EXHIBIT
        13
 Excerpts
        From Union National Financial Corporation’s
 2006
        Annual Report to Stockholders


















**TABLE
                  OF CONTENTS**Financial
                  Highlights
              F-1To
                  Our Stockholders
              2-3Consolidated
                  Balance Sheets
              4Consolidated
                  Statements of Income
              5Consolidated
                  Statements of Changes in Stockholders' Equity
              6Consolidated
                  Statements of Cash Flows
              7Notes
                  to Consolidated Financial Statements
              8-27Report
                  of Independent Registered Public Accounting Firm
              28Summary
                  of Quarterly Financial Data
              29Selected
                  Financial Data
              30Management's
                  Discussion and Analysis of Financial Condition andResults
                  of Operations
              31-48Board
                  of Directors
              49
  **STOCK,
          BROKER, AND DIVIDEND INFORMATION**
  Union
          National Financial Corporation has only one class of common stock authorized,
          issued, and outstanding. The outstanding common stock is traded on the
          OTC
          Bulletin Board (OTCBB), primarily in Lancaster County, Pennsylvania, under
          the
          symbol UNNF. Prices presented in the table below reflect actual transactions
          known to management. Prices and dividends per share are adjusted for stock
          dividends. Cash dividends, when declared by the Board of Directors, are
          payable
          on or about the 20th day of February, May, August, and November. Stockholders
          of
          record may elect to have cash dividends deposited directly to their checking
          or
          savings accounts. Union National offers its stockholders a Dividend Reinvestment
          and Stock Purchase Plan, whereby holders of stock may have their quarterly
          cash
          dividends automatically invested in additional shares of common stock of
          the
          corporation and may purchase additional shares within specified
          limits.
 **Stock
                    Price**
                
                **Dividends****Quarter**
                
                **High**
                
                **Low**
                
                **Per
                    Share****First,
                    2006**
                
                **$**
                **21.85**
                
                **$**
                **18.36**
                
                **$**
                **0.160****Second**
                
                
                **20.50**
                
                
                **18.75**
                
                
                **0.160****Third**
                
                
                **20.25**
                
                
                **18.65**
                
                
                **0.160****Fourth**
                
                
                **19.50**
                
                
                **17.90**
                
                
                **0.140**First,
                    2005
                
                $
                26.29
                
                $
                23.38
                
                $
                0.152Second
                
                
                23.81
                
                
                20.30
                
                
                0.152Third
                
                
                22.50
                
                
                21.00
                
                
                0.160Fourth
                
                
                22.50
                
                
                21.10
                
                
                0.160
  Union
        National had approximately 1,353 stockholders (including stockholders of
        record
        and individual participants in security position listings) at December 31,
        2006,
        and approximately 1,386 stockholders at December 31, 2005.
  **REGARDING
        FORWARD-LOOKING INFORMATION**
 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 the information concerning possible
          or
          assumed future results of operations of Union National Financial Corporation,
          Union National Community Bank or the combined company. When we use words
          such as
“believes,” “expects,” "anticipates", or similar expressions, we are making
          forward-looking statements.
 
 Union
          National undertakes no obligation to publicly revise or update these
          forward-looking statements to reflect events or circumstances that arise
          after
          the date of this report.
 
  **REGISTRAR
          AND TRANSFER AGENT**
 
 Union
          National Community Bank
 Attn:
          Stock Transfer Department
 P.O.
          Box
          567
 Mount
          Joy, PA 17552-0567
 
 **FOR
          FURTHER INFORMATION ON PURCHASING** **OUR
          STOCK, WE REFER YOU TO:**
 
 Ferris
          Baker Watts
 Renaissance
          Place, 2nd Floor
 635
          North
          12th Street
 Lemoyne,
          PA 17043
 (800)
          480-7497
 
 Janney
          Montgomery Scott, LLC
 61
          North
          Duke Street
 Lancaster,
          PA 17602
 (717)
          293-4100
 
 F.
          J.
          Morrissey & Company, Inc.
 4
          Tower
          Bridge, Suite 300
 200
          Barr
          Harbor Drive
 West
          Conshohocken, PA 19428
 (800)
          842-8928
 
 Ryan
          Beck
& Co., Inc.
 220
          South
          Orange Avenue
 Livingston,
          NJ 07039
 (973)
          597-6000
 
 Hazlett,
          Burt & Watson, Inc.
 100
          East
          King Street
 P.
          O. Box
          1267
 Lancaster,
          PA 17608
 (717)
          397-5515
 
 **FORM
          10-K REQUEST**
 
 The
          Annual Report on Form 10-K filed with the Securities
          & Exchange Commission may be obtained, without
          charge, by writing to:
  Clement
          M. Hoober, CPA
 Treasurer/CFO
 Union
          National Financial Corporation
 P.O.
          Box
          567
 Mount
          Joy, PA 17552-0567
  The
          annual report and other company reports are also
          filed electronically through the Electronic Data Gathering,
          Analysis and Retrieval System (EDGAR) which
          performs automated collection, validation, indexing,
          acceptance and forwarding of submissions to
          the
          Securities & Exchange Commission (SEC) and is
          accessible by the public using the internet at *http://www.sec.gov/edgar.shtml.*
 
 **ANNUAL
          MEETING**
 
 The
          Annual Meeting of Stockholders will be held
 on
          Wednesday, May 2, 2007, at 10:00 a.m. at:
 Eden
          Resort Inn and Conference Center
 222
          Eden
          Road
 Lancaster,
          PA 17601
 
  
 **FINANCIAL
              HIGHLIGHTS**
 **December
                      31,**
                  
                  December
                      31,
                  
                  %
                      Increase**(Dollars
                      in thousands, except per share data)**
                  
                  **2006**
                  
                  2005
                  
                  (Decrease)**For
                      the Year**Total
                      Interest Income
                  
                  **$**
                  **30,290**
                  
                  $
                  23,978
                  
                  
                  26.3
                  %Total
                      Interest Expense
                  
                  
                  **15,626**
                  
                  
                  9,662
                  
                  
                  61.7
                  %Net
                      Interest Income
                  
                  
                  **14,664**
                  
                  
                  14,316
                  
                  
                  2.4
                  %Net
                      Income
                  
                  
                  **2,444**
                  
                  
                  3,353
                  
                  
                  (27.1
                  %)**Per
                      Share***Net
                      Income (Basic)
                  
                  **$**
                  **0.97**
                  
                  $
                  1.33
                  
                  
                  (27.1
                  %)Net
                      Income (Assuming Dilution)
                  
                  
                  **0.96**
                  
                  
                  1.31
                  
                  
                  (26.7
                  %)Cash
                      Dividends Paid
                  
                  
                  **0.620**
                  
                  
                  0.625
                  
                  
                  (0.8
                  %)Stockholders'
                      Equity
                  
                  
                  **11.31**
                  
                  
                  10.84
                  
                  
                  4.3
                  %**Average
                      Balances**Loans
                  
                  **$**
                  **318,251**
                  
                  $
                  280,245
                  
                  
                  13.6
                  %Investments
                      and Other Earning Assets
                  
                  
                  **135,895**
                  
                  
                  116,422
                  
                  
                  16.7
                  %Total
                      Assets
                  
                  
                  **489,884**
                  
                  
                  425,611
                  
                  
                  15.1
                  %Total
                      Deposits
                  
                  
                  **316,402**
                  
                  
                  282,934
                  
                  
                  11.8
                  %Stockholders'
                      Equity
                  
                  
                  **27,754**
                  
                  
                  26,621
                  
                  
                  4.3
                  %**Return
                      on Average**Assets
                  
                  
                  **0.50**
                  **%**
                  
                  0.79
                  %Stockholders'
                      Equity
                  
                  
                  **8.81**
                  **%**
                  
                  12.59
                  %Realized
                      Stockholders' Equity (1)
                  
                  
                  **8.55**
                  **%**
                  
                  12.64
                  %
 (1)
              Excludes the impact of accumulated other comprehensive income on total
              stockholders' equity.
  *
                Per
                Share information reflects the 5% stock dividend effective on May
                20,
                2005.
 **CORPORATE
              INTRODUCTION**
  Union
              National Financial Corporation, headquartered in Lancaster, Pennsylvania,
              is the
              holding company of Union National Community Bank. The bank provides
              a full range
              of financial services for both retail and business customers primarily
              in
              Lancaster County, Pennsylvania. Also, Union National Community Bank,
              through its
              mortgage subsidiary, Home Team Financial, LLC, offers residential mortgage
              loan
              products in multiple states through internet banking marketing programs.
              In
              addition to traditional banking services, Union National also offers
              insurance,
              retirement plan services and wealth management services through its **UnionNational** Advisors
              Group. Union National Community Bank has seven full-service traditional
              offices
              in Columbia, Elizabethtown, Hempfield, Manheim, Manheim Township, Maytown
              and
              Mount Joy; and two full-service offices featuring the Gold Café experience in
              Lancaster and Centerville. The deposits of Union National Community
              Bank are
              insured by the Federal Deposit Insurance Corporation (FDIC) to the
              maximum
              extent provided by law.
  **CORPORATE
                OFFICERS**
 Mark
                          D. Gainer, Chairman of the Board/President/CEO
                      Carl
                          R. Hallgren, Esq., Vice Chariman /SecretaryMichael
                          A. Frey, Vice President
                      Clement
                          M. Hoober, CPA, Treasurer/CFO
 1
  **It’s
        time to begin.**
 
 During
        2006, we embarked on a new, exciting chapter in the Union National story.
        We put
        into motion initiatives to increase our presence in Lancaster County, and
        strategies that would allow our organization to clearly stand out in a crowded
        market place.
 
 **2006
        was by all accounts, the most active year in our history.**
 
 The
        pace
        was swift, the attitude was enthusiastic, and our initiatives were filled
        with
        energy. Yet, even with the moves, new efforts, and heightened activity, our
        objectives remain grounded in a very simple premise: to proactively manage
        change instead of reacting to it.
 
 During
        the year, we launched our innovative Gold Cafe brand by opening two new and
        unique offices. Gold Cafe is part of our commitment to the delivery of a
        remarkable customer experience. Gold Cafe is a destination point that completely
        redefines what the banking experience should be for customers. In an industry
        saturated with parity, the concept has provided an extremely clear
        differentiation from our local competitors. People have noticed, and customer
        feedback has been positive. Gold Cafe has already been featured in The Wall
        Street Journal, The Baltimore Sun, American Banker Magazine, and numerous
        local
        publications.
 
 Union
        National also established its new corporate headquarters in Lancaster during
        2006, providing us with a facility that is accessible, visible and centrally
        located in our Lancaster County marketplace. It is important to note that
        we
        also expanded our Administrative Services Center and relocated the entire
        Home
        Team Financial operations center to Mount Joy. We now have established a
        larger
        presence in Lancaster and in our hometown.
 
 The
        momentum that was established in previous years continued in 2006. Our
        Commercial and Business Banking Group once again posted strong results by
        increasing both loan and deposit outstandings while maintaining strong credit
        quality. Our Preferred Client Group increased its presence in the market
        by
        acquiring numerous new relationships. Overall the organization realized net
        loan
        growth of 13.6% and deposit growth of 14.7%.
 
 **A
        year that was not without challenges.**
 
 This
        past
        year has been a very challenging one for our industry in general and certainly
        also for Union National. It was fully anticipated that the expansion of our
        footprint and the launch of a new brand would require additional resources
        and
        would negatively impact our short-term earnings. However, a flat and inverted
        treasury yield curve along with a shift in the mix of customer deposits
        significantly compressed the net interest margin to further impact 2006
        earnings.
 
 2
 
 **Proactively
        managing change.**
 
 In
        order
        to strengthen its equity position and facilitate its future core banking
        growth
        strategies for loans and deposits, Union National undertook a de-leveraging
        strategy in January of 2007. This strategy significantly decreased the bank’s
        portfolio of available-for-sale investment securities and its long-term debt.
        Proceeds of approximately $66 million from the sale of investment securities
        were utilized to pay off a commensurate amount of borrowings primarily from
        the
        Federal Home Loan Bank of Pittsburgh. These transactions have better positioned
        Union National for future core growth. The transactions were completed before
        the end of January and resulted in realized losses and FHLB prepayment penalties
        totaling a pre-tax amount of $551,000.
 
 Additionally,
        during January 2007, we engaged the consulting firm S.R. Snodgrass, A.C.
        (“Snodgrass”) to undertake a profit enhancement project that will assist
        management in developing and implementing strategies for achieving higher
        profitability. Snodgrass utilizes a unique diagnostic methodology that
        aggressively locates profit improvement opportunities, coupled with a detailed
        implementation plan and change management techniques to build an ongoing
        process
        for innovation and efficiency with sustainable results. We expect that each
        specific profit project that is identified will result in measurable targets
        for
        increases to pre-tax income.
 
 We
        have
        taken significant steps on the journey to be the most remarkable bank in
        our
        market and we have committed ourselves to creating positive, engaging
        experiences for our customers that are unmatched by any other financial services
        company. We recognize that this journey will be a difficult one, but we intend
        to meet the challenges
 head
        on,
        as we proactively manage change and position ourselves to compete effectively
        in
        an increasingly competitive environment.
 
 The
        Board
        of Directors and Senior Management are fully engaged and committed to making
        the
        necessary changes to improve the financial results achieved by Union National.
        Our story is still a work in process, and will require an intense effort
        in 2007
        to achieve our goal of profitable growth.
 
 Your
        continued support and confidence are greatly appreciated.
 
 **It’s
        time to begin thinking differently about Union National Financial
        Corporation.**
 
 **Mark
                  D. Gainer**Chairman,
                  President & Chief Executive Officer
                Union
                  National Financial Corporation**Michael A. Frey**President
                  & Chief Operating Officer
                Union
                  National Community Bank
 
 3
  **Consolidated
        Balance Sheets**
  **December
                  31**
              
              December
                  31,(Dollars
                  in thousands, except share data)
              
              **2006**
              
              2005**ASSETS**Cash
                  and Due from Banks
              
              **$**
              **15,129**
              
              $
              14,317Interest-Bearing
                  Deposits in Other Banks
              
              
              **333**
              
              
              184Total
                  Cash and Cash Equivalents
              
              
              **15,462**
              
              
              14,501Investment
                  Securities Available for Sale
              
              
              **129,810**
              
              
              119,702Loans
                  Held for Sale
              
              
              **1,662**
              
              
              2,147Loans
                  and Leases, Net of Unearned Income
              
              
              **341,113**
              
              
              300,213Less:
                  Allowance for Loan and Lease Losses
              
              
              **(3,070**
              **)**
              
              (2,675
              )Net
                  Loans and Leases
              
              
              **338,043**
              
              
              297,538Premises
                  and Equipment, Net
              
              
              **9,580**
              
              
              7,059Restricted
                  Investment in Bank Stocks
              
              
              **5,994**
              
              
              5,736Bank-Owned
                  Life Insurance
              
              
              **10,243**
              
              
              9,860Other
                  Assets
              
              
              **6,803**
              
              
              5,635TOTAL
                  ASSETS
              
              **$**
              **517,597**
              
              $
              462,178**LIABILITIES**Deposits:Noninterest-Bearing
              
              **$**
              **48,311**
              
              $
              43,643Interest-Bearing
              
              
              **291,764**
              
              
              252,967Total
                  Deposits
              
              
              **340,075**
              
              
              296,610Short-Term
                  Borrowings
              
              
              **10,544**
              
              
              18,305Long-Term
                  Debt
              
              
              **117,571**
              
              
              105,815Junior
                  Subordinated Debentures
              
              
              **17,341**
              
              
              11,341Other
                  Liabilities
              
              
              **3,443**
              
              
              2,817TOTAL
                  LIABILITIES
              
              
              **488,974**
              
              
              434,888Minority
                  Interest in Consolidated Subsidiaries
              
              
              **75**
              
              
              65**STOCKHOLDERS'
                  EQUITY**Common
                  Stock (Par Value $.25 per share)
              
              
              **735**
              
              
              734Shares
                  Authorized - 20,000,000; Issued - 2,941,808 (2,936,798 in
                  2005)Outstanding
                  - 2,523,983 (2,510,682 in 2005)Surplus
              
              
              **12,918**
              
              
              12,855Retained
                  Earnings
              
              
              **23,460**
              
              
              22,576Accumulated
                  Other Comprehensive Loss
              
              
              **(242**
              **)**
              
              (447
              )Treasury
                  Stock, at cost - 417,825 shares in 2006(426,116
                  shares in 2005)
              
              
              **(8,323**
              **)**
              
              (8,493
              )TOTAL
                  STOCKHOLDERS' EQUITY
              
              
              **28,548**
              
              
              27,225TOTAL
                  LIABILITIES andSTOCKHOLDERS'
                  EQUITY
              
              **$**
              **517,597**
              
              $
              462,178
  *See
                  notes to consolidated financial statements.*
  4
 **Consolidated
          Statements of Income**
 Years
                    Ended December 31,(Dollars
                    in thousands, except per share data)
                
                **2006**
                
                2005
                
                2004**INTEREST
                    INCOME**Interest
                    and Fees on Loans and Leases
                
                **$**
                **23,613**
                
                $
                18,894
                
                $
                15,467Investment
                    Securities:Taxable
                    Interest
                
                
                **4,875**
                
                
                3,552
                
                
                2,933Tax-Exempt
                    Interest
                
                
                **1,365**
                
                
                1,293
                
                
                1,131Dividends
                
                
                **402**
                
                
                199
                
                
                99Other
                
                
                **35**
                
                
                40
                
                
                8Total
                    Interest Income
                
                
                **30,290**
                
                
                23,978
                
                
                19,638**INTEREST
                    EXPENSE**Deposits
                
                
                **8,392**
                
                
                4,962
                
                
                3,032Short-Term
                    Borrowings
                
                
                **489**
                
                
                234
                
                
                108Long-Term
                    Debt
                
                
                **5,729**
                
                
                3,785
                
                
                3,082Junior
                    Subordinated Debentures
                
                
                **1,016**
                
                
                681
                
                
                399Total
                    Interest Expense
                
                
                **15,626**
                
                
                9,662
                
                
                6,621Net
                    Interest Income
                
                
                **14,664**
                
                
                14,316
                
                
                13,017**PROVISION
                    for LOAN and LEASE LOSSES**
                
                
                **672**
                
                
                681
                
                
                404Net
                    Interest Income after Provision forLoan
                    and Lease Losses
                
                
                **13,992**
                
                
                13,635
                
                
                12,613**OTHER
                    OPERATING INCOME**Income
                    from Fiduciary Activities
                
                
                **274**
                
                
                301
                
                
                225Service
                    Charges on Deposit Accounts
                
                
                **1,671**
                
                
                1,600
                
                
                1,569Other
                    Service Charges, Commissions, and Fees
                
                
                **954**
                
                
                813
                
                
                691Alternative
                    Investment Sales Commissions
                
                
                **673**
                
                
                783
                
                
                647Investment
                    Securities Gains
                
                
                **209**
                
                
                104
                
                
                194Mortgage
                    Banking/Brokerage Activities
                
                
                **3,129**
                
                
                1,431
                
                
                230Title
                    Insurance/Settlement Income
                
                
                **585**
                
                
                332
                
                
                25Earnings
                    from Bank-Owned Life Insurance
                
                
                **383**
                
                
                373
                
                
                383Other
                    Income
                
                
                **384**
                
                
                274
                
                
                131Total
                    Other Operating Income
                
                
                **8,262**
                
                
                6,011
                
                
                4,095**OTHER
                    OPERATING EXPENSES**Salaries
                    and Wages
                
                
                **8,270**
                
                
                6,790
                
                
                5,539Retirement
                    Plan and Other Employee Benefits
                
                
                **2,156**
                
                
                1,835
                
                
                1,521Net
                    Occupancy
                
                
                **1,507**
                
                
                944
                
                
                801Furniture
                    and Equipment
                
                
                **886**
                
                
                697
                
                
                702Professional
                    Fees
                
                
                **804**
                
                
                702
                
                
                641Data
                    Processing Services
                
                
                **844**
                
                
                746
                
                
                701Pennsylvania
                    Shares Tax
                
                
                **216**
                
                
                271
                
                
                268Advertising
                    and Marketing
                
                
                **1,308**
                
                
                635
                
                
                336ATM
                    Processing
                
                
                **419**
                
                
                354
                
                
                300Minority
                    Interests in Earnings of Subsidiaries
                
                
                **130**
                
                
                155
                
                
                5Other
                    Expenses
                
                
                **3,171**
                
                
                2,498
                
                
                1,995Total
                    Other Operating Expenses
                
                
                **19,711**
                
                
                15,627
                
                
                12,809Income
                    before Income Taxes
                
                
                **2,543**
                
                
                4,019
                
                
                3,899**PROVISION
                    for INCOME TAXES**
                
                
                **99**
                
                
                666
                
                
                676**NET
                    INCOME**
                
                **$**
                **2,444**
                
                $
                3,353
                
                $
                3,223**PER
                    SHARE INFORMATION**Net
                    Income for Year - Basic
                
                **$**
                **0.97**
                
                $
                1.33
                
                $
                1.28Net
                    Income for Year - Assuming Dilution
                
                
                **0.96**
                
                
                1.31
                
                
                1.25Cash
                    Dividends
                
                
                **0.620**
                
                
                0.625
                
                
                0.610
  *See
                    notes to consolidated financial statements.*
  5
  **Consolidated
          Statements of Changes in Stockholders' Equity**
  AccumulatedShares
                    of
                
                
                
                
                
                
                
                OtherCommon
                    Stock
                
                Common
                
                
                
                Retained
                
                Comprehensive
                
                Treasury(Dollars
                      in thousands, except share data)
                
                Outstanding
                
                Stock
                
                Surplus
                
                Earnings
                
                Income
                    (Loss)
                
                Stock
                
                Total**Balance,
                    December 31, 2003**
                
                
                2,458,748
                
                $
                690
                
                $
                9,090
                
                $
                21,963
                
                $
                1,035
                
                $
                (5,654
                )
                $
                27,124Comprehensive
                    Income:Net
                    Income
                
