Pursuant to Exchange
      Act Rules 13a-14(a)/15d-14(a) as added by Section 302 of the Sarbanes-Oxley
      Act of 2002





Exhibit
      No. 31.2 - Certification of Principal Financial Officer Pursuant
      to Exchange
      Act Rules 13a-14(a)/15d-14(a) as added by Section 302 of the Sarbanes-Oxley
      Act of 2002





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





25


**SIGNATURES**





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


Union National Financial Corporation
              (Registrant)By
            /s/ Mark D. GainerMark
              D. GainerChairman/President/Chief
                Executive Officer
              (Principal
                Executive Officer)Date: August 14,
              2007


By
            /s/ Diane W. RodkeyDiane
                W. Rodkey
              Vice
                President, Chief Accounting Officer
              (Principal
                Financial and
              Accounting
                Officer)Date: August 14, 2007






26