                
                
                
                
                
                
                
                
                
                
                3,223
                
                
                
                
                
                
                
                
                3,223Unrealized
                      Holding Losses on Available-for-Sale Investment Securities
                      Arising During
                      the Year, Net of Tax Benefit of $169
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (326
                )
                
                
                
                
                (326
                )Reclassification
                      Adjustment for Gains Included in Net Income, Net of Tax of
                      $66
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (128
                )
                
                
                
                
                (128
                )Total
                    Comprehensive Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,769Acquisition
                    of Treasury Stock
                
                
                (100,489
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,260
                )
                
                (2,260
                )Issuance
                    of Common Stock under DividendReinvestment
                    and Stock Purchase Plan
                
                
                14,572
                
                
                4
                
                
                328
                
                
                
                
                
                
                
                
                
                
                
                332Issuance
                      of Common Stock under Employee and Director Plans, Including
                      Tax Benefit
                      of $13
                
                
                29,375
                
                
                7
                
                
                423
                
                
                
                
                
                
                
                
                
                
                
                430Retirement
                    of Treasury Stock (14,000 shares)
                
                
                
                
                
                (3
                )
                
                (271
                )
                
                
                
                
                
                
                
                274
                
                
                -Cash
                    Dividends
                
                
                
                
                
                
                
                
                
                
                
                (1,542
                )
                
                
                
                
                
                
                
                (1,542
                )**Balance,
                    December 31, 2004**
                
                
                2,402,206
                
                
                698
                
                
                9,570
                
                
                23,644
                
                
                581
                
                
                (7,640
                )
                
                26,853Comprehensive
                    Income:Net
                    Income
                
                
                
                
                
                
                
                
                
                
                
                3,353
                
                
                
                
                
                
                
                
                3,353Unrealized
                      Holding Losses on Available-for-Sale Investment Securities
                      Arising During
                      the Year, Net of Tax Benefit of $479
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (930
                )
                
                
                
                
                (930
                )Reclassification
                      Adjustment for Gains Included in Net Income, Net of Tax of
                      $36
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (69
                )
                
                
                
                
                (69
                )Unrealized
                    Losses on Cash Flow Hedges, netof
                    Tax Benefit of $0
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (29
                )
                
                
                
                
                (29
                )Total
                    Comprehensive Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,325Acquisition
                    of Treasury Stock
                
                
                (53,276
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,192
                )
                
                (1,192
                )Issuance
                    of Common Stock under DividendReinvestment
                    and Stock Purchase Plan
                
                
                15,889
                
                
                4
                
                
                354
                
                
                
                
                
                
                
                
                
                
                
                358Issuance
                        of Common Stock under Employee and Director Plans, Including
                        Tax Benefit
                        of $40
                
                
                26,605
                
                
                6
                
                
                451
                
                
                
                
                
                
                
                
                
                
                
                457Issuance
                    of Common Stock under5%
                    Common Stock Dividend
                
                
                119,258
                
                
                30
                
                
                2,815
                
                
                (2,845
                )
                
                
                
                
                
                
                
                -Retirement
                    of Treasury Stock (17,000 shares)
                
                
                
                
                
                (4
                )
                
                (335
                )
                
                
                
                
                
                
                
                339
                
                
                -Cash
                    Dividends
                
                
                
                
                
                
                
                
                
                
                
                (1,576
                )
                
                
                
                
                
                
                
                (1,576
                )**Balance,
                    December 31, 2005**
                
                
                2,510,682
                
                
                734
                
                
                12,855
                
                
                22,576
                
                
                (447
                )
                
                (8,493
                )
                
                27,225**Comprehensive
                    Income:****Net
                    Income**
                
                
                
                
                
                
                
                
                
                
                
                **2,444**
                
                
                
                
                
                
                
                
                **2,444****Unrealized
                      Holding Gains on Available-for-Sale Investment Securities Arising
                      During****the
                      Year, Net of Tax of $191**
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                **370**
                
                
                
                
                
                **370****Reclassification
                    Adjustment for Gains****Included
                    in Net Income, Net of Tax of $70**
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                **(139**
                **)**
                
                
                
                
                **(139**
                **)****Unrealized
                    Losses on Cash Flow Hedges,****Net
                    of Tax Benefit of $11**
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                **(26**
                **)**
                
                
                
                
                **(26**
                **)****Total
                    Comprehensive Income**
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                **2,649****Acquisition
                    of Treasury Stock**
                
                
                **(8,709**
                **)**
                
                
                
                
                
                
                
                
                
                
                
                
                
                **(168**
                **)**
                
                **(168**
                **)****Issuance
                    of Common Stock under Dividend****Reinvestment
                    and Stock Purchase Plan**
                
                
                **18,404**
                
                
                **4**
                
                
                **349**
                
                
                
                
                
                
                
                
                
                
                
                **353****Issuance
                    of Common Stock under****Employee
                    Plans**
                
                
                **3,606**
                
                
                **1**
                
                
                **48**
                
                
                
                
                
                
                
                
                
                
                
                **49****Retirement
                    of Treasury Stock (17,000 shares)**
                
                
                **-**
                
                
                **(4**
                **)**
                
                **(334**
                **)**
                
                
                
                
                
                
                
                **338**
                
                
                **-****Cash
                    Dividends**
                
                
                
                
                
                
                
                
                
                
                
                **(1,560**
                **)**
                
                
                
                
                
                
                
                **(1,560**
                **)****Balance,
                    December 31, 2006**
                
                
                **2,523,983**
                
                **$**
                **735**
                
                **$**
                **12,918**
                
                **$**
                **23,460**
                
                **$**
                **(242**
                **)**
                **$**
                **(8,323**
                **)**
                **$**
                **28,548**
  *See
                    notes to consolidated financial statements.*
  6
 **Consolidated
          Statements of Cash Flows**
 Years
                    Ended December 31,(Dollars
                    in thousands)
                
                **2006**
                
                2005
                
                2004CASH
                    FLOWS from OPERATING ACTIVITIESNet
                    Income
                
                **$**
                **2,444**
                
                $
                3,353
                
                $
                3,223Adjustments
                    to Reconcile Net Income to NetCash
                    Provided by Operating Activities:Depreciation
                    and Amortization
                
                
                **1,104**
                
                
                915
                
                
                931Provision
                    for Loan and Lease Losses
                
                
                **672**
                
                
                681
                
                
                404Net
                    Amortization of Investment Securities' Premiums
                
                
                **429**
                
                
                916
                
                
                1,160Investment
                    Securities Gains
                
                
                **(209**
                **)**
                
                (104
                )
                
                (194
                )Benefit
                    From Deferred Income Taxes
                
                
                **(344**
                **)**
                
                (156
                )
                
                (92
                )Increase
                    in Minority Interest in Consolidated Subsidiaries
                
                
                **10**
                
                
                63
                
                
                1Earnings
                    from Bank-Owned Life Insurance
                
                
                **(383**
                **)**
                
                (373
                )
                
                (383
                )Gains
                    on Loans Sold
                
                
                **(2,149**
                **)**
                
                (541
                )
                
                (130
                )Proceeds
                    from Sales of Loans
                
                
                **80,315**
                
                
                19,324
                
                
                5,265Loans
                    Originated for Sale
                
                
                **(77,681**
                **)**
                
                (20,698
                )
                
                (5,170
                )Increase
                    in Accrued Interest Receivable
                
                
                **(371**
                **)**
                
                (327
                )
                
                (27
                )(Increase)
                    Decrease in Other Assets
                
                
                **(661**
                **)**
                
                (786
                )
                
                187Increase
                    in Other Liabilities
                
                
                **630**
                
                
                847
                
                
                380Net
                    Cash Provided by Operating Activities
                
                
                **3,806**
                
                
                3,114
                
                
                5,555CASH
                    FLOWS from INVESTING ACTIVITIESProceeds
                    from Sales of Available-for-Sale Securities
                
                
                **19,549**
                
                
                8,256
                
                
                20,862Proceeds
                    from Maturities of Available-for-Sale Securities
                
                
                **17,491**
                
                
                16,739
                
                
                18,777Purchases
                    of Available-for-Sale Securities
                
                
                **(47,015**
                **)**
                
                (43,532
                )
                
                (47,717
                )Net
                    Purchases of Restricted Investments in Bank Stocks
                
                
                **(258**
                **)**
                
                (775
                )
                
                (869
                )Net
                    Loans and Leases Made to Customers
                
                
                **(41,177**
                **)**
                
                (37,506
                )
                
                (37,721
                )Purchases
                    of Premises, Equipment, and Computer Software
                
                
                **(3,569**
                **)**
                
                (1,251
                )
                
                (598
                )Purchase
                    of Bank-Owned Life Insurance
                
                
                -
                
                
                -
                
                
                (1,300
                )Net
                    Cash Used in Investing Activities
                
                
                **(54,979**
                **)**
                
                (58,069
                )
                
                (48,566
                )CASH
                    FLOWS from FINANCING ACTIVITIESNet
                    Increase in Demand Deposits and Savings Accounts
                
                
                **10,856**
                
                
                15,518
                
                
                21,483Net
                    Increase in Time Deposits
                
                
                **32,609**
                
                
                15,122
                
                
                13,413Net
                    (Decrease) Increase in Short-Term Borrowings
                
                
                **(7,761**
                **)**
                ****
                13,781
                
                
                (5,457
                )Proceeds
                    from Issuance of Long-Term Debt
                
                
                **44,486**
                
                
                35,091
                
                
                26,593Payments
                    on Long-Term Debt
                
                
                **(32,730**
                **)**
                
                (17,906
                )
                
                (11,837
                )Proceeds
                    from Issuance of Junior Subordinated Debentures, net
                
                
                **6,000**
                
                
                -
                
                
                3,033Acquisition
                    of Treasury Stock
                
                
                **(168**
                **)**
                
                (1,192
                )
                
                (2,260
                )Issuance
                    of Common Stock
                
                
                **402**
                
                
                775
                
                
                749Cash
                    Dividends Paid
                
                
                **(1,560**
                **)**
                
                (1,576
                )
                
                (1,542
                )Net
                    Cash Provided by Financing Activities
                
                
                **52,134**
                
                
                59,613
                
                
                44,175Net
                    Increase in Cash and Cash Equivalents
                
                
                **961**
                
                
                4,658
                
                
                1,164CASH
                    and CASH EQUIVALENTS - Beginning of Period
                
                
                **14,501**
                
                
                9,843
                
                
                8,679CASH
                    and CASH EQUIVALENTS--End of Period
                
                **$**
                **15,462**
                
                $
                14,501
                
                $
                9,843SUPPLEMENTAL
                    DISCLOSURES OF CASH FLOW INFORMATIONCash
                    Payments for:Interest
                
                **$**
                **15,011**
                
                $
                9,161
                
                $
                6,506Income
                    Taxes
                
                
                **800**
                
                
                831
                
                
                570SUPPLEMENTAL
                    SCHEDULE OF NONCASH INVESTING ACTIVITIESRetirement
                    of Treasury Stock (17,000 shares in 2006 and 2005,14,000
                    shares in 2004)
                
                **$**
                **338**
                
                $
                339
                
                $
                274
  *See
                    notes to consolidated financial statements.*
  7
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
  **NOTE
        1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 The
        accounting and reporting policies of Union National Financial Corporation
        (“Union National”) and its subsidiary, Union National Community Bank (“the
        bank”), are in conformance with accounting principles generally accepted in the
        United States of America (“GAAP”) and prevailing practices within the banking
        industry. 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 (for additional
        information, see Note 11).
 
 Union
        National Community Bank is a full-service commercial bank which operates
        nine
        retail office locations in Lancaster County, Pennsylvania, providing a wide
        range of services to individuals and businesses. The bank accepts time, demand
        and savings deposits and offers secured and unsecured commercial, real estate
        and consumer loans, and leases. The bank also offers investment, custodial,
        estate planning and trust services. The bank is subject to government regulation
        and undergoes periodic examinations by its federal regulator, the Office
        of the
        Comptroller of the Currency.
 
 Home
        Team
        Financial, LLC, a subsidiary of Union National Community Bank that began
        operations in July 2005, has mortgage banking operations and offers mortgage
        brokerage services. It also offers title insurance and settlement services
        through its subsidiary, TA of Lancaster, LLC. The bank’s ownership interest in
        Home Team Financial, LLC is 98% with an initial interest in net profits of
        30%.
        Home Team Financial, LLC generates the majority of its business through direct
        marketing and operates in multiple states. (For additional information see
        Note
        16.)
  Basis
        of
        Presentation
  The
        consolidated financial statements include the accounts of Union National,
        the
        bank, Home Team Financial, LLC, and its subsidiary, TA of Lancaster, LLC.
        All
        material intercompany accounts and transactions have been eliminated. Union
        National’s two trust subsidiaries are not consolidated.
 
 Use
        of
        Estimates
 
 The
        process of preparing consolidated financial statements in conformity with
        GAAP
        requires the use of estimates and assumptions that affect the reported amounts
        of certain types of assets, liabilities, revenues and expenses. Accordingly,
        actual results may differ from estimated amounts. Material estimates that
        are
        particularly susceptible to significant change in the near term relate to
        the
        determination of the allowance for loan and lease losses and the assessment
        of
        other than temporary impairment of investment securities.
 
 Significant
        Group Concentrations of Credit Risk
  Most
        of
        Union National’s activities are with customers primarily located in Lancaster
        County, PA. The types of securities in which Union National invests are
        discussed in Note 3, while the types of lending that are engaged in by Union
        National are described in Note 4. Union National does not have any significant
        concentrations of risk in any one industry or customer. A large portion of
        the
        loan portfolio consists of commercial and agricultural loans, primarily secured
        by real estate.
 
 Cash
        and
        Cash Equivalents
  For
        purposes of the consolidated statements of cash flows, Union National considers
        cash, amounts due from banks and short-term investments with maturities less
        than 90 days at the time of purchase to be cash equivalents.
 
 Interest-bearing
        Deposits in Banks
  Interest-bearing
        deposits in banks consist of demand deposits and are carried at cost.
 
 Investment
        Securities
  Investment
        securities include both debt securities and equity securities. As of December
        31, 2006 and 2005, all of Union National’s investment securities are classified
        as available for sale.
 
 Securities
        classified as available for sale are those debt securities that Union National
        intends to hold for an indefinite period of time, but not necessarily to
        maturity, and marketable equity securities. Any decision to sell a security
        would be based on various factors, including significant movements in interest
        rates, changes in maturity mix of Union National's assets and liabilities,
        liquidity needs, regulatory capital considerations and other similar factors.
        Available-for-sale securities are carried at fair value with premiums and
        discounts amortized or accreted to interest income using the interest method.
        Changes in unrealized gains or losses on available-for-sale securities, net
        of
        taxes, are recorded in other comprehensive income (loss), a component of
        stockholders' equity.
 
 When
        a
        determination is made that a decline in fair value below the cost of a
        marketable equity or debt security is other than temporary, the cost basis
        of
        the individual security is written down to the fair value and the impact
        is
        reflected in earnings as a realized loss. In estimating other-than-temporary
        impairment losses, management considers (1) the length of time and the extent
        to
        which the fair value has been less than cost, (2) the financial condition
        and
        near-term prospects of the issuer, and (3) the intent and the ability of
        Union
        National to retain its investment in the issuer for a period of time sufficient
        to allow for any anticipated recovery in fair value. Realized gains and losses,
        determined on the basis of the cost of specific securities sold, are included
        in
        earnings.
 
 Loans
        Held for Sale
  Loans
        originated and intended for sale in the secondary market are carried at the
        lower of aggregate cost or fair value, as determined by aggregate outstanding
        commitments from investors or current investor yield requirements. Net
        unrealized losses are recognized through a valuation allowance by charges
        to
        income. Loans held for sale arise primarily in connection with the mortgage
        banking activities of Home Team Financial, LLC, and to a lesser extent from
        the
        operations of the bank.
 
 Loans
        and
        Leases
  Loans
        that management has the intent and ability to hold are generally stated at
        their
        outstanding unpaid principal balances adjusted for charge-offs, plus any
        unamortized premiums on purchased loans, net of any deferred fees or costs
        on
        originated loans. Interest income is accrued on the unpaid principal balance.
        Loan origination fees, net of certain direct origination costs, are deferred
        and
        recognized as an adjustment to interest income generally over the contractual
        life of the related loans.
 
 Loans
        include leases that meet the criteria for direct financing leases under
        Statement of Financial Accounting Standards (“SFAS”) No. 13. Such leases are
        recorded as assets at the total minimum lease payments and residual value
        to be
        received, less unearned interest income. Unearned interest income and initial
        direct costs are amortized to interest income over the lease term using the
        interest method.
 
 ***Impaired
        Loans and Leases***– Union National considers a loan or lease to be
        impaired when, based upon current information and events, it is probable
        that
        all interest and principal payments due according to the contractual terms
        of
        the loan or lease agreement will not be collected. An insignificant delay
        or
        shortfall in the amounts of payments would not cause a loan or lease to be
        considered impaired. Management determines the significance of payment delays
        and payment shortfalls on a case-by-case basis, taking into consideration
        all of
        the circumstances surrounding the loan or lease and the borrower, including
        the
        length of the delay, the reasons for the delay, the borrower’s prior payment
        record and the amount of the shortfall in relation to the principal and interest
        owed. Larger groups of small-balance loans, such as residential mortgages
        and
        consumer installment loans, are collectively evaluated for impairment.
        Accordingly, Union National does not separately identify individual consumer
        and
        residential loans for impairment disclosures unless such loans are the subject
        of a restructuring agreement. Union National measures impairment of commercial
        loans and leases on a loan-by-loan basis based upon the present value of
        expected future cash flows discounted at the loan or lease's effective interest
        rate, or the fair value of the collateral for certain collateral-dependent
        loans.
 
 ***Allowance
        for Loan and Lease Losses***– The allowance for loan and lease losses
        is established through provisions for loan and lease losses charged against
        income as losses are estimated to occur. Loans and leases, including impaired
        loans and leases, deemed to be uncollectible are charged against the allowance
        for loan and lease losses, and subsequent recoveries, if any, are credited
        to
        the allowance.
 
 The
        allowance for loan and lease losses is maintained at a level believed by
        management to be adequate to absorb estimated probable loan and lease losses.
        Management's periodic evaluation of the adequacy of the allowance is based
        on
        Union National's past 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 portfolio, current economic conditions and
        other
        relevant factors. This evaluation is inherently subjective as it requires
        material estimates including the amounts and timing of future cash flows
        expected to be received on impaired loans and leases that may be susceptible
        to
        significant change.
  8
 NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
 The
        allowance consists of specific, general and unallocated components. The specific
        component relates to loans and leases that are classified as impaired. For
        such
        loans and leases, an allowance is established when the discounted cash flows
        (or
        collateral value or observable market price) of the impaired loan or lease
        is
        lower than the carrying value of that loan or lease. The general component
        covers non-classified loans and leases and is based on historical loss
        experience adjusted for qualitative factors. An unallocated component is
        maintained to cover uncertainties that could affect management’s estimate of
        probable losses. The unallocated component of the allowance reflects the
        margin
        of imprecision inherent in the underlying assumptions used in the methodologies
        for estimating specific and general losses in the portfolio.
 
 ***Nonaccrual
        Loans and Leases*** - Generally, a loan or lease (including an
        impaired loan or lease as discussed above) is classified as nonaccrual and
        the
        accrual of interest on such loan or lease is discontinued when the contractual
        payment of principal or interest has become 90 days past due or management
        has
        serious doubts about further collectibility of principal or interest. A loan
        or
        lease may remain on accrual status if it is in the process of collection
        and is
        either guaranteed or well-secured. When a loan or lease is placed on nonaccrual
        status, uncollected interest previously credited to interest income that
        is
        deemed uncollectible, is reversed. Interest received on nonaccrual loans
        and
        leases is either applied against principal or reported as interest income,
        according to management's judgment as to the collectibility of principal.
        Generally, loans and leases are restored to accrual status when both principal
        and interest are brought current, the loan or lease has performed in accordance
        with the contractual terms for a reasonable period of time and the ultimate
        collectibility of the total contractual principal and interest is no longer
        in
        doubt.
 
 Premises
        and Equipment
  Land
        is
        carried at cost. Premises and equipment are stated at cost less accumulated
        depreciation, which is computed over the assets' estimated useful lives on
        both
        the accelerated and the straight-line methods. Leasehold improvements are
        stated
        at cost less accumulated amortization, which is computed over the term of
        the
        lease, including renewal options if reasonably assured, on the straight-line
        method. Gains and losses on premises and equipment are recognized upon disposal
        of the asset. Charges for maintenance and repairs are charged to expense
        as
        incurred.
 
 Restricted
        Investment in Bank Stocks
  Union
        National owns several restricted investments in bank stocks including stock
        in
        the FHLB, the Federal Reserve Bank of Philadelphia and the Atlantic Central
        Bankers Bank. These stocks are reflected on the balance sheet at historical
        cost. Under the bank's membership agreement with the FHLB, required stock
        purchases are based on a percentage of outstanding borrowings, a percentage
        of
        unused borrowing capacity and may also include a percentage of assets sold
        to
        the FHLB.
 
 Bank-Owned
        Life Insurance
  Union
        National invests in bank-owned life insurance (“BOLI”) as a source of funding
        for employee benefit expenses. BOLI involves the purchase of life insurance
        by
        the bank on a chosen group of employees. The bank is the owner and is a joint
        or
        sole beneficiary of the policies. This life insurance investment is carried
        at
        the cash surrender value of the underlying policies. Income from the increase
        in
        cash surrender value of the policies is reflected in Other Income.
 
 Transfers
        of Financial Assets
  Transfers
        of financial assets are accounted for as sales when control over the assets
        is
        deemed to be surrendered, specifically when (1) the assets have been isolated
        from Union National; (2) the transferee obtains the right (free of conditions
        that constrain it from taking advantage of that right) to pledge or exchange
        the
        transferred assets; and (3) Union National does not maintain effective control
        over the transferred assets through an agreement to repurchase them before
        their
        maturity.
  Mortgage
        Servicing Rights
  Union
        National retains the servicing on the loans sold to the Federal Home Loan
        Bank
        (“FHLB”) and receives a fee based upon the principal balance outstanding. The
        following is a summary of information related to servicing assets:
 **(Dollars
                    in thousands)**
                
                **Servicing
                    Assets**
                  **Capitalized**
                
                **Amortization**
                  **Expense****Years
                    Ended:****December
                    31, 2006**
                
                **$**
                **3**
                
                **$**
                **50**December
                    31, 2005
                
                
                41
                
                
                56December
                    31, 2004
                
                
                35
                
                
                53
  **Book
                    Value**
                
                
                **Fair
                    Value****Servicing
                    Assets as of:****December
                    31, 2006**
                
                **$**
                **149**
                
                
                **299******December
                    31, 2005
                
                
                196
                
                
                324
 
 Servicing
        rights are recognized as assets upon the sale of a loan. A portion of the
        cost
        of the loan is allocated to the servicing right based upon relative fair
        value.
        The fair value of servicing assets is based on the present value of estimated
        future cash flows for pools of mortgages stratified by rate and maturity
        date.
        Assumptions that are incorporated in the valuation of servicing assets include
        assumptions about prepayment speeds on mortgages and the cost to service
        loans.
        Servicing assets are reported in Other Assets and are amortized over the
        estimated period of future servicing income to be received on the underlying
        mortgage loans. Amortization expense is netted against loan servicing fee
        income
        and is reflected in the consolidated statements of income in Mortgage
        Banking/Brokerage Activities. Servicing assets are evaluated for impairment
        based upon estimated fair value as compared to unamortized book value. Total
        loans serviced for others amounted to $35,225,000, $38,239,000, and $37,034,000
        at December 31, 2006, 2005, and 2004, respectively, and are not reflected
        in the
        consolidated balance sheets.
  Derivative
        Instruments
  For
        asset/liability management purposes, Union National uses interest rate cap
        and
        collar agreements to hedge various exposures or to modify interest rate
        characteristics of various balance sheet accounts. Such derivatives are used
        as
        part of the asset/liability management process and are linked to specific
        assets
        or liabilities and have high correlation between the contract and the underlying
        item being hedged both at inception and throughout the hedge
        period.
 
 In
        accordance with SFAS No. 133, as amended, Union National records all derivatives
        on the balance sheet at fair value.  The accounting for changes in the fair
        value of derivatives depends on the intended use of the derivative and the
        resulting designation. Derivatives used to hedge Union National’s exposure to
        variability in expected future cash flows, or other types of forecasted
        transactions, are designated as cash flow hedges.
  For
        derivatives designated as cash flow hedges, the effective portion of changes
        in
        the fair value of the derivative is initially reported in other comprehensive
        income (loss) and subsequently reclassified to earnings when the underlying
        hedged transaction affects earnings. The ineffective portion of changes in
        the
        fair value of the derivative is recognized directly in earnings. Union National
        assesses the effectiveness of each hedging relationship by using the
        hypothetical derivative method. This method compares the actual hedge with
        a
        hypothetically perfect hedge, where the cumulative change in fair value of
        the
        actual hedge will be compared to the cumulative change in fair value of a
        hypothetically perfect hedge with critical terms that exactly match the critical
        terms of the hedged transactions.
 
 Cash
        flows resulting from the derivative financial instruments that are accounted
        for
        as hedges of assets and liabilities are classified in the cash flow statement
        in
        the same category as the cash flows of the underlying hedged items.
 
 As
        of
        December 31, 2006 and 2005, no derivatives were designated as fair value
        hedges.
        Additionally, Union National does not currently use derivatives for trading
        or
        speculative purposes and does not currently have any derivatives that are
        not
        designated as hedges.
 
 Foreclosed
        Real Estate
  Foreclosed
        real estate includes assets acquired through foreclosure and loans identified
        as
        in-substance foreclosures. A loan is classified as an in-substance foreclosure
        when Union National has taken possession of the collateral regardless of
        whether
        formal foreclosure proceedings have taken place. Foreclosed real estate is
        held
        for sale and is initially recorded at fair value less cost to sell at the
        date
        of foreclosure, establishing a new cost basis. Subsequent to foreclosure,
        valuations are periodically performed by management and the assets are carried
        at the lower of carrying amount or fair value less cost to sell. Revenue
        and
        expenses from operations and changes in the valuation allowance are included
        in
        net expenses from foreclosed assets, included in Other Expenses. Union National
        had foreclosed real estate with a carrying value of $186,000 at December
        31,
        2006 and had no foreclosed real estate at December 31, 2005.
  9
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 Trust
        Assets
  Assets
        held in a fiduciary capacity are not assets of Union National and are therefore
        not included in the consolidated financial statements. The market value of
        trust
        assets amounted to $90,260,000 at December 31, 2006, and $83,178,000 at December
        31, 2005.
 
 Off-Balance
        Sheet Credit-Related Financial Instruments
  In
        the
        ordinary course of business, Union National has entered into commitments
        to
        extend credit, including commitments under commercial letters of credit and
        standby letters of credit. Such financial instruments are recorded when they
        are
        funded.
 
 Rate
        Lock
        Commitments
  Union
        National enters into rate lock commitments to originate loans whereby the
        interest rate on the loan is determined generally up to 30 days prior to
        funding. Rate lock commitments on mortgage loans that are intended to be
        sold
        are considered to be derivatives. Accordingly, such commitments, along with
        any
        related fees received from potential borrowers, are recorded at fair value
        in
        derivative assets or liabilities, with changes in fair value recorded in
        the net
        gain or loss on sale of mortgage loans. Fair value is based on fees currently
        charged to enter into similar agreements. For fixed rate commitments, fair
        value
        also considers the difference between current levels of interest rates and
        the
        committed rates.
  Net
        Income per Share
  Basic
        earnings per share is computed by dividing net income by the weighted-average
        number of common shares outstanding during the period. Diluted earnings per
        share reflects the potential dilution that could occur if options to issue
        common stock were exercised. Potential common shares that may be issued relate
        solely to outstanding stock options and are determined using the treasury
        stock
        method. Per share information is restated to reflect the effect of stock
        dividends.
 
 The
        computation of basic and diluted earnings per share, net income and
        weighted-average number of shares outstanding for the years ended December
        31,
        2006, 2005 and 2004, are as follows:
  (In
                    thousands, except per share data)
                
                Net
                    Income
                
                Shares
                
                Per
                    Share**Year
                    Ended December 31, 2006:****Basic
                    Earnings per Share:****Net
                    Income**
                
                **$**
                **2,444**
                
                
                **2,518**
                
                **$**
                **0.97****Effect
                    of Dilutive Options**
                
                
                **-**
                
                
                **19****Diluted
                    Earnings per Share**
                
                **$**
                **2,444**
                
                
                **2,537**
                
                **$**
                **0.96**Year
                    Ended December 31, 2005:Basic
                    Earnings per Share:Net
                    Income
                
                $
                3,353
                
                
                2,517
                
                $
                1.33Effect
                    of Dilutive Options
                
                
                -
                
                
                39Diluted
                    Earnings per Share
                
                $
                3,353
                
                
                2,556
                
                $
                1.31Year
                    Ended December 31, 2004:Basic
                    Earnings per Share:Net
                    Income
                
                $
                3,223
                
                
                2,526
                
                $
                1.28Effect
                    of Dilutive Options
                
                
                -
                
                
                54Diluted
                    Earnings per Share
                
                $
                3,223
                
                
                2,580
                
                $
                1.25
  The
        following options to purchase shares of common stock were outstanding at
        year-end, but were not included in the computation of diluted earnings per
        share
        for the year because their effect would have been anti-dilutive:
  Options
                  Outstanding
                
                Average
                  Exercise
                    PriceDecember
                    31, 2006
                
                
                88,532
                
                $
                21.31December
                    31, 2005
                
                
                27,825
                
                
                22.14December
                    31, 2004
                
                
                -
                
                
                -
 Advertising
          Costs
  Advertising
          costs are charged to expense as incurred.
 
 Income
          Taxes
  The
          provision for income taxes is based upon the results of operations, adjusted
          principally for tax-exempt income. Accounting for income taxes is under
          the
          liability method, whereby a deferred tax asset or liability is recorded
          based
          upon the difference between the tax basis of assets and liabilities and
          their
          carrying amounts for financial reporting purposes. The deferred tax assets
          and
          liabilities are adjusted for the impact of tax-rate changes. Valuation
          allowances are established when necessary to reduce deferred tax assets
          to the
          amount expected to be realized in the future. Income tax expense or benefit
          is
          the tax payable or refundable for the period plus or minus the change in
          deferred tax assets and liabilities during the period.
  Comprehensive
        Income (Loss)
  Union
        National reports comprehensive income (loss) and the components of other
        comprehensive income (loss) in the Consolidated Statements of Changes in
        Stockholders’ Equity. Union National’s comprehensive income (loss) consists of
        net income, unrealized gains and losses on available-for-sale investment
        securities, and changes in the fair value of cash flow hedges arising during
        the
        period. The components of accumulated other comprehensive income (loss),
        included in stockholders’ equity, are as follows:
  December
                    31,(In
                    thousands)
                
                
                2006
                
                
                2005Unrealized
                    Holding Losses on InvestmentSecurities
                    Available for Sale, Net of Tax Benefitof
                    $96 and $216, respectively
                
                $
                (186
                )
                $
                (418
                )Net
                    Unrealized Losses on Derivatives Used asCash
                    Flow Hedges, Net of Tax Benefit of $28 and$0,
                    Respectively
                
                
                (56
                )
                
                (29
                )Accumulated
                    Other Comprehensive Loss
                
                $
                (242
                )
                $
                (447
                )
  Treasury
        Stock
  The
        acquisition of treasury stock is recorded under the cost method. The subsequent
        disposition or sale of the treasury stock is recorded using the average cost
        method.
 
 Segment
        Reporting
  Based
        on
        the way management monitors financial results, Union National has only one
        operating segment consisting primarily of its banking and fiduciary activities.
 
 Share-Based
        Compensation
  On
        January 1, 2006, Union National adopted Statement of Financial Accounting
        Standards No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”) which requires
        recognition of compensation expense for future 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 No. 123(R)
        on
        a going-forward basis rather than restating prior periods. No shared-based
        awards were granted or vested during the year ended December 31, 2006;
        accordingly, no compensation expense related to such awards was recorded
        in
        2006. Stock compensation expense for future share-based awards will be
        recognized on a straight-line basis over the vesting period of the award.
        Prior
        to 2006, Union National used the intrinsic value based method of accounting
        for
        share-based compensation, in accordance with Accounting Principles Board
        Opinion
        No. 25; thus, no compensation expense was recognized at the grant date. See
        additional information regarding share-based compensation at Note
        2.
 
 Recent
        Accounting Pronouncements
  In
        February 2006, the Financial Accounting Standards Board (“FASB”) issued
        Statement of Financial Accounting Standards No. 155, “Accounting for Certain
        Hybrid Financial Instruments” (“SFAS 155”).  SFAS 155 amends FASB Statement
        Nos. 133 and 140, and improves the financial reporting of certain hybrid
        financial instruments by requiring more consistent accounting that eliminates
        exemptions and provides a means to simplify the accounting for these
        instruments.  Specifically, SFAS 155 allows financial instruments that have
        embedded derivatives to be accounted for as a whole (eliminating the need
        to
        bifurcate the derivative from its host) if the holder elects to account for
        the
        whole instrument on a fair value basis.  SFAS 155 is effective for all
        financial instruments acquired or issued after the beginning of an entity's
        first fiscal year that begins after September 15, 2006.  Union National is
        required to adopt the provisions of SFAS 155, as applicable, beginning January
        1, 2007.  Management does not believe the adoption of SFAS 155 will have a
        material impact on Union National's consolidated financial condition and
        results
        of operations.
  10
 
 In
        March
        2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
        Financial Assets — An Amendment of FASB Statement No. 140”
(“SFAS 156”). SFAS 156 requires that all separately recognized
        servicing assets and servicing liabilities be initially measured at fair
        value,
        if practicable. The statement permits, but does not require, the subsequent
        measurement of servicing assets and servicing liabilities at fair value.
        SFAS 156 is effective as of the beginning of an entity’s first fiscal year
        that begins after September 15, 2006, which for Union National will be as
        of January 1, 2007. Management does not believe that the adoption of
        SFAS 156 will have a material effect on its consolidated financial
        statements.
 
 In
        July
        2006, the 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. Management does not believe
        that
        the adoption of FIN 48 will have a material effect on its consolidated financial
        statements.
 
 In
        September 2006, the FASB issued FASB Statement No. 157, “Fair Value
        Measurements”, which defines fair value, establishes a framework for measuring
        fair value under GAAP, and expands disclosures about fair value measurements.
        FASB Statement No. 157 applies to other accounting pronouncements that
        require or permit fair value measurements. The new guidance is effective
        for
        financial statements issued for fiscal years beginning after November 15,
        2007, and for interim periods within those fiscal years. Management is currently
        evaluating the potential impact, if any, of the adoption of FASB Statement
        No. 157 on Union National’s consolidated financial condition, results of
        operations and cash flows.
 
 On
        September 13, 2006, the Securities and Exchange Commission “SEC” issued
        Staff Accounting Bulleting 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.
        The
        Company has analyzed SAB 108 and determined that upon adoption it will have
        no
        impact on the reported consolidated results of operations or financial
        condition.
 
 Reclassifications
  Certain
        prior period amounts have been reclassified to conform to the 2006 presentation.
        Such reclassifications did not impact net income.
 
 11
  NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
  **NOTE
        2 - SHARE-BASED COMPENSATION**
  On
        January 1, 2006, Union National adopted SFAS No. 123(R) which requires
        recognition of compensation expense for future 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 No. 123(R)
        on
        a going-forward basis rather than restating prior periods. No shared-based
        awards were granted or vested during the year ended December 31, 2006;
        accordingly, no compensation expense related to such awards was recorded
        in
        2006. Stock compensation expense for future share-based awards will be
        recognized on a straight-line basis over the vesting period of the award.
 
 Prior
        to
        2006, Union National used the intrinsic value based method of accounting
        for
        share-based compensation, in accordance with Accounting Principles Board
        Opinion
        No. 25; thus, no compensation expense was recognized at the grant date. If
        compensation expense had been recognized in 2005 and 2004, based on the
        estimated fair value of the options on the date of the grant, net income
        and
        earnings per share would have been reduced to the following pro forma
        amounts:
  (Dollars
                    in thousands, except per share data)
                
                2005
                
                2004Net
                    Income - As Reported
                
                $
                3,353
                
                $
                3,223Less:
                    Share-Based Compensation Cost
                
                
                (96
                )
                
                (213
                )Net
                    Income - Pro-Forma
                
                $
                3,257
                
                $
                3,010Net
                    Income Per Share:As
                    Reported - Basic
                
                $
                1.33
                
                $
                1.28As
                    Reported - Assuming Dilution
                
                
                1.31
                
                
                1.25Pro-Forma
                    - Basic
                
                
                1.29
                
                
                1.19Pro-Forma
                    - Assuming Dilution
                
                
                1.27
                
                
                1.17
  SFAS
        No.
        123(R) also requires that the tax benefit from the exercise of non-qualified
        stock options and disqualifying dispositions of incentive stock options and
        shares purchased under the Employee Stock Purchase Plan (“ESPP”) in excess of
        the tax benefit from the compensation expense recorded for those options
        be
        included in the cash flow statement as a cash inflow from financing activities.
        Prior to the adoption of SFAS No. 123(R), these tax benefits had been reflected
        as a cash inflow from operations. The prior years’ cash flow statements have not
        been restated. No tax benefit was recorded during the year ended December
        31,
        2006, as there were no such exercises or dispositions during the year. Union
        National recorded a tax benefit $40,000 and $13,000 in 2005 and 2004,
        respectively, for exercises and dispositions.
 
 Union
        National has three stock option plans: the ESPP; the Employee Stock Incentive
        Plan (“SIP”); and the Independent Directors’ Stock Option Plan (“IDSOP”).
        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. Of the 115,762
        shares reserved for issuance under this plan, options to purchase 64,658
        shares
        were available for grant at December 31, 2006. All of these remaining available
        options lapsed in February 2007, and no further options can be granted under
        the
        plan. 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.
        SIP options vest over six months, become exercisable six months after the
        grant
        date, and generally lapse 90 days after termination of employment. Of the
        249,506 shares reserved for issuance under the SIP, options to purchase 31,920
        shares are available for grant. No further options can be granted under the
        IDSOP, which 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.
 
 The
        fair
        value of each option is estimated on the date of grant using the Black-Scholes
        option-pricing model. No options were granted during 2006. The per share
        weighted-average fair value of stock options granted was $3.56, and $3.87
        in
        2005 and 2004, respectively. These fair values were computed using the following
        weighted-average assumptions for the years ended December 31:
  2005
                
                2004Expected
                    Dividend Yield
                
                
                3.02
                %
                
                2.85
                %Risk-Free
                    Interest Rate
                
                
                4.00
                %
                
                4.26
                %Expected
                    Life (Years)
                
                
                8.0
                
                
                8.0Expected
                    Volatility
                
                
                45.90
                %
                
                44.80
                %
  12
  NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
  Stock
        option activity for the years ended December 31, 2006, 2005 and 2004, is
        summarized below:
 Stock
                
                Weighted-AverageOptions
                
                Exercise
                    PriceOptions
                    Outstanding at December 31, 2003(Prices
                    range from $11.52 to $20.64)
                
                
                227,287
                
                $
                16.11Year
                    Ended December 31, 2004:Granted
                
                
                41,389
                
                
                22.03Exercised
                
                
                (30,843
                )
                
                13.53Forfeited
                
                
                (5,051
                )
                
                18.19Expired
                
                
                (13,464
                )
                
                17.95Options
                    Outstanding at December 31, 2004(Prices
                    range from $11.52 to $20.64)
                
                
                219,318
                
                $
                18.10Year
                    Ended December 31, 2005:Granted
                
                
                27,000
                
                
                21.19Exercised
                
                
                (26,606
                )
                
                15.78Forfeited
                
                
                (6,223
                )
                
                19.21Expired
                
                
                (10,490
                )
                
                20.44Options
                    Outstanding at December 31, 2005(Prices
                    range from $11.52 to $22.14)
                
                
                202,999
                
                $
                18.22**Year
                    Ended December 31, 2006:****Granted**
                
                
                **-**
                
                
                **-****Exercised**
                
                
                **(3,619**
                **)**
                
                **13.67****Forfeited**
                
                
                **(11,634**
                **)**
                
                **19.90****Expired**
                
                
                **(10,416**
                **)**
                
                **16.78****Options
                    Outstanding at December 31, 2006****(Prices
                    range from $11.52 to $22.14)**
                
                
                **177,330**
                
                **$**
                **18.14**
 
 All
        options outstanding at December 31, 2006, 2005, and 2004 were fully vested
        and
        exercisable.
 
 As
        of
        December 31, 2006, the total intrinsic value (the difference between the
        market
        price and the exercise price) of all options outstanding was $285,000. The
        total
        intrinsic value of all options exercised during the year ended December 31,
        2006
        was $20,000.
 
 Options
        outstanding at December 31, 2006, consisted of the following:
  Weighted-Average
                
                Average
                    RemainingRange
                      of Exercise Price
                
                OptionsOutstanding
                
                ExercisePrice
                
                Contractual
                  Life$11.52
                    to $13.08
                
                
                33,617
                
                $
                12.68
                
                
                4.7
                    years$13.09
                    to $16.78
                
                
                24,489
                
                
                15.91
                
                
                4.4
                    years$16.79
                    to $18.49
                
                
                41,093
                
                
                17.98
                
                
                3.1
                    years$18.50
                    to $20.81
                
                
                20,200
                
                
                20.10
                
                
                5.3
                    years$20.82
                    to $22.14
                
                
                57,931
                
                
                21.69
                
                
                7.7
                    years$11.52
                    to $22.14
                
                
                177,330
                
                
                18.14
                
                
                5.3
                    years
  13
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 **NOTE
          3 - INVESTMENT SECURITIES AVAILABLE FOR SALE**
 The
          amortized cost and fair value of investment securities are as
          follows:
 **At
                  December 31, 2006****Gross**
              
              **Gross****Amortized**
              
              **Unrealized**
              
              **Unrealized**
              
              **Fair****Cost**
              
              **Gains**
              
              **Losses**
              
              **Value**(Dollars
                  in thousands)Obligations
                  of State andPolitical
                  Subdivisions
              
              **$**
              **25,885**
              
              **$**
              **1,080**
              
              **$**
              **(26**
              **)**
              **$**
              **26,939**Obligations
                  of U.S. Government Agencies
              
              
              **4,253**
              
              
              **-**
              
              
              **(102**
              **)**
              
              **4,151**Mortgage-Backed
                  Securities
              
              
              **86,353**
              
              
              **272**
              
              
              **(979**
              **)**
              
              **85,646**Corporate
                  Securities
              
              
              **13,232**
              
              
              **134**
              
              
              **(839**
              **)**
              
              **12,527**Equity
                  Securities
              
              
              **369**
              
              
              **182**
              
              
              **(4**
              **)**
              
              **547**Total
              
              **$**
              **130,092**
              
              **$**
              **1,668**
              
              **$**
              **(1,950**
              **)**
              **$**
              **129,810**
  At
                  December 31, 2005Gross
              
              
              GrossAmortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              Fair(Dollars
                  in thousands)
              
              
              Cost
              
              
              Gains
              
              
              Losses
              
              
              ValueObligations
                  of State andPolitical
                  Subdivisions
              
              $
              35,483
              
              $
              741
              
              $
              (330
              )
              $
              35,894Obligations
                  of U.S. Government Agencies
              
              
              5,009
              
              
              -
              
              
              (136
              )
              
              4,873Mortgage-Backed
                  Securities
              
              
              63,569
              
              
              269
              
              
              (1,046
              )
              
              62,792Asset-Backed
                  Securities
              
              
              1,477
              
              
              -
              
              
              (18
              )
              
              1,459Corporate
                  Securities
              
              
              14,441
              
              
              205
              
              
              (504
              )
              
              14,142Equity
                  Securities
              
              
              357
              
              
              193
              
              
              (8
              )
              
              542Total
              
              $
              120,336
              
              $
              1,408
              
              $
              (2,042
              )
              $
              119,702
  The
          following table shows Union National's investments' gross unrealized losses
          and
          fair value, aggregated by investment category
          and length of time that individual securities have been in a continuous
          unrealized loss position at December 31, 2006:
  **Less
                  than 12 Months**
              
              **12
                  Months or More**
              
              **Total****Fair**
              
              **Unrealized**
              
              **Fair**
              
              **Unrealized**
              
              **Fair**
              
              **Unrealized****Value**
              
              **Losses**
              
              **Value**
              
              **Losses**
              
              **Value**
              
              **Losses**(Dollars
                  in thousands)Obligations
                  of State andPolitical
                  Subdivisions
              
              **$**
              **353**
              
              **$**
              **-**
              
              **$**
              **1,666**
              
              **$**
              **(26**
              **)**
              **$**
              **2,019**
              
              **$**
              **(26**
              **)**Obligations
                  of U.S. Government Agencies
              
              
              **-**
              
              
              **-**
              
              
              **4,151**
              
              
              **(102**
              **)**
              
              **4,151**
              
              
              **(102**
              **)**Mortgage-Backed
                  Securities
              
              
              **37,892**
              
              
              **(307**
              **)**
              
              **21,582**
              
              
              **(672**
              **)**
              
              **59,474**
              
              
              **(979**
              **)**Corporate
                  Securities
              
              
              **1,886**
              
              
              **(665**
              **)**
              
              **6,077**
              
              
              **(174**
              **)**
              
              **7,963**
              
              
              **(839**
              **)**Equity
                  Securities
              
              
              **-**
              
              
              **-**
              
              
              **41**
              
              
              **(4**
              **)**
              
              **41**
              
              
              **(4**
              **)**Total
                  Temporarily Impaired Securities
              
              **$**
              **40,131**
              
              **$**
              **(972**
              **)**
              **$**
              **33,517**
              
              **$**
              **(978**
              **)**
              **$**
              **73,648**
              
              **$**
              **(1,950**
              **)**
  The
          following table shows Union National's investments' gross unrealized losses
          and
          fair value, aggregated by investment category
          and length of time that individual securities had been in a continuous
          unrealized loss position at December 31, 2005:
  Less
                  than 12 Months
              
              12
                  Months or More
              
              TotalFair
              
              Unrealized
              
              Fair
              
              Unrealized
              
              Fair
              
              UnrealizedValue
              
              Losses
              
              Value
              
              Losses
              
              Value
              
              Losses(Dollars
                  in thousands)Obligations
                  of State andPolitical
                  Subdivisions
              
              $
              12,505
              
              $
              (239
              )
              $
              2,803
              
              $
              (91
              )
              $
              15,308
              
              $
              (330
              )Obligations
                  of U.S. Government Agencies
              
              
              4,873
              
              
              (136
              )
              
              -
              
              
              -
              
              
              4,873
              
              
              (136
              )Mortgage-Backed
                  Securities
              
              
              29,289
              
              
              (335
              )
              
              22,961
              
              
              (711
              )
              
              52,250
              
              
              (1,046
              )Asset-Backed
                  Securities
              
              
              1,459
              
              
              (18
              )
              
              -
              
              
              -
              
              
              1,459
              
              
              (18
              )Corporate
                  Securities
              
              
              3,674
              
              
              (102
              )
              
              5,763
              
              
              (402
              )
              
              9,437
              
              
              (504
              )Equity
                  Securities
              
              
              30
              
              
              (2
              )
              
              55
              
              
              (6
              )
              
              85
              
              
              (8
              )Total
                  Temporarily Impaired Securities
              
              $
              51,830
              
              $
              (832
              )
              $
              31,582
              
              $
              (1,210
              )
              $
              83,412
              
              $
              (2,042
              )
  14
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 At
          December 31, 2006, there were a total of 77 debt securities with unrealized
          losses of $1,946,000 that amounted to 2.6% of their amortized cost. Except
          for
          losses on corporate debt securities pertaining to major corporations in
          the
          automotive industry, management believes that the unrealized losses primarily
          reflect changes in interest rates subsequent to the acquisition of specific
          securities. With respect to the automotive debt securities, amortized cost
          totaled $2,026,000 and fair value totaled $1,987,000 on four securities
          with
          unrealized losses amounting to $39,000, primarily representing a decline
          in
          credit strength of these corporations. At December 31, 2006, with consideration
          given to independent analyst reports, management believed that these
          corporations had the ability to service the debt for the foreseeable future
          and
          that all amounts due upon maturity of these debt securities would be collected;
          thus, all unrealized losses represented temporary impairment of the value
          of the
          securities. These
          four securities were later sold in connection with the transaction described
          under “Subsequent Event”, below, with realized losses totaling
          $39,000.
  Investment
          securities carried at $52,813,000 at December 31, 2006, and $48,301,000
          at
          December 31, 2005 were pledged to secure public, trust, and government
          deposits
          and for other purposes. In addition, securities carried at $3,984,000 at
          December 31, 2006 and $1,546,000 at December 31, 2005 were pledged for
          repurchase agreements.
  The
          amortized cost and fair value of debt securities at December 31, 2006,
          by
          contractual maturity, are shown below. Expected maturities will differ
          from
          contractual maturities because borrowers may have the right to call or
          prepay
          obligations with or without call or prepayment penalties.
  **Amortized**
              
              **Fair**(Dollars
                  in thousands)
              
              **Cost**
              
              **Value**Due
                  in One Year or Less
              
              **$**
              **2,179**
              
              **$**
              **2,185**Due
                  After One Year Through Five Years
              
              
              **14,139**
              
              
              **13,950**Due
                  After Five Years Through Ten Years
              
              
              **7,337**
              
              
              **7,662**Due
                  After Ten Years
              
              
              **19,715**
              
              
              **19,820****43,370**
              
              
              **43,617**Mortgage-Backed
                  Securities
              
              
              **86,353**
              
              
              **85,646****$**
              **129,723**
              
              **$**
              **129,263**
 The
          following information is related to the sales of available-for-sale
          securities:
 Realized
              
              Realized
              
              Income
                  Tax(Dollars
                  in thousands)
              
              Gains
              
              Losses
              
              Expense**The
                  year ended December 31, 2006**
              
              **273**
              
              **(64)**
              
              **71**The
                  year ended December 31, 2005
              
              
              124
              
              
              (20
              )
              
              36The
                  year ended December 31, 2004
              
              
              235
              
              
              (41
              )
              
              66
  *Subsequent
          Event*
  In
          January 2007, Union National decided to de-leverage its Balance Sheet.
          The
          de-leveraging strategy will strengthen Union National’s equity position, enhance
          its income tax effectiveness, and facilitate its future core banking growth
          strategies for loans and deposits. Consequently, Union National 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 its interest rate risk profile. Union National realized losses
          on the
          sale of securities of approximately $520,000 on a pre-tax basis and incurred
          prepayment penalties of approximately $31,000 on a pre-tax basis. In the
          aggregate, 2007 first quarter earnings are expected to be adversely impacted
          by
          approximately $364,000 after tax, or approximately $0.14 per share
  15
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
  **NOTE
        4 - LOANS AND LEASES**
 
 Loans
        and
        leases, net of unamortized loan origination fees of $623,000 at December
        31,
        2006, and $712,000 at December 31, 2005, are summarized as follows:
 **December
                    31**,
                
                December
                    31,(Dollars
                      in thousands)
                
                **2006**
                
                2005Real
                    Estate Mortgages:First
                    and Second Residential
                
                **$**
                **130,363**
                
                $
                124,259Commercial
                    and Industrial
                
                
                **105,158**
                
                
                94,016Construction
                    and Land Development
                
                
                **23,634**
                
                
                10,618Agricultural
                
                
                **24,133**
                
                
                23,488Commercial
                    and Industrial
                
                
                **27,226**
                
                
                20,291Consumer,
                    Net of Unearned Income
                
                
                **7,893**
                
                
                8,159Agricultural
                
                
                **3,733**
                
                
                3,300Political
                    Subdivisions
                
                
                **9,803**
                
                
                11,029Lease
                    Financing Receivables,Net
                    of Unearned Income
                
                
                **8,339**
                
                
                3,707Other
                
                
                **799**
                
                
                1,261Total
                    Loans and Leases
                
                
                **341,081**
                
                
                300,128Add:
                    Unamortized Premium on Purchased Loans
                
                
                **32**
                
                
                85Loans
                    and Leases, Net of Unearned Income
                
                **$**
                **341,113**
                
                $
                300,213
 
 Union
        National grants commercial, agricultural, residential, and consumer loans
        and
        leases to customers primarily located in Lancaster County, Pennsylvania.
        Although Union National has a diversified loan and lease portfolio, its debtors’
ability to honor their contracts is influenced by the region's
        economy.
 
 The
        following information concerns Union National’s net investment in direct
        financing leases, included in loans and leases:
 **December
                    31,**
                
                December
                    31,(Dollars
                    in thousands)
                
                **2006**
                
                2005Minimum
                    Lease Payments Receivable
                
                **$**
                **9,538**
                
                $
                4,195Residual
                    Values
                
                
                **467**
                
                
                296Unearned
                    Income
                
                
                **(1,666**
                **)**
                
                (784
                )**$**
                **8,339**
                
                $
                3,707
  The
        allowance for uncollectible lease payments, included in the allowance for
        loan
        and lease losses, was $63,000 and $25,000 at December 31, 2006 and 2005,
        respectively.
 
 Minimum
        future rentals on noncancelable financing leases as of December 31, 2006
        are as
        follows:
 2007
                
                **$**
                **4,753**2008
                
                
                **2,056**2009
                
                
                **1,529**2010
                
                
                **807**2011
                
                
                **255**Thereafter
                
                
                **138****$**
                **9,538**
 
 Union
        National’s nonperforming assets consisted of the following:
 **December
                    31,**
                
                December
                    31,(Dollars
                    in thousands)
                
                **2006**
                
                2005Nonaccruing
                    Loans
                
                **$**
                **2,280**
                
                $
                1,814Accruing
                    Loans - 90 Days or More Past Due
                
                
                **253**
                
                
                298Total
                    Nonperforming Loans
                
                **$**
                **2,533**
                
                $
                2,112Foreclosed
                    Real Estate
                
                
                **186**
                
                
                -Foreclosed
                    Purchased Loans
                
                
                **134**
                
                
                -Total
                    Nonperforming Assets
                
                **$**
                **2,853**
                
                $
                2,112
  16
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
  Following
        is a summary of information related to impaired loans and leases:
 December
                    31,(Dollars
                    in thousands)
                
                **2006**
                
                2005
                
                2004Impaired
                    Loans and Leases with a RelatedAllowance
                    for Loan and Lease Losses
                
                **$**
                **1,798**
                
                $
                2,061
                
                $
                2,446Impaired
                    Loans and Leases without a RelatedAllowance
                    for Loan and Lease Losses
                
                
                **4,786**
                
                
                1,209
                
                
                1,668Total
                    Outstanding Balance at Year End
                
                **$**
                **6,584**
                
                $
                3,270
                
                $
                4,114Related
                    Allowance for Loan and Lease Losses
                
                **$**
                **146**
                
                $
                254
                
                $
                442Average
                    Outstanding Balance for the Year
                
                
                **4,645**
                
                
                3,642
                
                
                2,939Recognized
                    Interest Income
                
                
                **239**
                
                
                167
                
                
                134Cash
                    Basis Interest Income
                
                
                **216**
                
                
                165
                
                
                122
  Loans
        to
        certain directors and principal officers of Union National, including their
        immediate families and companies in which they are principal owners (more
        than
        10%), amounted to $5,708,000 at December 31, 2006. Such loans were made in
        the
        ordinary course of business at Union National's normal credit terms, including
        interest rates and security, and do not represent more than a normal risk
        of
        collection. Transactions on these loans for the year ended December 31, 2006,
        are as follows:
 (Dollars
                    in thousands):Balance,
                    Beginning of Year
                
                **$**
                **8,521**Additions
                
                
                **2,001**Deductions
                
                
                **(4,814**
                **)**Balance,
                    End of Year
                
                **$**
                **5,708**
 
 **NOTE
        5 - ALLOWANCE FOR LOAN AND LEASE LOSSES**
 
 An
        analysis of changes in the allowance for loan and lease losses for the years
        ended December 31 is as follows:
 (Dollars
                    in thousands)
                
                **2006**
                
                2005
                
                2004Balance,
                    Beginning of Year
                
                **$**
                **2,675**
                
                $
                2,288
                
                $
                1,985Provision
                    Charged to Operating Expense
                
                
                **672**
                
                
                681
                
                
                404Recoveries
                    of Charged-Off Loans
                
                
                **62**
                
                
                33
                
                
                60Charged-Off
                    Loans
                
                
                **(339**
                **)**
                
                (327
                )
                
                (161
                )Balance,
                    End of Year
                
                **$**
                **3,070**
                
                $
                2,675
                
                $
                2,288
 
 **NOTE
        6 - PREMISES AND EQUIPMENT**
 
 A
        summary
        of premises and equipment owned is as follows:
 Estimated
                
                **December
                    31,**
                
                December
                    31,Useful
                    Lives
                
                **2006**
                
                2005(Dollars
                    in thousands)Construction
                    & Development
                
                
                
                
                **$**
                **26**
                
                $
                566Land
                
                
                
                
                
                **644**
                
                
                644Land
                    Improvements
                
                
                20
                    years
                
                
                **1,055**
                
                
                1,055Buildings
                    and Improvements
                
                
                15-50
                    years
                
                
                **7,455**
                
                
                5,756Leasehold
                    Improvements
                
                
                3-40
                    years
                
                
                **1,125**
                
                
                639Furniture,
                    Fixtures andEquipment
                
                
                5-20
                    years
                
                
                **8,464**
                
                
                6,709Subtotal
                
                
                
                
                
                **18,769**
                
                
                15,369Less:
                    Accumulated Depreciation
                
                **(9,189**
                **)**
                
                (8,310
                )Premises
                    and Equipment - Net
                
                
                
                
                **$**
                **9,580**
                
                $
                7,059
 
 Depreciation
        expense amounted to $879,000 in 2006, $709,000 in 2005 and $706,000 in
        2004.
 
 17
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
  At
        December 31, 2006, Union National was obligated under noncancelable operating
        leases for real estate with future minimum payments, including certain amounts
        which are payable to a related party, as follows:
 **Related**(Dollars
                    in thousands)
                
                **Total**
                
                **Party**2007
                
                **$**
                **886**
                
                **$**
                **483**2008
                
                
                **898**
                
                
                **483**2009
                
                
                **893**
                
                
                **483**2010
                
                
                **873**
                
                
                **483**2011
                
                
                **893**
                
                
                **528**Thereafter
                
                
                **8,177**
                
                
                **5,097****$**
                **12,620**
                
                **$**
                **7,557**
 
 Total
        rental expense amounted to $667,000 in 2006, $273,000 in 2005 and $172,000
        in
        2004, including rents paid to a related party of $412,000, $0 and $0 for
        2006,
        2005, and 2004, respectively.
 
 **NOTE
        7 - TIME DEPOSITS**
 
 At
        December 31, 2006, the scheduled maturities of certificates of deposit are
        as
        follows:
 (Dollars
                    in thousands)2007
                
                **$**
                **94,795**2008
                
                
                **17,494**2009
                
                
                **6,424**2010
                
                
                **16,530**2011
                
                
                **11,420**2012
                
                
                **2,076****$**
                **148,739**
 
 At
        December 31, 2006, the above total included $31,975,000 of brokered CDs
        outstanding.
 
 Certificates
        of deposit in denominations of $100,000 or more amounted to $41,372,000 at
        December 31, 2006, and $33,820,000 at December 31, 2005. The maturities of
        these
        certificates of deposit of $100,000 or more at December 31, 2006, are as
        follows:
 (Dollars
                    in thousands)Three
                    months or less
                
                **$**
                **15,751**Over
                    three months through six months
                
                
                **6,354**Over
                    six months through twelve months
                
                
                **8,788**Over
                    twelve months
                
                
                **10,479**Total
                
                **$**
                **41,372**
  **NOTE
        8 - SHORT-TERM BORROWINGS**
 
 Short-term
        borrowings and weighted-average interest rates at December 31 are as
        follows:
 **2006**
                
                2005(Dollars
                    in thousands)
                
                **Amount**
                
                **Rate**
                
                Amount
                
                RateTreasury
                    Tax and Loan Notes
                
                **$**
                **900**
                
                
                **5.00**
                **%**
                $
                900
                
                
                4.00
                %Federal
                    Funds Purchased
                
                
                **6,550**
                
                
                **5.25**
                
                
                3,560
                
                
                4.38Securities
                    Sold UnderRepurchase
                    Agreements
                
                
                **3,094**
                
                
                **4.79**
                
                
                845
                
                
                3.63FHLB
                    Short-Term Advances
                
                
                **-**
                
                
                **-**
                
                
                13,000
                
                
                4.22Total
                
                **$**
                **10,544**
                
                
                **5.09**
                **%**
                $
                18,305
                
                
                4.21
                %
 
 Short-term
        borrowings had an average outstanding balance of $9,790,000 during 2006 at
        a
        weighted-average interest rate of 4.99%. The highest balance outstanding
        at a
        month-end during 2006 was $17,307,000. During 2005, short-term borrowings
        had an
        average outstanding balance of $7,584,000 at a weighted-average interest
        rate of
        3.09%. The highest balance outstanding at a month-end during 2005 was
        $18,305,000. During 2004, short-term borrowings had an average outstanding
        balance of $7,602,000 at a weighted-average interest rate of 1.42%. The highest
        balance at a month-end during 2004 was $11,921,000.
  18
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
  Under
          an
          agreement with the FHLB, Union National has a line of credit available
          in the
          amount of $15,000,000, none of which was outstanding at December 31, 2006.
          No
          short-term advances were outstanding at December 31, 2006. All FHLB advances
          are
          collateralized by a security agreement covering qualifying loans and unpledged
          treasury, agency and mortgage-backed securities. In
          addition, all FHLB advances are secured by the FHLB capital stock owned
          by Union
          National with a carrying amount of $5,655,000 at December 31, 2006, and
          $5,406,000 at December 31, 2005. In addition, Union National has unsecured
          lines
          of credit with correspondent banks amounting to $33,000,000 for overnight
          fed
          funds borrowings, of which $6,550,000 was utilized at December 31, 2006.
 
 Union
        National offers a short-term investment program for corporate customers for
        secured investing. This program consists of overnight and short-term repurchase
        agreements that are secured by designated investment securities of the bank.
  **NOTE
        9 - LONG-TERM DEBT**
 
 A
        summary
        of long-term debt as of December 31 is as follows **:**
 **2006**
                
                2005(Dollars
                    in thousands)
                
                **Amount**
                
                **Rate**
                
                Amount
                
                RateFHLB
                    fixed-rate advances maturing:2006
                
                **$**
                **-**
                
                
                **-**
                **%**
                $
                17,587
                
                
                2.81
                %2007
                
                
                **2,000**
                
                
                **5.19**
                
                
                -
                
                
                -2008
                
                
                **1,550**
                
                
                **3.36**
                
                
                1,550
                
                
                3.362009
                
                
                **18,891**
                
                
                **4.62**
                
                
                6,707
                
                
                3.822010
                
                
                **10,117**
                
                
                **4.72**
                
                
                -
                
                
                -2011
                
                
                **2,006**
                
                
                **5.27**
                
                
                -
                
                
                -2012
                
                
                **13,054**
                
                
                **4.26**
                
                
                13,054
                
                
                4.262013
                
                
                **1,000**
                
                
                **4.39**
                
                
                1,000
                
                
                4.39FHLB
                    floating-rate advances maturing:2006
                
                
                **-**
                
                
                **-**
                
                
                15,143
                
                
                4.172007
                
                
                **8,877**
                
                
                **5.28**
                
                
                8,877
                
                
                4.322008
                
                
                **11,897**
                
                
                **5.22**
                
                
                11,897
                
                
                4.172009
                
                
                **13,305**
                
                
                **5.19**
                
                
                -
                
                
                -2010
                
                
                **2,000**
                
                
                **5.23**
                
                
                -
                
                
                -2011
                
                
                **2,874**
                
                
                **5.23**
                
                
                -
                
                
                -FHLB
                    convertible fixed-rate advances maturing:2010
                
                
                **20,000**
                
                
                **5.70**
                
                
                20,000
                
                
                5.702011
                
                
                **10,000**
                
                
                **5.23**
                
                
                10,000
                
                
                5.23Total
                
                **$**
                **117,571**
                
                
                **5.03**
                **%**
                $
                105,815
                
                
                4.33
                %
 
 The
        FHLB
        advances are collateralized by the security agreement and FHLB capital stock
        described in Note 8. Union National can borrow a maximum of $163,506,000
        from
        the FHLB, of which $45,935,000 was available at December 31, 2006. The FHLB's
        convertible fixed-rate advances allow the FHLB the periodic option to convert
        to
        London Interbank Offered Rate (“LIBOR”) adjustable-rate advances at the
        three-month LIBOR plus 0.08% to 0.20%. The FHLB currently has the option
        to
        convert all $30,000,000 of the outstanding convertible advances on a quarterly
        basis. Upon the FHLB's conversion, the bank has the option to repay the
        respective advances in full.
 
 *Subsequent
        Event*
  A
        total
        of $48,755,000 of the above advances was paid off in connection with the
        de-leveraging transaction described in Note 3 in January 2007, reducing total
        FHLB borrowings to $68,816,000 with an average interest rate of
        4.91%.
  19
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 **NOTE
        10 - DERIVATIVE FINANCIAL INSTRUMENTS**
 
 **Rate
        Lock Commitments**
  Union
        National enters into commitments to originate loans whereby the interest
        rate on
        the loan is determined generally up to 30 days prior to funding (“rate lock
        commitments”). Rate lock commitments on mortgage loans that are intended to be
        sold are considered to be derivatives. Accordingly, such commitments, along
        with
        any related fees received from potential borrowers, are recorded at fair
        value
        in derivative assets or liabilities, with changes in fair value recorded
        in the
        net gain or loss on sale of mortgage loans. Fair value is based on fees
        currently charged to enter into similar agreements and for fixed rate
        commitments also considers the difference between current levels of interest
        rates and the committed rates.
 
 Some
        of
        these rate lock commitments will ultimately expire without being completed.
        To
        the extent that a loan is ultimately granted and the borrower ultimately
        accepts
        the terms of the loan, these rate lock commitments expose Union National
        to
        variability in their fair value due to changes in interest rates. If interest
        rates increase, the value of these rate lock commitments decreases. Conversely,
        if interest rates decrease, the value of these rate lock commitments increases.
        The notional amount of interest rate lock commitments was insignificant at
        December 31, 2006 and 2005.
 
 **Interest
        Rate Derivatives**
  Union
        National has derivative financial instruments in the form of an interest
        rate
        collar agreement and an interest rate cap agreement which derive their value
        from underlying interest rates, both of which have been designated as cash
        flow
        hedges. These transactions involve both credit and market risk. The notional
        amounts are amounts on which calculations, payments, and the value of the
        derivative are based. Notional amounts do not represent direct credit exposures.
        Direct credit exposure is limited to the net difference between the calculated
        amounts to be received and paid, if any. Such difference, which represents
        the
        fair value of the derivative instruments, is reflected on Union National’s
        balance sheet as derivative assets and derivative liabilities, with changes
        in
        such fair values reflected in accumulated other comprehensive income (loss). Union
        National’s objective in using derivatives is to add stability to its net
        interest income by managing its exposure to interest rate movements or other
        identified risks.
 
 The
        $10
        million notional amount interest rate collar agreement, which was entered
        into
        in the fourth quarter of 2005, consists of a purchased interest rate floor
        with
        a strike price of 6.75% and a sold interest rate cap with a strike price
        of
        9.0%. The terms of the collar result in Union National receiving payments
        when
        the Prime interest rate is below 6.75% and making payments when the Prime
        interest rate is above 9.00%. At December 31, 2006, the Prime rate was 8.25%
        and
        Union National was neither entitled to receive nor obligated to make a payment
        under the terms of the collar. The collar was used to hedge the variable
        cash
        flows associated with $10 million of Union National’s existing variable-rate
        assets over a five-year term ending in October 2010.
 
 The
        $10
        million notional amount interest rate cap agreement, which was entered into
        in
        the third quarter of 2006, has a strike price of 5.50%. The terms of the
        cap
        result in Union National receiving payments when the 3-month USD LIBOR interest
        rate is above 5.5%. At December 31, 2006, the 3-month USD LIBOR rate was
        5.36%
        and Union National was not entitled to receive a payment under the terms
        of the
        cap. The cap was used to hedge the variable cash flows associated with $10
        million of Union National’s existing variable-rate FHLB borrowings over a
        three-year term ending in July 2009.
 
 Union
        National is exposed to credit-related losses, in the event of nonperformance
        by
        the counterparties to these agreements. Union National controls the credit
        risk
        of its financial contracts through credit approvals, limits, and monitoring
        procedures, and does not expect any counterparties to fail their obligations.
        Union National deals only with primary dealers.
 
 At
        December 31, 2006, the interest rate collar and cap derivatives with fair
        values
        of $17,000 and $28,000, respectively, were included in other assets. The
        change
        in net unrealized after-tax losses of $26,000 in 2006 for derivatives designated
        as cash flow hedges is separately disclosed in the statement of changes in
        stockholders’ equity and comprehensive income (loss). Hedge ineffectiveness on
        cash flow hedges recognized during 2006 was not significant.
  20
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 Amounts
        reported in accumulated other comprehensive income (loss) related to derivatives
        will be reclassified to interest income as interest payments are received
        on
        Union National’s variable-rate assets or to interest expense as payments are
        made on Union National’s debt. No such net unrealized amounts were reclassified
        from accumulated other comprehensive income (loss) to interest income or
        expense
        during 2006.
 
 **NOTE
        11 - JUNIOR SUBORDINATED DEBENTURES**
 
 On
        July
        28, 2006, the bank issued $6,000,000 of subordinated debentures due September
        15, 2021, with a five-year initial fixed rate of 7.17%, and then at an annual
        coupon rate, reset quarterly, based on three-month LIBOR plus 1.65%. The
        debentures were issued in order to fund growth and to raise the bank’s
        risk-based capital ratio above the 10% well-capitalized level. These securities
        are redeemable at the bank’s option beginning after five years.
 
 On
        December 19, 2003, Union National issued $8,248,000 in junior subordinated
        debentures due January 23, 2034, to Union National Capital Trust I (“UNCT I”).
        On October 14, 2004, Union National issued $3,093,000 in junior subordinated
        debentures due November 23, 2034, to Union National Capital Trust II (“UNCT
        II”). Union National owns all of the common equity of $248,000 and $93,000 in
        UNCT I and UNCT II, respectively, and the debentures are the sole asset of
        the
        trusts. UNCT I issued $8,000,000 and UNCT II issued $3,000,000 of floating-rate
        trust capital securities in non-public offerings in reliance on Section 4(2)
        of
        the Securities Act of 1933.
 
 The
        UNCT
        I floating-rate capital securities provide for quarterly distributions at
        a
        variable annual coupon rate, reset quarterly, based on three-month LIBOR
        plus
        2.85%; the coupon rate was 8.23% at December 31, 2006, and 7.09% at December
        31,
        2005. The UNCT II floating-rate capital securities provide for quarterly
        distributions at a fixed annual coupon rate of 5.28% until November 2007,
        and
        then at an annual coupon rate, reset quarterly, based on three-month LIBOR
        plus
        2.00%. The securities in both trusts are callable by Union National, subject
        to
        any required regulatory approval, at par, after 5 years. Union National
        unconditionally guarantees the trust capital securities. The terms of the
        junior
        subordinated debentures and the common equity of the trusts mirror the terms
        of
        the trust capital securities issued by the trusts.
 
 In
        December 2003, Union National used $4,000,000 of the net proceeds from the
        UNCT
        I offering to fund an additional capital investment in Union National Community
        Bank to fund its operations and future growth. In October 2005, Union National
        used the net proceeds from the UNCT II offering to fund an additional $3,000,000
        capital investment in Union National Community Bank to fund its operations
        and
        future growth. Union National plans to use the balance of the funding for
        the
        repurchase of common stock and general corporate purposes. During 2006, 2005,
        and 2004, Union National repurchased 8,709, 53,276, and 100,489 shares of
        common
        stock at a cost of $168,000, $1,192,000, and $2,260,000 respectively.
 
 In
        accordance with FASB Interpretation No. 46, “Consolidation of Variable Interest
        Entities,” the accounts of Union National Capital Trust I and Union National
        Capital Trust II are not included in the consolidated financial statements
        of
        Union National. However, for regulatory purposes, the trust capital securities
        qualify as Tier I capital of Union National subject to a 25% of capital
        limitation under risk-based capital guidelines developed by the Federal Reserve.
        The portion that exceeds the 25% of capital limitation qualifies as Tier
        II
        capital. Included in Tier I regulatory capital of Union National Financial
        Corporation detailed above is $9,435,000 of junior subordinated debentures
        issued through Union National Capital Trust I and Union National Capital
        Trust
        II (together, “the Capital Trusts”), wholly-owned subsidiaries of Union
        National. The balance of the junior subordinated debentures issued through
        the
        Capital Trusts, $1,565,000, 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 junior subordinated debt can no longer be considered in regulatory
        capital.
  21
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 **NOTE
        12 - EMPLOYEE BENEFITS**
 
 Union
        National has 401(k) profit-sharing plans that cover substantially all full-time
        employees. These plans allow employees to contribute a portion of their salaries
        and wages to the plan. The bank may elect to make discretionary contributions
        to
        the plans. The plans provide for the bank to match a portion of employee-elected
        salary deferrals, subject to certain percentage maximums of their salaries
        and
        wages.
 
 Union
        National’s expense relative to its profit-sharing plans amounted to $329,000 for
        the year ended December 31, 2006, $324,000 for 2005 and $344,000 for
        2004.
 
 Union
        National entered into a salary continuation agreement with its Chairman/
        President/CEO on December 31, 2003. This is an unfunded plan that provides
        for
        target retirement benefits beginning at age 62. The agreement also provides
        for
        benefits in the event of the disability or death of the participant, the
        termination of employment of the participant or a change in control of Union
        National. At December 31, 2006 and 2005, Union National’s total accrued
        liability under this agreement was $164,000 and $103,000, respectively. Total
        expenses related to this liability and related insurance costs as provided
        for
        in the agreement amounted to $62,000, $56,000, and $49,000 for the years
        ended
        December 31, 2006, 2005, and 2004, respectively.
 
 Union
        National entered into executive incentive retirement agreements with two
        senior
        executive officers during 2004. These are unfunded arrangements with incentives
        that **** are
        declared based on Union National meeting certain earnings and profitability
        goals established by the Board of Directors on an annual basis. The rate
        of
        return credited to participants’ accounts each year, the vesting provisions and
        other provisions are set forth in the agreements. There was no expense relative
        to these agreements for the years ended December 31, 2006, 2005, and 2004.
  **NOTE
        13 - INCOME TAXES**
 
 The
        net
        deferred tax asset consisted of the following components as of December
        31:
 (Dollars
                    in thousands)
                
                **2006**
                
                2005Deferred
                    Tax Assets:Allowance
                    for Loan and Lease Losses
                
                **$**
                **937**
                
                $
                802Recoverable
                    Alternative Minimum Taxes
                
                
                **788**
                
                
                360Income
                    Tax Credit Carryforward
                
                
                **278**
                
                
                285Unrealized
                    Losses on InvestmentSecurities
                    Available for Sale
                
                
                **125**
                
                
                216Other
                
                
                **224**
                
                
                89Total
                    Deferred Tax Assets
                
                
                **2,352**
                
                
                1,752Deferred
                    Tax Liabilities:Deferred
                    Net Loan Fees
                
                
                **(50**
                **)**
                
                (55
                )Depreciation
                
                
                **(383**
                **)**
                
                (350
                )Prepaid
                    Expenses
                
                
                **(82**
                **)**
                
                (80
                )Mortgage
                    Servicing Assets and CreditEnhancement
                    Fees Receivable
                
                
                **(72**
                **)**
                
                (95
                )Leasing
                
                
                **(421**
                **)**
                
                (80
                )Other
                
                
                **(23**
                **)**
                
                (18
                )Total
                    Deferred Tax Liabilities
                
                
                **(1,031**
                **)**
                
                (678
                )Net
                    Deferred Tax Asset
                
                **$**
                **1,321**
                
                $
                1,074
  An
        analysis of the income tax expense included in the consolidated statements
        of
        income for the years ended December 31 is as follows:
 (Dollars
                    in thousands)
                
                **2006**
                
                2005
                
                2004Taxes
                    Currently Payable
                
                **$**
                **443**
                
                $
                822
                
                $
                768Deferred
                    Income Taxes (Benefit)
                
                
                **(344**
                **)**
                
                (156
                )
                
                (92
                )Provision
                    for Income Taxes
                
                **$**
                **99**
                
                $
                666
                
                $
                676
  22
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 The
        reasons for the difference between Union National's provision for income
        taxes
        and the amount computed by applying the statutory federal income tax rate
        to
        income before income taxes for the years ended December 31 are as follows:
 **2006**
                
                2005
                
                2004(Dollars
                    in thousands)
                
                **Amount**
                ****
                **%**
                
                Amount
                
                %
                
                Amount
                
                %Tax
                    at StatutoryFederal
                    Income Tax Rate
                
                **$**
                **865**
                
                
                **34.0**
                **%**
                $
                1,366
                
                
                34.0
                %
                $
                1,326
                
                
                34.0
                %Tax-Exempt
                    Income, Net ofDisallowed
                    Interest Expense
                
                
                **(583**
                **)**
                
                **(22.9**
                **)**
                
                (520
                )
                
                (12.9
                )
                
                (461
                )
                
                (11.8
                )Earnings
                    from Bank-OwnedLife
                    Insurance
                
                
                **(130**
                **)**
                
                **(5.1**
                **)**
                
                (127
                )
                
                (3.2
                )
                
                (130
                )
                
                (3.3
                )Income
                    Tax Credits
                
                
                **(72**
                **)**
                
                **(2.8**
                **)**
                
                (72
                )
                
                (1.8
                )
                
                (72
                )
                
                (1.9
                )Other
                
                
                **19**
                
                
                **0.7**
                
                
                19
                
                
                .5
                
                
                13
                
                
                .3Provision
                    for IncomeTaxes
                
                **$**
                **99**
                
                
                **3.9**
                **%**
                $
                666
                
                
                16.6
                %
                $
                676
                
                
                17.3
                %
 
 Income
        tax credit carryforwards begin to expire in 2020. Income tax credits are
        recognized as earned. Credits earned were $72,000 in 2006, $72,000 in 2005
        and
        $72,000 in 2004. Projected tax credits are $38,000 for 2007 and $0 for 2008.
  **NOTE
        14 - COMMITMENTS AND CONTINGENT LIABILITIES**
 
 The
        bank
        is a party to financial instruments with off-balance sheet risk in the normal
        course of business to meet the financing needs of its customers. These financial
        instruments include commitments to extend credit and standby letters of credit.
        These instruments involve, to varying degrees, elements of credit risk and
        interest rate risk in excess of the amount recognized in the consolidated
        balance sheets. The contract amounts of these instruments reflect the exposure
        to credit loss in the event of nonperformance.
 **December
                    31**,
                
                December
                    31,(Dollars
                    in thousands)
                
                **2006**
                
                2005Financial
                    Instruments Whose Contract AmountsRepresent
                    Credit Risk:Commitments
                    to Extend Credit
                
                **$**
                **42,694**
                
                $
                60,525Unused
                    Portion of Home Equity,Personal
                    and Overdraft Lines
                
                
                **36,958**
                
                
                36,329Other
                    Unused Commitments, PrincipallyCommercial
                    Lines of Credit
                
                
                **53,325**
                
                
                39,605Standby
                    Letters of Credit
                
                
                **8,694**
                
                
                4,950
  Commitments
        to extend credit are agreements to lend to a customer as long as there is
        no
        violation of any condition established in the contract. Commitments generally
        have fixed expiration dates or other termination clauses and may require
        payment
        of a fee. Certain commitments may expire without being drawn upon and,
        therefore, future cash may not be required. The bank evaluates each customer's
        creditworthiness on a case-by-case basis. The bank generally requires collateral
        or other security to support financial instruments with credit risk. Collateral
        held varies but may include residential or commercial real estate, equipment,
        inventory, and accounts receivable.
 
 Standby
        letters of credit are conditional commitments issued by the bank to guarantee
        the performance of a customer to a third party. These letters of credit are
        primarily issued to support public and private borrowing arrangements and
        have
        terms of less than two years. The credit risk involved in issuing letters
        of
        credit is essentially the same as that involved in extending loan advances
        to
        customers. The contract amounts of these instruments reflect the exposure
        to
        credit loss in the event of nonperformance. **** The
        bank
        requires collateral supporting these letters of credit as deemed necessary.
        Based on the creditworthiness of the borrowers, Union National had unsecured
        letters of credit outstanding that totaled $1,338,000 at December 31, 2006.
        Management believes that the proceeds obtained through a liquidation of
        collateral on secured letters of credit would be sufficient to cover the
        maximum
        potential amount of future payments required under the corresponding guarantees.
        The amount of the liability as of December 31, 2006 and 2005, for guarantees
        under standby letters of credit issued is not material.
  23
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 In
        addition to other investors, Union National sells residential mortgage loans
        to
        the FHLB of Pittsburgh. The agreement with the FHLB includes a maximum credit
        enhancement liability of $802,000, which Union National may be required to
        pay
        if realized losses on any of the sold mortgages exceed the amount held in
        the
        FHLB’s spread account. The FHLB is funding the spread account annually at 0.04%
        of the outstanding balance of loans sold. Union National’s historical losses on
        residential mortgages have been lower than the amount being funded to the
        spread
        account. As such, Union National does not anticipate recognizing any losses
        and
        accordingly, has not recorded a liability for the credit enhancement. As
        compensation for the credit enhancement, the FHLB is paying Union National
        0.10%
        of the outstanding loan balance in the portfolio on a monthly basis. Union
        National records credit enhancement fees receivable based upon the present
        value
        of estimated future cash flows as loans are sold. The credit enhancement fees
        receivable amounted to $64,000 at December 31, 2006, and $84,000 at December
        31,
        2005, and are amortized as principal is received on loans sold.
  **NOTE
        15 - REGULATORY RESTRICTIONS**
 
 The
        bank
        is required to maintain reserves, in the form of cash and balances with the
        Federal Reserve Bank, against its deposit liabilities. The average amount
        of
        required reserves during 2006 was approximately $4,976,000 and during 2005
        it
        was approximately $4,467,000.
 
 The
        bank
        is also subject to certain restrictions in connection with the payment of
        dividends. National banking laws require the approval of the Comptroller
        of
        the **** Currency
        if the total of all dividends declared by a national bank in any calendar
        year
        exceeds the net profits of the bank (as defined) for that year combined with
        its
        retained net profits for the preceding two calendar years. Under this formula,
        the bank may declare dividends to its parent corporation in 2007 of
        approximately $2,522,000 plus an amount equal to the net profits of the bank
        in
        2007 up to the date of any such dividend declaration.
 
 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 material
        adverse effect on Union National’s 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 I capital to average assets and of Tier I and total capital (as defined
        in the regulations) to risk-weighted assets. Management believes, as of
        December 31, 2006 and 2005, that Union National and the bank meet all
        capital adequacy requirements to which they are subject.
  As
        of
        December 31, 2006, 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:
 **December
                    31, 2006**
                
                December
                    31, 2005(Dollars
                    in thousands)
                
                **Amount**
                
                **%**
                
                Amount
                
                %Union
                    National Financial CorporationLeverage
                    Ratio:Tier
                    I Capital to Average Total Assets
                
                **$**
                **38**,**091**
                
                
                **7.39**
                **%**
                $
                36,457
                
                
                8.09
                %Minimum
                    Required for CapitalAdequacy
                    Purposes
                
                
                **20,611**
                
                
                **4.00**
                
                
                18,021
                
                
                4.00Risk-based
                    Capital Ratios:Tier
                    I Capital Ratio - Actual
                
                
                **38,091**
                
                
                **8.97**
                
                
                36,457
                
                
                9.70Minimum
                    Required for CapitalAdequacy
                    Purposes
                
                
                **16,991**
                
                
                **4.00**
                
                
                15,032
                
                
                4.00Total
                    Capital Ratio - Actual
                
                
                **54,786**
                
                
                **12.90**
                
                
                41,289
                
                
                10.99Minimum
                    Required for CapitalAdequacy
                    Purposes
                
                
                **33,983**
                
                
                **8.00**
                
                
                30,064
                
                
                8.00Union
                    National Community BankLeverage
                    Ratio:Tier
                    I Capital to Average Total Assets
                
                $
                **38,048**
                
                
                **7.45**
                **%**
                $
                36,398
                
                
                8.10
                %Minimum
                    Required for CapitalAdequacy
                    Purposes
                
                
                **20,611**
                
                
                **4.00**
                
                
                17,965
                
                
                4.00To
                    Be Well-Capitalized Under PromptCorrective
                    Action Provisions
                
                
                **25,764**
                
                
                **5.00**
                
                
                22,456
                
                
                5.00Risk-based
                    Capital Ratios:Tier
                    I Capital Ratio - Actual
                
                
                **38,048**
                
                
                **9.08**
                
                
                36,398
                
                
                9.71Minimum
                    Required for CapitalAdequacy
                    Purposes
                
                
                **16,925**
                
                
                **4.00**
                
                
                14,992
                
                
                4.00To
                    Be Well-Capitalized Under PromptCorrective
                    Action Provisions
                
                
                **25,387**
                
                
                **6.00**
                
                
                22,488
                
                
                6.00Total
                    Capital Ratio - Actual
                
                
                **47,473**
                
                
                **11.22**
                
                
                39,073
                
                
                10.43Minimum
                    Required for CapitalAdequacy
                    Purposes
                
                
                **33,849**
                
                
                **8.00**
                
                
                29,984
                
                
                8.00To
                    Be Well-Capitalized Under PromptCorrective
                    Action Provisions
                
                
                **42,312**
                
                
                **10.00**
                
                
                37,480
                
                
                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 December 31, 2006, this limitation amounted
        to approximately $4,747,000. 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.
 
 **NOTE
        16 - NEW BUSINESS VENTURE**
 
 Union
        National Community Bank formed a new mortgage subsidiary, Home Team Financial,
        LLC that began operations in July 2005. Union National Community Bank has
        a 98%
        ownership interest and a 30% initial interest in net profits. Home Team
        Financial, LLC acquired certain net assets totaling $155,000 from Home Team
        Mortgage, Inc. and the employees of Home Team Mortgage, Inc. became employees
        of
        Home Team Financial, LLC. The principals of Home Team Mortgage, Inc. serve
        as
        executive officers and they have the authority to manage the day-to-day
        operations of the new company. The principals, who previously owned and operated
        Home Team Mortgage, Inc., will initially receive a greater proportion than
        Union
        National Community Bank of the net profits of the new company. In addition,
        in
        accordance with various agreements, Union National will begin to buy the
        principal’s interests in the company in 2011 and will complete this purchase
        over a total five-year period of time. Their ownership interests and net
        profit
        distributions will be gradually reduced over the buyout period. The acquisition
        of their interests will be at amounts based on the future earnings of the
        company. This contingent consideration is not expected to be significant
        to
        Union National’s financial condition and will be considered as part of the
        purchase price as the contingencies lapse.
 
 The
        results of Home Team Financial, LLC are included in Union National’s
        consolidated results beginning with the quarter ended September 30, 2005.
        While
        pro forma results as though Home Team Mortgage, Inc. had been included in
        the
        consolidation for all periods presented are not determinable, management
        does
        not believe such results would differ significantly from the results reported
        within. Home Team Mortgage, Inc. did not compute or report earnings on a
        quarterly basis.
  24
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 **NOTE
        17 - DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN**
 
 Union
        National maintains a Dividend Reinvestment and Stock Purchase Plan. Stockholders
        may participate in the plan, which provides that additional shares of common
        stock may be purchased with reinvested dividends and optional cash payments
        within specified limits at prevailing market prices. To the extent that shares
        are not available for purchase by the plan in the open market, Union National
        has reserved 182,326 shares of common stock to be issued under the plan.
        At
        December 31, 2006, 160,589 shares have been issued under the plan. Open-market
        purchases are usually made by an independent purchasing agent retained to
        act as
        agent for plan participants, and the purchase price to participants will
        be the
        actual price paid, excluding brokerage commissions and other expenses that
        will
        be paid by Union National.
  **NOTE
        18 - FAIR VALUE OF FINANCIAL INSTRUMENTS**
 
 As
        required by SFAS
        No.
        107, "Disclosures about Fair Value of Financial Instruments," Union National
        has
        presented estimated fair value information about financial instruments, whether
        or not recognized in the consolidated balance sheets, for which it is
        practicable to estimate that value. Fair value is best determined by values
        quoted through active trading markets. Because no active trading market exists
        for various types of financial instruments, many of the fair values disclosed
        were derived using present value or other valuation techniques. These fair
        values are significantly affected by assumptions used, principally the timing
        of
        future cash flows and the discount rate. As a result, Union National's ability
        to realize these derived values cannot be assured. Further, certain financial
        instruments and all non-financial instruments are excluded. Accordingly,
        the
        aggregate fair value amounts presented do not represent the underlying value
        of
        Union National.
 
 The
        following methods and assumptions were used by Union National in estimating
        the
        fair value of its financial instruments:
 
 Cash
        and cash equivalents: The
        carrying amounts reported in the consolidated balance sheets for cash and
        short-term investments approximate their fair values.
 
 Investment
        securities: Fair
        values for investment securities are based on quoted prices, where available.
        If
        quoted prices are not available, fair values are based on quoted prices of
        comparable instruments.
 
 Loans
        held for sale: Loans
        originated and intended for sale in the secondary market are carried at the
        lower of aggregate cost or fair value, as determined by aggregate outstanding
        commitments from investors or current investor yield requirements.
 
 Loans: For
        variable-rate loans that reprice frequently and with no significant change
        in
        credit risk, fair values are based on carrying values. The fair values of
        other
        loans are determined using estimated future cash flows, discounted at the
        interest rates currently being offered for loans with similar terms to borrowers
        with similar credit quality.
 
 Restricted
        investment in bank stocks: The
        carrying amounts reported in the consolidated balance sheets for restricted
        investment in bank stocks approximate their fair values.
 
 Accrued
        interest receivable: The
        carrying amount of accrued interest receivable approximates its fair
        value.
 
 Mortgage
        servicing assets and credit enhancement fees receivable: The fair
        value of servicing assets and credit enhancement fees receivable is based
        on the
        present value of estimated future cash flows for pools of mortgages stratified
        by rate and maturity date.
 
 Deposit
        liabilities: The fair
        values of deposits with no stated maturities, such as demand deposits, savings
        accounts, NOW and money market deposits, equal their carrying amounts, which
        represent the amount payable on demand. Fair values for fixed-rate certificates
        of deposit are estimated using a discounted cash flow calculation that applies
        interest rates currently being offered on certificates to a schedule of
        aggregated expected monthly maturities on time deposits.
  25
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 Short-term
        borrowings: The
        carrying amounts of federal funds purchased, advances from the Federal Home
        Loan
        Bank and other short-term borrowings approximate their fair values.
 
 Long-term
        debt: The fair
        values of Union National's long-term debt are estimated using discounted
        cash
        flow analyses, based on Union National's incremental borrowing rates for
        similar
        types of borrowing arrangements.
 
 Junior
        subordinated debentures: For
        floating-rate debentures, fair value is based on the difference between current
        interest rates for similar types of borrowing arrangements and the current
        coupon rate. For junior subordinated debentures that are at a fixed rate
        for a
        period of time, the fair value is determined using discounted cash flow
        analyses, based on current interest rates for similar types of borrowing
        arrangements.
  Accrued
        interest payable: The
        carrying amount of accrued interest payable approximates its fair
        value.
 
 Derivative
        financial instruments:
 Fair
        value for interest rate agreements are based upon the amounts required to
        settle
        the contracts. Fair values for on-balance-sheet commitments to originate
        loans
        held for sale are based on fees currently charged to enter into similar
        agreements and for fixed-rate commitments, fair value also considers the
        difference between current levels of interest rates and the committed
        rates.
 
 Off-balance-sheet
        instruments: For
        Union National's off-balance-sheet instruments, consisting of commitments
        to
        extend credit and financial and performance standby letters of credit, the
        estimated fair value is based on fees currently charged to enter into similar
        agreements, taking into account the remaining term of the agreements and
        the
        present creditworthiness of the counterparties. For fixed-rate loan commitments,
        fair value also considers the difference between current levels of interest
        rates and the committed rates.
 
 At
        December 31, 2006 and 2005, the estimated fair values of financial instruments
        based on the disclosed assumptions are as follows:
 **December
                    31, 2006**
                
                December
                    31, 2005(Dollars
                    in thousands)
                
                **Carrying**
                  **Amount**
                
                **Fair
                    Value**
                
                Carrying
                  Amount
                
                Fair
                    ValueAssets:Cash
                    and Cash Equivalents
                
                **$**
                **15,462**
                
                **$**
                **15,462**
                
                $
                14,501
                
                $
                14,501Investment
                    SecuritiesAvailable
                    for Sale
                
                
                **129,810**
                
                
                **129,810**
                
                
                119,702
                
                
                119,702Loans
                    Held for Sale
                
                
                **1,662**
                
                
                **1,662**
                
                
                2,147
                
                
                2,147Loans
                    (excluding leases), Net ofUnearned
                    Income and AllowanceFor
                    Loan Losses
                
                
                **329,767**
                
                
                **324,119**
                
                
                293,842
                
                
                294,633Restricted
                    Investment in Bank Stocks
                
                
                **5,994**
                
                
                **5,994**
                
                
                5,736
                
                
                5,736Accrued
                    Interest Receivable
                
                
                **2,559**
                
                
                **2,559**
                
                
                2,172
                
                
                2,172Mortgage
                    Servicing Assets andCredit
                    Enhancement Fees Receivable
                
                
                **213**
                
                
                **421**
                
                
                280
                
                
                456Liabilities:Demand
                    and Savings Deposits
                
                
                **191,336**
                
                
                **191,336**
                
                
                180,480
                
                
                180,480Time
                    Deposits
                
                
                **148,739**
                
                
                **147,993**
                
                
                116,130
                
                
                115,026Short-term
                    Borrowings
                
                
                **10,544**
                
                
                **10,544**
                
                
                18,305
                
                
                18,305Long-term
                    Debt
                
                
                **117,571**
                
                
                **116,987**
                
                
                105,815
                
                
                105,693Junior
                    Subordinated Debentures
                
                
                **17,341**
                
                
                **17,690**
                
                
                11,341
                
                
                11,376Accrued
                    Interest Payable
                
                
                **1,974**
                
                
                **1,974**
                
                
                1,359
                
                
                1,359Derivative
                    Financial Instruments:Rate
                    Lock Commitments - Liabilities
                
                
                **-**
                
                
                **-**
                
                
                -
                
                
                -Interest
                    Rate Collar Agreement Asset
                
                
                **17**
                
                
                **17**
                
                
                26
                
                
                26Interest
                    Rate Cap Agreement Asset
                
                
                **28**
                
                
                **28**
                
                
                -
                
                
                -Off-balance-sheet
                    Items:Commitments
                    to Extend Creditand
                    Standby Letters of Credit
                
                
                **-**
                
                
                **-**
                
                
                -
                
                
                -
  26
  NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 **NOTE
        19 - UNION NATIONAL FINANCIAL CORPORATION (PARENT COMPANY
        ONLY)**
 
 **CONDENSED
        BALANCE SHEETS**
  **December
                    31,**
                
                December
                    31,(Dollars
                    in thousands)
                
                **2006**
                
                2005ASSETSCash
                    in Bank Subsidiary
                
                **$**
                **399**
                
                $
                495Interest-Bearing
                    Deposits in Other Banks
                
                
                **60**
                
                
                119Investment
                    in Subsidiaries
                
                
                **38,523**
                
                
                36,318Other
                    Equity Investment Securities
                
                
                **547**
                
                
                542Investments
                    in Limited Partnerships
                
                
                **343**
                
                
                426Recoverable
                    Federal Income Taxes
                
                
                **361**
                
                
                716Other
                    Assets
                
                
                **100**
                
                
                144Total
                    Assets
                
                **$**
                **40,333**
                
                $
                38,760LIABILITIESJunior
                    Subordinated Debentures
                
                **$**
                **11,341**
                
                $
                11,341Other
                    Liabilities
                
                
                **444**
                
                
                194STOCKHOLDERS'
                    EQUITY
                
                
                **28,548**
                
                
                27,225Total
                    Liabilities andStockholders'
                    Equity
                
                **$**
                **40,333**
                
                $
                38,760
  **CONDENSED
        STATEMENTS OF INCOME**
 Years
                    Ended December 31,(Dollars
                    in thousands)
                
                **2006**
                
                2005
                
                2004INCOMEDividends
                    from Subsidiaries
                
                **$**
                **1,895**
                
                $
                2,166
                
                $
                1,715Dividends
                    on Other Equity Investment Securities
                
                
                **13**
                
                
                16
                
                
                14Interest
                    on Deposits in Bank Subsidiary
                
                
                **3**
                
                
                10
                
                
                14Gain
                    on Sale of Securities
                
                
                **47**
                
                
                34
                
                
                39Management
                    Fees from Bank Subsidiary
                
                
                **42**
                
                
                42
                
                
                42Total
                    Income
                
                
                **2,000**
                
                
                2,268
                
                
                1,824EXPENSESInterest
                    Expense on JuniorSubordinated
                    Debentures
                
                
                **828**
                
                
                681
                
                
                399Other
                    Expenses
                
                
                **207**
                
                
                206
                
                
                187Total
                    Expenses
                
                
                **1,035**
                
                
                887
                
                
                586Income
                    before Income Taxes and Equityin
                    Undistributed Income of Subsidiary
                
                
                **965**
                
                
                1,381
                
                
                1,238Provision
                    for Income Taxes(Benefit)
                
                
                **(383**
                **)**
                
                (334
                )
                
                (235
                )**1,348**
                
                
                1,715
                
                
                1,473EQUITY
                    in UNDISTRIBUTEDINCOME
                    of BANK SUBSIDIARY
                
                
                **1,096**
                
                
                1,638
                
                
                1,750NET
                    INCOME
                
                **$**
                **2,444**
                
                $
                3,353
                
                $
                3,223
 
 **CONDENSED
        STATEMENTS OF CASH FLOWS**
  Years
                    Ended December 31,(Dollars
                    in thousands)
                
                **2006**
                
                2005
                
                2004CASH
                    FLOWS from OPERATING ACTIVITIESNet
                    Income
                
                **$**
                **2,444**
                
                $
                3,353
                
                $
                3,223Adjustments
                    to Reconcile Net Income to NetCash
                    Provided by Operating Activities:Equity
                    In Undistributed Incomeof
                    Bank Subsidiary
                
                
                **(1,096**
                **)**
                
                (1,638
                )
                
                (1,750
                )Investment
                    Securities Gains
                
                
                **(47**
                **)**
                
                (34
                )
                
                (39
                )Provision
                    for (Benefit from) DeferredIncome
                    Taxes
                
                
                **26**
                
                
                (4
                )
                
                (5
                )Decrease(Increase)
                    in Other Assets
                
                
                **481**
                
                
                (218
                )
                
                (119
                )Increase
                    in Other Liabilities
                
                
                **236**
                
                
                40
                
                
                74Net
                    Cash Provided by Operating Activities
                
                
                **2,044**
                
                
                1,499
                
                
                1,384CASH
                    FLOWS from INVESTING ACTIVITIESProceeds
                    from Sales of Available-for-SaleSecurities
                
                
                **100**
                
                
                87
                
                
                49Purchases
                    of Available-for-Sale Securities
                
                
                **(73**
                **)**
                
                (40
                )
                
                (196
                )Investment
                    in Subsidiaries
                
                
                **(900**
                **)**
                
                (1,000
                )
                
                (3,093
                )Net
                    Cash Used in Investing Activities
                
                
                **(873**
                **)**
                
                (953
                )
                
                (3,240
                )CASH
                    FLOWS from FINANCING ACTIVITIESProceeds
                    from Issuance of JuniorSubordinated
                    Debentures
                
                
                **-**
                
                
                -
                
                
                3,093Issuance
                    Costs of Junior SubordinatedDebentures
                
                
                **-**
                
                
                -
                
                
                (60
                )Acquisition
                    of Treasury Stock
                
                
                **(168**
                **)**
                
                (1,192
                )
                
                (2,260
                )Issuance
                    of Common Stock
                
                
                **402**
                
                
                775
                
                
                749Cash
                    Dividends Paid
                
                
                **(1,560**
                **)**
                
                (1,576
                )
                
                (1,542
                )Net
                    Cash Used in Financing Activities
                
                
                **(1,326**
                **)**
                
                (1,993
                )
                
                (20
                )NET
                    DECREASE in CASH
                
                
                **(155**
                **)**
                
                (1,447
                )
                
                (1,876
                )CASH
                    - Beginning of Year
                
                
                **614**
                
                
                2,061
                
                
                3,937CASH
                    - End of Year
                
                **$**
                **459**
                
                $
                614
                
                $
                2,061
 
 **NOTE
        20 - SUBSEQUENT EVENT**
 
 In
        January 2007, Union National decided to de-leverage its Balance Sheet. The
        de-leveraging strategy will strengthen Union National’s equity position, enhance
        its income tax effectiveness, and facilitate its future core banking growth
        strategies for loans and deposits. Consequently, Union National reduced the
        size
        of its securities portfolio by $66,000,000 while paying down FHLB debt totaling
        $48,755,000, as well as other short-term borrowings, thereby reducing its
        overall capital needs and its interest rate risk profile. Union National
        realized losses on the sale of securities of approximately $520,000 on a
        pre-tax
        basis, and incurred prepayment penalties of approximately $31,000 on a pre-tax
        basis. In the aggregate, 2007 first quarter earnings are expected to be
        adversely impacted by approximately $364,000 after tax, or approximately
        $0.14
        per share.
  27
 
  Report
        of
        Independent Registered
 Public
        Accounting Firm
  To
        the
        Board of Directors and Stockholders
 Union
        National Financial Corporation
 Lancaster,
        Pennsylvania
  We
        have
        audited the accompanying consolidated balance sheets of Union National Financial
        Corporation and subsidiary (the Company) as of December 31, 2006 and 2005,
        and the related consolidated statements of income, changes in stockholders’
equity and cash flows for each of the years in the three-year period ended
        December 31, 2006. These consolidated financial statements are the
        responsibility of the Company’s management. Our responsibility is to express an
        opinion on these consolidated financial statements based on our audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the
        consolidated financial statements are free of material misstatement. The
        Company
        is not required to have, nor were we engaged to perform, an audit of its
        internal control over financial reporting. Our audits included consideration
        of
        internal control over financial reporting as a basis for designing audit
        procedures that are appropriate in the circumstances, but not for the purpose
        of
        expressing an opinion on the effectiveness of the Company’s internal control
        over financial reporting. Accordingly, we express no such opinion. An audit
        also
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the consolidated financial statements, assessing the accounting
        principles used and significant estimates made by management, as well as
        evaluating the overall financial statement presentation. We believe that
        our
        audits provide a reasonable basis for our opinion.
  In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of Union National Financial
        Corporation and subsidiary as of December 31, 2006 and 2005, and the
        results of their operations and their cash flows for each of the years in
        the
        three-year period ended December 31, 2006, in conformity with accounting
        principles generally accepted in the United States of America.
   Beard
        Miller Company LLP
 Harrisburg,
        Pennsylvania
 March
        15,
        2007
  28
 Summary
        of Quarterly Financial Data
  The
        unaudited quarterly results of operations for the years ended December 31,
        2006
        and 2005, are as follows:
 (Dollars
        in thousands, except per share data)
  **2006**
              
              2005**March**
              
              **June**
              
              **September**
              
              **December**
              
              March
              
              June
              
              September
              
              December**31**
              
              **30**
              
              **30**
              
              **31**
              
              31
              
              30
              
              30
              
              31Interest
                  Income
              
              **$**
              **6,792**
              
              **$**
              **7,351**
              
              **$**
              **7,937**
              
              **$**
              **8,210**
              
              $
              5,513
              
              $
              5,763
              
              $
              6,143
              
              $
              6,559Interest
                  Expense
              
              
              **3,204**
              
              
              **3,649**
              
              
              **4,275**
              
              
              **4,498**
              
              
              1,934
              
              
              2,246
              
              
              2,559
              
              
              2,923Net
                  Interest Income
              
              
              **3,588**
              
              
              **3,702**
              
              
              **3,662**
              
              
              **3,712**
              
              
              3,579
              
              
              3,517
              
              
              3,584
              
              
              3,636Provision
                  forLoan
                  Losses
              
              
              **30**
              
              
              **307**
              
              
              **104**
              
              
              **231**
              
              
              124
              
              
              144
              
              
              135
              
              
              278Net
                  Interest Income afterProvision
                  forLoan
                  Losses
              
              
              **3,558**
              
              
              **3,395**
              
              
              **3,558**
              
              
              **3,481**
              
              
              3,455
              
              
              3,373
              
              
              3,449
              
              
              3,358Other
                  Operating Income
              
              
              **1,854**
              
              
              **2,095**
              
              
              **1,938**
              
              
              **2,166**
              
              
              988
              
              
              1,130
              
              
              1,895
              
              
              1,894Investment
                  Securities Gains
              
              
              **22**
              
              
              **19**
              
              
              **24**
              
              
              **144**
              
              
              21
              
              
              14
              
              
              11
              
              
              58Other
                  Operating Expenses
              
              
              **4,571**
              
              
              **5,092**
              
              
              **4,834**
              
              
              **5,214**
              
              
              3,470
              
              
              3,473
              
              
              4,306
              
              
              4,378Income
                  beforeIncome
                  Taxes
              
              
              **863**
              
              
              **417**
              
              
              **686**
              
              
              **577**
              
              
              994
              
              
              1,044
              
              
              1,049
              
              
              932Provision
                  for Income Taxes
              
              
              **93**
              
              
              **(55**
              **)**
              
              **46**
              
              
              **15**
              
              
              172
              
              
              185
              
              
              179
              
              
              130Net
                  Income
              
              **$**
              **770**
              
              **$**
              **472**
              
              **$**
              **640**
              
              **$**
              **562**
              
              $
              822
              
              $
              859
              
              $
              870
              
              $
              802**Per
                  Share Information**Net
                  Income for Period - Basic
              
              **$**
              **0.31**
              
              **$**
              **0.19**
              
              **$**
              **0.25**
              
              **$**
              **0.22**
              
              $
              0.33
              
              $
              0.34
              
              $
              0.35
              
              $
              0.32Net
                  Income for Period - Assuming Dilution
              
              
              **0.30**
              
              
              **0.19**
              
              
              **0.25**
              
              
              **0.22**
              
              
              0.32
              
              
              0.34
              
              
              0.34
              
              
              0.32
 Note:
          Due
          to rounding, quarterly earnings per share may not add up to reported annual
          earnings per share.
  29
 **Selected
        Financial Data**
 (Dollars
                    in thousands, except per share data)
                
                Years
                    Ended December 31,**2006**
                
                2005
                
                2004
                
                2003
                
                2002INCOME
                    STATEMENTInterest
                    Income
                
                **$**
                **30,290**
                
                $
                23,978
                
                $
                19,638
                
                $
                18,034
                
                $
                19,561Interest
                    Expense
                
                
                **15,626**
                
                
                9,662
                
                
                6,621
                
                
                6,703
                
                
                8,107Net
                    Interest Income
                
                
                **14,664**
                
                
                14,316
                
                
                13,017
                
                
                11,331
                
                
                11,454Provision
                    for Loan and Lease Losses
                
                
                **672**
                
                
                681
                
                
                404
                
                
                274
                
                
                184Net
                    Interest Income after Provisionfor
                    Loan and Lease Losses
                
                
                **13,992**
                
                
                13,635
                
                
                12,613
                
                
                11,057
                
                
                11,270Other
                    Operating Income
                
                
                **8,262**
                
                
                6,011
                
                
                4,095
                
                
                4,165
                
                
                3,164Other
                    Operating Expenses
                
                
                **19,711**
                
                
                15,627
                
                
                12,809
                
                
                11,325
                
                
                10,538Income
                    before Income Taxes
                
                
                **2,543**
                
                
                4,019
                
                
                3,899
                
                
                3,897
                
                
                3,896Provision
                    for Income Taxes
                
                
                **99**
                
                
                666
                
                
                676
                
                
                681
                
                
                736Net
                    Income for Year
                
                **$**
                **2,444**
                
                $
                3,353
                
                $
                3,223
                
                $
                3,216
                
                $
                3,160SHARE
                    INFORMATIONNet
                    Income Per Share (Basic)
                
                **$**
                **0.97**
                
                $
                1.33
                
                $
                1.28
                
                $
                1.23
                
                $
                1.18Cash
                    Dividends Per Share
                
                
                **0.620**
                
                
                0.625
                
                
                0.610
                
                
                0.600
                
                
                0.548Average
                    Shares Outstanding (Basic) (000's)
                
                
                **2,518**
                
                
                2,517
                
                
                2,526
                
                
                2,623
                
                
                2,685FINANCIAL
                    RATIOSReturn
                    on Average Assets
                
                
                **0.50**
                **%**
                
                0.79
                %
                
                0.87
                %
                
                0.98
                %
                
                1.02
                %Return
                    on Average Stockholders' Equity
                
                
                **8.81**
                **%**
                
                12.59
                %
                
                12.28
                %
                
                11.89
                %
                
                12.20
                %Return
                    on Average Realized Stockholders' Equity (1)
                
                
                **8.55**
                **%**
                
                12.64
                %
                
                12.62
                %
                
                12.38
                %
                
                12.51
                %Dividend
                    Payout Ratio
                
                
                **63.83**
                **%**
                
                47.00
                %
                
                47.84
                %
                
                48.90
                %
                
                46.58
                %Average
                    Stockholders' Equity toAverage
                    Assets
                
                
                **5.67**
                **%**
                
                6.25
                %
                
                7.05
                %
                
                8.25
                %
                
                8.39
                %AVERAGE
                    BALANCE SHEETLoans
                    and Leases
                
                **$**
                **318,251**
                
                $
                280,245
                
                $
                244,752
                
                $
                200,808
                
                $
                201,976Investment
                    Securities
                
                
                **129,413**
                
                
                110,440
                
                
                95,033
                
                
                96,650
                
                
                80,558Other
                    Earning Assets
                
                
                **6,482**
                
                
                5,982
                
                
                5,201
                
                
                8,386
                
                
                7,381Total
                    Assets
                
                
                **489,884**
                
                
                425,611
                
                
                372,207
                
                
                327,644
                
                
                308,584Deposits
                
                
                **316,402**
                
                
                282,934
                
                
                246,445
                
                
                226,781
                
                
                215,242Short-Term
                    Borrowings
                
                
                **9,790**
                
                
                7,584
                
                
                7,602
                
                
                3,415
                
                
                3,501Long-Term
                    Debt
                
                
                **119,326**
                
                
                94,474
                
                
                81,442
                
                
                68,623
                
                
                62,322Junior
                    Subordinated Debentures
                
                
                **13,922**
                
                
                11,341
                
                
                8,916
                
                
                294
                
                
                -Stockholders'
                    Equity
                
                
                **27,754**
                
                
                26,621
                
                
                26,250
                
                
                27,046
                
                
                25,900BALANCE
                    SHEET AT YEAR-ENDLoans
                    and Leases
                
                **$**
                **341,113**
                
                $
                300,213
                
                $
                263,001
                
                $
                225,381
                
                $
                199,065Investment
                    Securities
                
                
                **129,810**
                
                
                119,702
                
                
                103,490
                
                
                97,066
                
                
                90,679Total
                    Earning Assets
                
                
                **478,912**
                
                
                427,982
                
                
                371,724
                
                
                326,989
                
                
                301,738Total
                    Assets
                
                
                **517,597**
                
                
                462,178
                
                
                399,290
                
                
                351,892
                
                
                320,509Deposits
                
                
                **340,075**
                
                
                296,610
                
                
                265,970
                
                
                231,074
                
                
                223,350Short-Term
                    Borrowings
                
                
                **10,544**
                
                
                18,305
                
                
                4,524
                
                
                9,981
                
                
                3,387Long-Term
                    Debt
                
                
                **117,571**
                
                
                105,815
                
                
                88,630
                
                
                73,874
                
                
                65,299Junior
                    Subordinated Debentures
                
                
                **17,341**
                
                
                11,341
                
                
                11,341
                
                
                8,248
                
                
                -Stockholders'
                    Equity
                
                
                **28,548**
                
                
                27,225
                
                
                26,853
                
                
                27,124
                
                
                26,735
 
 **(1)**
                **Excludes
                    the impact of accumulated other comprehensive income (loss) on
                    total
                    stockholders' equity.**
 
 30
 **MANAGEMENT'S
          DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND**
 **RESULTS
          OF OPERATIONS**
 
 The
          following is management's discussion and analysis of the significant factors
          impacting 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
          almost entirely 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
          elsewhere in this 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 Financial Corporation, Union
          National Community 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 and in the documents that we incorporate by reference, could affect
          the
          future financial results of Union National Financial Corporation, Union
          National
          Community 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.
  Union
          National undertakes no obligation to publicly revise or update these
          forward-looking statements to reflect events or circumstances that arise
          after
          the date of this report. Readers should carefully review the risk factors
          described in the Annual Report on Form 10-K that we periodically file with
          the
          Securities and Exchange Commission.
 
 **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 *  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.
 
 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 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.
 
 *
            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.”
  31
 
 In
          December 2004, the FASB issued Statement No. 123(R), "Share-Based Payment,"
          which requires an entity to recognize the grant-date fair-value of stock
          options
          and other equity-based compensation issued to employees in the income statement,
          and eliminates the intrinsic value method of accounting in APB No. 25.
          Beginning
          January 1, 2006, we adopted the provisions of Statement No. 123(R) using
          the
          modified prospective method with no restatement of prior periods. Any impact
          that the adoption of this statement will have on our financial position
          and
          results of operations will be determined by future grants of share-based
          payments and the assumptions upon which the value of those share-based
          payments
          is based. We did not grant any share-based payments during 2006, and all
          outstanding options as of December 31, 2005 were fully vested; accordingly,
          the
          adoption of Statement No. 123(R) did not have an impact on our financial
          condition or results of operations.
 
 RESULTS
          OF OPERATIONS
 
 ***Overview***
 
 ***2006
          Compared to 2005***
 
 2006
          was
          a year of investment and positioning ourselves for future growth. Consolidated
          net income for 2006 was $2,444,000 as compared to record earnings of $3,353,000
          for 2005 and $3,223,000 for 2004. Basic and diluted earnings per share
          for 2006
          amounted to $0.97 and $0.96, respectively, as compared to basic earnings
          per
          share of $1.33 and diluted earnings per share of $1.31 for 2005 and basic
          earnings per share of $1.28 and diluted earnings per share of $1.25 for
          2004. We
          continued to implement our strategic growth initiatives during 2006, which
          included the relocation of our Corporate Headquarters to Lancaster, Pennsylvania
          in order to more effectively serve communities throughout Lancaster County,
          and
          the opening of two innovative retail offices utilizing our new Gold Cafe
          brand
          and concept. The first Gold Cafe was opened in April along the Old Philadelphia
          Pike near the Harrisburg Area Community College and the second opened in
          November, 2006 along Centerville Road.
 
 Higher
          income resulting from strong growth in commercial loans ($36.8 million
          or 18.6%)
          and customer deposits ($29.6 million or 10.9%) helped us to achieve an
          increase
          in net interest income of 2.4% over the prior year; however, the income
          benefit
          of this growth was largely offset by constriction of our net interest margin
          by
          the inversion of the treasury yield curve in 2006, a shift in the mix of
          customer deposits, and continued utilization of higher-cost alternative
          funding
          sources. The opening of two Gold Cafe retail office locations during 2006,
          bringing our total number of branches to nine, resulted in increased operating
          expenses over the prior year, primarily due to salaries, wages, and benefits
          for
          Gold Cafe staff and occupancy costs. Further cost increases resulted from
          other
          staff and salary additions, and higher costs associated with the relocation
          of
          our corporate headquarters. These higher costs were expected and will continue
          as our strategic growth initiatives are implemented, due to the anticipated
          timeline of approximately two to three years for a new branch to begin
          operating
          at breakeven.
 
 Net
          income as a percent of total average assets, also known as return on average
          assets (ROA), was 0.50% for 2006, 0.79% for 2005 and 0.87% for 2004. Net
          income
          as a percent of average stockholders' equity, also known as return on average
          equity (ROE), was 8.81% for 2006, 12.59% for 2005 and 12.28% for 2004.
          Net
          income as a percent of average realized stockholders’ equity, which excludes the
          impact of accumulated other comprehensive income (loss), was 8.55% for
          2006,
          12.64% for 2005 and 12.62% for 2004. For Union National, accumulated other
          comprehensive income (loss) consists of unrealized gains or losses on
          available-for-sale investment securities, net of tax, and the net unrealized
          gains or losses, net of tax, on derivatives designated as cash flow hedges.
 
 The
          above
          items are quantified and discussed in further detail under their respective
          sections below.
 
 ***2005
          Compared to 2004***
 
 The
          following items impacted results of operations for 2005 as compared to
          2004:
  ·
                Net
                    income increased due to an increase in net interest income of
                    $1,419,000
                    (on a taxable equivalent basis), or 10.3%. This was primarily
                    a result of
                    growth of 15.0% in average earning assets, which was funded by
                    increased
                    deposits and borrowings, partially offset by a decrease in the
                    net
                    interest margin percentage to 3.83% for 2005 as compared to 3.99%
                    for
                    2004. During 2005, overall loan balances increased by $37,212,000
                    or 14.1%
                    over loans outstanding at the preceding year-end. We experienced
                    strong
                    commercial and agricultural loan demand, primarily resulting
                    from
                    continued strategic focus on expansion of the commercial and
                    agricultural
                    banking business, and nominal growth in residential real estate
                    loans,
                    primarily due to an increase in home equity loans. Offsetting
                    these
                    increases were a decrease in consumer loans and a decline in
                    the balance
                    of purchased loans (residential mortgages and manufactured housing
                    loans).
 ·
                Net
                    income decreased due to an increase in the provision for loan
                    losses of
                    $277,000.
 ·
                Net
                    income increased due to an increase in other operating income
                    of
                    $1,916,000, or 46.8%, which was primarily attributable to Home
                    Team’s
                    income from mortgage banking/brokerage and title insurance/settlement
                    activities of $1,237,000 and $300,000, respectively. The remainder
                    of the
                    increase resulted from higher revenues from deposit and other
                    service
                    charges, commissions and fees, alternative investment sales commissions,
                    and fiduciary income, net of a decline in gains from sales of
                    investment
                    securities.
  32
  ·
                Net
                    income decreased by $1,457,000 due to other operating expenses
                    attributable to Home Team.
 ·
                Net
                    income decreased due to an increase in other operating expenses
                    (excluding
                    the impact of Home Team) of $1,348,000, or 10.6% primarily related
                    to key
                    strategic initiatives which included preparation and staffing
                    for new
                    branch office locations and key additions to our sales team and
                    support
                    staff.
 
 The
          above
          items are quantified and discussed in further detail under their respective
          sections below.
 
 ***Outlook***
 
 The
          economy in our 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. Management is monitoring these general and specific trends closely.
          Their
          various effects are discussed later under the section on Loans. We currently
          expect continued strong growth in loans and deposits for 2007, driven largely
          by
          the development of new commercial business relationships and the planned
          opening
          of a new full-service branch office that will focus on commercial
          banking.
 
 The
          expansion of our commercial banking business continues to be a strategic
          focus
          for Union National. We continue 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 is expected to have a positive impact on net interest
          income
          and other operating income in 2007 and future periods.
 
 As
          mentioned above, we are planning to open a new branch office in the spring
          of
          2007. This branch will focus on commercial banking, with a small staff
          devoted
          primarily to commercial lending and business banking services. It will
          require
          minimal capital expenditures for leasehold improvements and furniture and
          equipment. The impact to the results of operations for 2007 as compared
          to 2006
          for this office is currently estimated to be an increase in operating expenses
          of approximately $73,000 ($48,000 after tax). Based upon projected incremental
          loan generation, fee and commission income, and deposit growth, we expect
          the
          branch to begin operating at breakeven in its second year of
          operation.
 
 During
          January 2007, we engaged the consulting firm of S.R. Snodgrass, A.C.
          (“Snodgrass”) to undertake a profit enhancement project that will assist
          management in developing and implementing strategies for achieving higher
          profitability. Snodgrass utilizes a unique diagnostic methodology that
          aggressively locates profit improvement opportunities, coupled with a detailed
          implementation plan and change management techniques to build an ongoing
          process
          for innovation and efficiency with sustainable results. We expect that
          each
          specific profit project that is identified will result in measurable targets
          for
          increases to pre-tax income.
 
 In
          January 2007 in conjunction with Snodgrass’ engagement, we decided to
          de-leverage our Balance Sheet. The de-leveraging strategy will strengthen
          our
          equity position, enhance our income tax effectiveness, and facilitate our
          future
          core banking growth strategies for loans and deposits. Consequently, we
          reduced
          the size of our securities portfolio by $66,000,000 while paying down Federal
          Home Loan Bank debt and other short-term borrowings, thereby reducing our
          overall capital needs and our interest rate risk profile. We realized losses
          on
          the sale of securities of approximately $520,000 on a pre-tax basis and
          incurred
          prepayment penalties of approximately $31,000 on a pre-tax basis. In the
          aggregate, 2007 first quarter earnings are expected to be adversely impacted
          by
          approximately $364,000 after tax, or approximately $0.14 per share.
 
 **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 tables and related discussion 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%.
 
 We
          experienced growth in assets that outpaced growth in deposits in both 2006
          and
          2005, requiring us to use additional alternative sources of funding. In
          addition, there has been a gradual shift in the our funding sources towards
          relatively higher-cost financing sources including borrowings from the
          Federal
          Home Loan Bank of Pittsburgh (“FHLB”), brokered certificates of deposit
          (“brokered CDs”), and issuance of junior subordinated debentures.
  33
 
 As
          one
          source of funding for asset growth, we utilized outstanding long-term advances
          of $117,571,000 with an average interest rate of 5.03% at December 31,
          2006. A
          total of $48,755,000 of these advances was paid off in connection with
          the
          de-leveraging transaction in January 2007, reducing our total FHLB borrowings
          to
          $68,816,000 with an average interest rate of 4.91%. At December 31, 2005,
          we had
          outstanding long-term advances of $105,815,000 and short-term advances
          of
          $10,000,000, as well as $3,000,000 outstanding under a $15,000,000 line
          of
          credit as of December 31, 2005, as compared to total outstanding FHLB advances
          of $90,130,000 at December 31, 2004. The long-term advances had maturities
          that
          ranged from January 2007 to December 2013. The average interest rate on
          total
          FHLB borrowings was 4.31% at December 31, 2005 and 3.52% at December 31,
          2004.
 
 We
          also
          obtain funding through the use of brokered CDs, which are included in time
          deposits in the Distribution of Assets, Liabilities and Stockholders’ Equity
          table above. Brokered CDs are obtained through various sources where we
          bid for
          these funds. As of December 31, 2006, 2005 and 2004, we had $31,975,000,
          $26,223,000, and $14,743,000, respectively, in brokered CDs
          outstanding.
 
 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 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 of approximately three years. 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 8.23% at December 31, 2006, 7.09% at December
          31, 2005, and 5.01% at December 31, 2004.  On
          July
          28, 2006, the bank issued $6,000,000 of subordinated debentures with a
          five-year
          initial fixed rate of 7.17%, and then an annual coupon rate, reset quarterly,
          based on three-month LIBOR plus 1.65%. 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 Union National’s overall balance
          sheet structure, maintain Union National within its interest rate risk
          policies.
 **Distribution
                        of Assets, Liabilities and Stockholders'
                        Equity****Interest
                        Rates and Interest Differential (Taxable Equivalent
                        Basis)**
  **Year
                      Ended**
                    
                    Year
                      Ended
                    
                    Year
                      Ended**December
                      31, 2006**
                    
                    December
                      31, 2005
                    
                    December
                      31, 2004**Average**
                    
                    
                    
                    
                    
                    Average
                    
                    
                    
                    
                    
                    Average(Dollars
                        in thousands)
                    
                    **Balance**
                    
                    **Interest**
                    
                    **Rate**
                    
                    Balance
                    
                    Interest
                    
                    Rate
                    
                    Balance
                    
                    Interest
                    
                    RateASSETSInterest-Bearing
                        Depositsin
                        Other Banks
                    
                    **$**
                    **196**
                    
                    **$**
                    **16**
                    
                    
                    **8.16**
                    **%**
                    $
                    149
                    
                    $
                    12
                    
                    
                    8.05
                    %
                    $
                    127
                    
                    $
                    1
                    
                    
                    0.79
                    %Federal
                        Funds Sold
                    
                    
                    **358**
                    
                    
                    **19**
                    
                    
                    **5.31**
                    **%**
                    
                    792
                    
                    
                    28
                    
                    
                    3.54
                    %
                    
                    517
                    
                    
                    7
                    
                    
                    1.35
                    %Investment
                        Securities (a):Taxable
                    
                    
                    **98,956**
                    
                    
                    **4,913**
                    
                    
                    **4.96**
                    **%**
                    
                    81,975
                    
                    
                    3,588
                    
                    
                    4.38
                    %
                    
                    70,997
                    
                    
                    2,959
                    
                    
                    4.17
                    %Tax
                        Exempt ( c)
                    
                    
                    **30,457**
                    
                    
                    **2,068**
                    
                    
                    **6.79**
                    **%**
                    
                    28,465
                    
                    
                    1,959
                    
                    
                    6.88
                    %
                    
                    24,036
                    
                    
                    1,714
                    
                    
                    7.13
                    %Loans
                        and Leases - Net (b,c,d)
                    
                    
                    **318,251**
                    
                    
                    **23,933**
                    
                    
                    **7.52**
                    **%**
                    
                    280,245
                    
                    
                    19,102
                    
                    
                    6.82
                    %
                    
                    244,752
                    
                    
                    15,637
                    
                    
                    6.39
                    %Restricted
                        Invest. - Bank Stocks
                    
                    
                    **5,928**
                    
                    
                    **364**
                    
                    
                    **6.14**
                    **%**
                    
                    5,041
                    
                    
                    162
                    
                    
                    3.21
                    %
                    
                    4,557
                    
                    
                    73
                    
                    
                    1.60
                    %Total
                        Earning Assets
                    
                    
                    **454,146**
                    
                    
                    **31,313**
                    
                    
                    **6.89**
                    **%**
                    
                    396,667
                    
                    
                    24,851
                    
                    
                    6.26
                    %
                    
                    344,986
                    
                    
                    20,391
                    
                    
                    5.91
                    %Allowance
                        for Loan Losses
                    
                    
                    **(2,818**
                    **)**
                    
                    
                    
                    
                    
                    
                    
                    (2,509
                    )
                    
                    
                    
                    
                    
                    
                    
                    (2,116
                    )Other
                        Nonearning Assets
                    
                    
                    **38,556**
                    
                    
                    
                    
                    
                    
                    
                    
                    31,453
                    
                    
                    
                    
                    
                    
                    
                    
                    29,337TOTAL
                        ASSETS
                    
                    **$**
                    **489,884**
                    
                    
                    
                    
                    
                    
                    
                    $
                    425,611
                    
                    
                    
                    
                    
                    
                    
                    $
                    372,207LIABILITIES
                        andSTOCKHOLDERS'
                        EQUITYDeposits:Interest-Bearing
                        Demand
                    
                    **$**
                    **114,938**
                    
                    
                    **2,881**
                    
                    
                    **2.51**
                    **%**
                    $
                    99,278
                    
                    
                    1,310
                    
                    
                    1.32
                    %
                    $
                    87,300
                    
                    
                    515
                    
                    
                    0.59
                    %Savings
                    
                    
                    **28,771**
                    
                    
                    **77**
                    
                    
                    **0.27**
                    **%**
                    
                    32,348
                    
                    
                    82
                    
                    
                    0.25
                    %
                    
                    32,532
                    
                    
                    88
                    
                    
                    0.27
                    %Time
                    
                    
                    **130,113**
                    
                    
                    **5,434**
                    
                    
                    **4.18**
                    **%**
                    
                    112,025
                    
                    
                    3,570
                    
                    
                    3.19
                    %
                    
                    91,522
                    
                    
                    2,428
                    
                    
                    2.65
                    %Short-Term
                        Borrowings
                    
                    
                    **9,790**
                    
                    
                    **489**
                    
                    
                    **4.99**
                    **%**
                    
                    7,584
                    
                    
                    234
                    
                    
                    3.09
                    %
                    
                    7,602
                    
                    
                    108
                    
                    
                    1.42
                    %Long-Term
                        Debt
                    
                    
                    **119,326**
                    
                    
                    **5,729**
                    
                    
                    **4.80**
                    **%**
                    
                    94,474
                    
                    
                    3,785
                    
                    
                    4.01
                    %
                    
                    81,442
                    
                    
                    3,082
                    
                    
                    3.78
                    %Junior
                        Subordinated Debentures
                    
                    
                    **13,922**
                    
                    
                    **1,016**
                    
                    
                    **7.30**
                    **%**
                    
                    11,341
                    
                    
                    681
                    
                    
                    6.00
                    %
                    
                    8,916
                    
                    
                    400
                    
                    
                    4.49
                    %Total
                        Interest-BearingLiabilities
                    
                    
                    **416,860**
                    
                    
                    **15,626**
                    
                    
                    **3.75**
                    **%**
                    
                    357,050
                    
                    
                    9,662
                    
                    
                    2.71
                    %
                    
                    309,314
                    
                    
                    6,621
                    
                    
                    2.14
                    %Demand
                        Deposits
                    
                    
                    **42,580**
                    
                    
                    
                    
                    
                    
                    
                    
                    39,283
                    
                    
                    
                    
                    
                    
                    
                    
                    35,091Other
                        Liabilities
                    
                    
                    **2,690**
                    
                    
                    
                    
                    
                    
                    
                    
                    2,657
                    
                    
                    
                    
                    
                    
                    
                    
                    1,552TOTAL
                        LIABILITIES
                    
                    
                    **462,130**
                    
                    
                    
                    
                    
                    
                    
                    
                    398,990
                    
                    
                    
                    
                    
                    
                    
                    
                    345,957Stockholders'
                        Equity
                    
                    
                    **27,754**
                    
                    
                    
                    
                    
                    
                    
                    
                    26,621
                    
                    
                    
                    
                    
                    
                    
                    
                    26,250TOTAL
                        LIABILITIES andSTOCKHOLDERS'
                        EQUITY
                    
                    **$**
                    **489,884**
                    
                    
                    
                    
                    
                    
                    
                    $
                    425,611
                    
                    
                    
                    
                    
                    
                    
                    $
                    372,207Net
                        Interest Income/InterestRate
                        Spread
                    
                    
                    
                    
                    **$**
                    **15,687**
                    
                    
                    **3.14**
                    **%**
                    
                    
                    
                    $
                    15,189
                    
                    
                    3.55
                    %
                    
                    
                    
                    $
                    13,770
                    
                    
                    3.77
                    %Net
                        Interest Margin
                    
                    
                    
                    
                    
                    
                    
                    
                    **3.45**
                    **%**
                    
                    
                    
                    
                    
                    
                    
                    3.83
                    %
                    
                    
                    
                    
                    
                    
                    
                    3.99
                    %
  (a)
                      Balances
                          reflect amortized historical cost for available-for-sale
                          securities. The
                          related average unrealized holding gain
                          or loss on securities is included in other nonearning
                          assets.
 (b)
                        Balances
                            of nonaccrual loans and related income recognized have
                            been included for
                            computational purposes.
 (c)
                          Tax-exempt
                              income included in loans and securities has been adjusted
                              to a taxable
                              equivalent basis using an incremental rate of
                              34%.
 (d)
                            Includes
                                loan fees of $813,000 for the year ended December
                                31, 2006, $759,000 for
                                the year ended December 31, 2005, and $728,000 for
                                the year ended December
                                31,
                                2004.
 **Rate/Volume
                      Analysis of Changes in Net Interest Income****(Taxable
                      Equivalent Basis)**
  **2006
                      vs. 2005**
                  
                  
                  
                  2005
                      vs. 2004**Total**
                  
                  
                  
                  
                  
                  Total(Dollars
                      in thousands)
                  
                  **Change**
                  
                  **Volume
                      (a)**
                  
                  **Rate
                      (a)**
                  
                  Change
                  
                  Volume
                      (a)
                  
                  Rate
                      (a)Interest
                      Income FromInterest-Bearing
                      Depositsin
                      Other Banks
                  
                  **$**
                  **4**
                  
                  **$**
                  **4**
                  
                  **$**
                  **-**
                  
                  $
                  11
                  
                  $
                  -
                  
                  $
                  11Federal
                      Funds Sold
                  
                  
                  **(9**
                  **)**
                  
                  **(19**
                  **)**
                  
                  **10**
                  
                  
                  21
                  
                  
                  6
                  
                  
                  15Investment
                      Securities:Taxable
                  
                  
                  **1,325**
                  
                  
                  **806**
                  
                  
                  **519**
                  
                  
                  629
                  
                  
                  475
                  
                  
                  154Tax
                      Exempt ( c)
                  
                  
                  **109**
                  
                  
                  **135**
                  
                  
                  **(26**
                  **)**
                  
                  245
                  
                  
                  307
                  
                  
                  (62
                  )Loans
                      and Leases - Net (b,c)
                  
                  
                  **4,831**
                  
                  
                  **2,750**
                  
                  
                  **2,081**
                  
                  
                  3,465
                  
                  
                  2,371
                  
                  
                  1,094Restricted
                      Invest. - Bank Stocks
                  
                  
                  **202**
                  
                  
                  **33**
                  
                  
                  **169**
                  
                  
                  89
                  
                  
                  9
                  
                  
                  80Total
                      Earning Assets
                  
                  
                  **6,462**
                  
                  
                  **3,709**
                  
                  
                  **2,753**
                  
                  
                  4,460
                  
                  
                  3,168
                  
                  
                  1,292Interest
                      Expense OnDeposits:Interest-Bearing
                      Demand
                  
                  
                  **1,571**
                  
                  
                  **234**
                  
                  
                  **1,337**
                  
                  
                  795
                  
                  
                  80
                  
                  
                  715Savings
                  
                  
                  **(5**
                  **)**
                  
                  **(10**
                  **)**
                  
                  **5**
                  
                  
                  (6
                  )
                  
                  -
                  
                  
                  (6
                  )Time
                  
                  
                  **1,864**
                  
                  
                  **636**
                  
                  
                  **1,228**
                  
                  
                  1,142
                  
                  
                  601
                  
                  
                  541Short-Term
                      Borrowings
                  
                  
                  **255**
                  
                  
                  **82**
                  
                  
                  **173**
                  
                  
                  126
                  
                  
                  -
                  
                  
                  126Long-Term
                      Debt
                  
                  
                  **1,944**
                  
                  
                  **1,112**
                  
                  
                  **832**
                  
                  
                  703
                  
                  
                  514
                  
                  
                  189Junior
                      Subordinated Debentures
                  
                  
                  **335**
                  
                  
                  **172**
                  
                  
                  **163**
                  
                  
                  281
                  
                  
                  126
                  
                  
                  155Total
                      Interest-BearingLiabilities
                  
                  
                  **5,964**
                  
                  
                  **2,226**
                  
                  
                  **3,738**
                  
                  
                  3,041
                  
                  
                  1,321
                  
                  
                  1,720Net
                      Interest Income
                  
                  **$**
                  **498**
                  
                  **$**
                  **1,483**
                  
                  **$**
                  **(985**
                  **)**
                  $
                  1,419
                  
                  $
                  1,847
                  
                  $
                  (428
                  )
 (a)
                    The
                        change in interest due to both volume and rate has been allocatedindividually
                        to the change in volume and rate on a proportional
                        basis.
 (b)
                    Balances
                        of nonaccrual loans and related income recognized have beenincluded
                        for computational purposes.
 (c)
                    Tax-exempt
                        income included in loans and securities has been adjusted
                        to ataxable
                        equivalent basis using an incremental rate of 34%.
  The
            change in mix of funding sources together with changes in the related
            cost of
            those funding sources impacted net interest income as described
            below.
 
 **2006
          Compared to 2005**
 
 Net
          interest income for 2006 increased by $498,000, or 3.3%, over 2005. For
          2006,
          average earning asset growth of $57,479,000 was funded by increased deposits
          and
          borrowings. The volume growth in earning assets and interest-bearing liabilities
          increased net interest income by $1,483,000 in 2006 over 2005. However,
          the net
          effect of all interest rate fluctuations and changes in the mix of funding
          sources was to decrease net interest income by $985,000 for 2006 as compared
          to
          2005, partially offsetting the positive impact of volume growth. The overall
          interest rate on average total earning assets increased to 6.89% for 2006,
          from
          6.26% for 2005, while the overall interest rate on average interest-bearing
          liabilities also increased to 3.75% for 2006 from 2.71% for 2005. The net
          interest margin percentage was 3.45% for 2006 as compared to 3.83% for
          2005.
  Overall,
          market interest rates increased by 1.00% during 2006 from the target fed
          funds
          rate of 4.25% at December 31, 2005 to 5.25% as the Federal Reserve continued
          to
          keep a close watch on inflation and the economy. While this positively
          impacted
          the yield on our earning assets, it was more than offset by increased funding
          costs due to higher rates we must pay to attract and retain deposits, and
          on
          maturing or repricing advances from the FHLB and brokered CDs, thus constricting
          our interest rate margin. Also, the shift toward higher-cost sources in
          the mix
          of our funding sources continued during 2006.
 
 ***2005
          Compared to 2004***
 
 Net
          interest income for 2005 increased by $1,419,000, or 10.3%, over 2004.
          For 2005,
          average earning asset growth of $51,681,000 was funded by increased deposits
          and
          borrowings. The volume growth in earning assets and interest-bearing liabilities
          increased net interest income by $1,847,000 in 2005 over 2004.
 
 The
          overall interest rate on average total earning assets increased to 6.26%
          for
          2005, from 5.91% for 2004. However, the overall interest rate on average
          interest-bearing liabilities also increased to 2.71% for 2005 from 2.14%
          for
          2004. The net effect of all interest rate fluctuations and changes in the
          mix of
          funding sources was to decrease net interest income by $428,000 for 2005
          as
          compared to 2004. The net interest margin percentage was 3.83% for 2005
          as
          compared to 3.99% for 2004.
 
 Overall,
          market interest rates increased by 3.25% from June 30, 2004 to the target
          fed
          funds rate of 4.25% at December 31, 2005 as the Federal Reserve tightened
          money
          supply. This positively impacted the yield on our earning assets, but was
          more
          than offset by increased funding costs due to higher rates we must pay
          to
          attract and retain deposits and must pay on maturing or repricing advances
          from
          the FHLB and brokered CDs. Additionally, there was a shift toward higher-cost
          sources in the mix of our total sources of funds. However, the resulting
          decrease in the net interest margin percentage was more than offset by
          growth in
          average earning assets during the year.
  34
  ***Outlook
          - 2007 Net Interest Income***
 
 Net
          interest income is expected to increase in 2007 as compared to 2006.  This
          is due to income from growth in earning assets which occurred during 2006,
          net
          of costs resulting from growth in deposits and borrowings.  The combination
          of these two factors, as reflected in our current simulation model and
          estimates
          as of December 31, 2006, may result in net interest income for 2007 that
          is
          comparable to the net interest income earned during 2006.  The simulation
          model for 2007 includes the effects of our de-leveraging transaction in
          January,
          2007.  The de-leveraging transaction will initially widen our net interest
          margin percentage, but overall the transaction will have an insignificant
          impact
          on net interest income for 2007.  Expected growth in earning assets during
          2007 should also increase our net interest income.  This expected growth
          was not reflected in the simulation model at December 31, 2006.
 
 Although
          the effective interest rate impact of expected cash flows on investments
          and of
          renewing certificates of deposit can be reasonably estimated at current
          interest
          rate levels, the yield curve during 2007, the options selected by customers,
          and
          the future mix of the loan, investment and deposit products in the bank's
          portfolios may significantly change the estimates used in the simulation
          models.
          In addition, our net interest income may be impacted by future actions
          of the
          Federal Reserve Bank. See discussions on Liquidity and Market Risk - Interest
          Rate Risk.
 
 **Provision
          for Loan Losses**
 
 The
          loan
          loss provision is an estimated expense charged to earnings to provide for
          losses
          attributable to uncollectible loans. The provision is based on our analysis
          of
          the adequacy of the allowance for loan losses. The provision for loan losses
          was
          $672,000 in 2006, $681,000 in 2005 and $404,000 in 2004. Net charge-offs
          amounted to $277,000 for 2006, as compared to $294,000 for 2005 and $101,000
          for
          2004. The increased provision for loan losses from 2004 to 2005 can be
          primarily
          attributed to growth in outstanding loan balances (specifically, commercial
          loan
          balances) and an increase in net charge-offs. 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 Loan Quality/Allowance for Loan Losses.
 
 **Other
          Operating Income**
 
 ***2006
          Compared to 2005***
 
 Other
          Operating Income increased by $2,251,000 or 37.4% in 2006 to $8,262,000,
          as
          compared to $6,011,000 for 2005. The increase was primarily a result of
          increases (decreases) in the following items:
 Mortgage
                      Banking/Brokerage Activities
                  
                  $
                  1,698,000Title
                      Insurance/Settlement Income
                  
                  
                  253,000ATM
                      Cash Services Fees
                  
                  
                  128,000Investment
                      Securities Gains
                  
                  
                  105,000Debit
                      Card Interchange Income
                  
                  
                  90,000Service
                      Charges on Deposit Accounts
                  
                  
                  71,000Alternative
                      Investment Sales Commissions
                  
                  
                  (110,000
                  )Other,
                      net
                  
                  
                  16,000Total
                      Increase in Other Operating Income
                  
                  $
                  2,251,000
  The
          increases in revenue from Mortgage Banking/Brokerage Activities and Title
          Insurance/Settlement Income reflect the activities of Home Team, which
          began
          operating in these businesses in July 2005. Overall, Home Team contributed
          $3,620,000 to Other Operating Income during 2006, as compared to $1,537,000
          during the second half of 2005. The increase in income from ATM cash services
          (included in Other Income) relates to fees received under an arrangement
          with a
          local ATM company where we provide cash for its ATM machines. These service
          fees
          fluctuate with interest rates and the amount of cash on hand at the ATM
          company.
          Investment securities gains increased due to sales of primarily municipal
          securities during the fourth quarter of 2006 to increase our tax effectiveness.
          The increase in debit card interchange income (included in Other Service
          Charges, Commissions, and Fees) reflects our sales focus promoting debit
          card
          usage. Service Charges on Deposit Accounts have increased as a result of
          our
“Overdraft Privilege” product, which permits customers to overdraw their
          accounts subject to certain limits. This increase has been partially offset
          by a
          decrease in other service charges on deposit accounts primarily as a result
          of
          the our “Three for Free” promotion, whereby a customer may select from any one
          of three types of accounts which are not subject to service charges. Alternative
          investment sales commissions decreased due to lower mutual fund and annuity
          sales in 2006.
  35
 
 ***2005
          Compared to 2004***
 
 Other
          operating income for 2005 was $6,011,000 as compared to $4,095,000 for
          2004, an
          increase of $1,916,000 or 46.8%. The increase was primarily a result of
          increases (decreases) in the following items:
 Mortgage
                      Banking/Brokerage Activities
                  
                  $
                  1,201,000Title
                      Insurance/Settlement Income
                  
                  
                  307,000Alternative
                      Investment Sales Commissions
                  
                  
                  136,000Investment
                      Securities Gains
                  
                  
                  (90,000
                  )Debit
                      Card Interchange Income
                  
                  
                  99,000ATM
                      Cash Services Fees
                  
                  
                  83,000Income
                      from Fiduciary Activities
                  
                  
                  76,000Other,
                      net
                  
                  
                  104,000Total
                      Increase in Other Operating Income
                  
                  $
                  1,916,000
 The
          increases in revenue from Mortgage Banking/Brokerage Activities and Title
          Insurance/Settlement Income primarily reflect the activities of Home Team,
          which
          began operating in these businesses in July 2005. Overall, Home Team contributed
          $1,537,000 to Other Operating Income during the second half of 2005. The
          increase in income from ATM cash services relates to fees received under
          an
          arrangement with a local ATM company where we provide cash for its ATM
          machines.
          The increase in income from debit cards, Alternative Investment Sales
          Commissions, and Fiduciary Activities reflects our strategic and sales
          focus on
          these areas.
  **Other
          Operating Expenses**
 
 ***2006
          Compared to 2005***
 
 Other
          Operating Expenses for 2006 increased to $19,711,000 as compared to $15,627,000
          for 2005, an increase of $4,084,000 or 26.1%. The increase was primarily
          a
          result of increases (decreases) in the following items:
 Salaries
                      and Wages
                  
                  $
                  1,480,000Employee
                      Benefit Costs
                  
                  
                  321,000Employee-Related
                      Costs
                  
                  
                  1,801,000Net
                      Occupancy and Furniture & Equipment
                  
                  
                  752,000Advertising
                      and Marketing
                  
                  
                  673,000Charitable
                      Contributions
                  
                  
                  108,000Pennsylvania
                      Shares Tax
                  
                  
                  (55,000
                  )Professional
                      Fees
                  
                  
                  102,000Data
                      Processing Services
                  
                  
                  98,000ATM
                      Processing Expenses
                  
                  
                  65,000Other,
                      Net
                  
                  
                  540,000Total
                      Increase in Other Operating Expenses
                  
                  $
                  4,084,000
 The
          inclusion of a full year of Home Team’s results in 2006 as compared to a partial
          year in 2005 contributed to many of the increases in Other Operating Expenses,
          as noted below. The increase in Salaries and Wages resulted from Gold Cafe
          staff
          additions, annual salary increases, additional commercial and business
          banking
          staff positions and other staff additions, as well as the inclusion of
          a full
          year of Home Team’s results. Employee Benefit Cost increases commensurate with
          the higher salaries and wages described above were 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. Home Team contributed a net
          increase of $860,000 to employee-related costs.
 
 Net
          Occupancy Expense increased primarily due to occupancy of the Lausch Lane
          office
          facility, the Gold Cafe 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
          Cafes,
          and the ASC addition.
  36
 
 Advertising
          and Marketing Expenses rose primarily due to the inclusion of a full year
          of
          Home Team results, representing $482,000 of the increase over the prior
          year. We
          also incurred incremental advertising and marketing costs during 2006 related
          to
          the opening of our two Gold Cafe branch locations, promotion of the Gold
          Cafe
          brand, and we retained a marketing firm to assist in implementing a deposit
          acquisition program. Pennsylvania Shares Tax reflects an increase in charitable
          contributions made under the state’s EITC program during 2006, resulting in a
          decrease in shares tax expense and an increase in contributions expense.
          Professional Fees increased primarily due to legal fees associated with
          regulatory approval for the Gold Cafes and various consulting projects.
          Home
          Team accounted for $57,000 of the increase in Data Processing Services.
          Increased usage due to growth of the bank and higher fees charged for data
          processing accounted for the remainder of the increase. The increase in
          ATM
          Processing resulted from higher usage of debit cards and ATMs by bank customers.
          Home Team contributed an increase of $208,000 in Other Expense. There were
          also
          numerous smaller increases in Other Expense that were not individually
          significant.
 
 ***2005
          Compared to 2004***
 
 Other
          Operating Expenses for 2005 amounted to $15,627,000 as compared to $12,809,000
          for 2004, an increase of $2,818,000 or 22.0%. The increase was primarily
          a
          result of increases (decreases) in the following items:
 Salaries
                      and Wages
                  
                  $
                  1,251,000Employee
                      Benefit Costs
                  
                  
                  314,000Employee-Related
                      Costs
                  
                  
                  1,565,000Advertising
                      and Marketing
                  
                  
                  299,000Minority
                      Interest in Earnings Of Subsidiaries
                  
                  
                  150,000Net
                      Occupancy, Furniture & Equipment
                  
                  
                  138,000Professional
                      Fees
                  
                  
                  61,000Other,
                      Net
                  
                  
                  605,000Total
                      Increase in Other Operating Expenses
                  
                  $
                  2,818,000
 Home
          Team
          began operation in the third quarter of 2005 and the inclusion of their
          partial
          year results contributed to many of the increases in Other Operating Expense,
          as
          noted below. Employee-related costs increased by 22.2%, over 2004. Home
          Team
          contributed a $527,000 increase in Salaries and Wages, while the remainder
          resulted from additional staffing in anticipation of the opening of a new
          Gold
          Cafe retail branch office, the addition of staff in the commercial and
          business
          banking group, and annual merit and cost-of-living increases. Home Team
          increased Employee Benefit Costs by $77,000, and the remainder of the increase
          resulted from the higher staff and salary levels noted above, as well as
          increased health insurance premiums. Advertising and Marketing expenses
          increased primarily due to marketing and lead generation costs for Home
          Team.
          Minority Interest in Earnings of Subsidiaries relates primarily to the
          earnings
          attributable to the holders of the minority interests of Home Team. Net
          Occupancy, Furniture & Equipment increases were related to a new commercial
          banking office that was opened in March 2004 and additional office space
          that
          was leased to accommodate our growing commercial and business banking group
          and
          their support staff. Home Team contributed an increase in these operating
          costs
          of $62,000 during 2005. There was also expense in 2005 amounting to $44,000
          related to land lease payments for a property that was later utilized for
          a Gold
          Cafe retail branch. Home Team contributed $48,000 of the increase in
          Professional Fees. The remainder primarily related to strategic consulting
          projects for key business initiatives, partially offset by non-recurrence
          of
          2004 fees related to the implementation of our Overdraft Privilege product.
          Various other cost increases resulted primarily from overall growth in
          banking
          operations.
 
 **Income
          Taxes**
 
 The
          Provision for Income Taxes was $99,000 for 2006, $666,000 for 2005 and
          $676,000
          for 2004. The effective tax rate for 2006 decreased to 3.9%, as compared
          to
          16.6% for 2005 and 17.3% for 2004, primarily as a result of a higher percentage
          of pre-tax income derived from interest on tax-exempt investment securities
          and
          loans and due to lower earnings overall. The realization of net deferred
          tax
          assets, which amounted to $1,321,000 and $1,074,000 at December 31, 2006
          and
          2005, respectively, is dependent on our future earnings. We currently anticipate
          that future earnings will be adequate to utilize these deferred tax assets.
          The
          increase in deferred tax assets resulted primarily from an increase in
          recoverable Alternative Minimum Tax, partially offset by timing differences
          related to our portfolio of financing leases.
 
 **Recent
          Accounting Pronouncements**
 
 In
          February 2006, the Financial Accounting Standards Board (“FASB”) issued
          Statement of Financial Accounting Standards No. 155, “Accounting for Certain
          Hybrid Financial Instruments” (“SFAS 155”).  SFAS 155 amends FASB Statement
          Nos. 133 and 140, and improves the financial reporting of certain hybrid
          financial instruments by requiring more consistent accounting that eliminates
          exemptions and provides a means to simplify the accounting for these
          instruments.  Specifically, SFAS 155 allows financial instruments that have
          embedded derivatives to be accounted for as a whole (eliminating the need
          to
          bifurcate the derivative from its host) if the holder elects to account
          for the
          whole instrument on a fair value basis.  SFAS 155 is effective for all
          financial instruments acquired or issued after the beginning of an entity's
          first fiscal year that begins after September 15, 2006.  We are required to
          adopt the provisions of SFAS 155, as applicable, beginning January 1,
          2007.  We do not believe the adoption of SFAS 155 will have a material
          impact on our consolidated financial condition and results of
          operations.
  37
 
 In
          March
          2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
          Financial Assets — An Amendment of FASB Statement No. 140”
(“SFAS 156”). SFAS 156 requires that all separately recognized
          servicing assets and servicing liabilities be initially measured at fair
          value,
          if practicable. The statement permits, but does not require, the subsequent
          measurement of servicing assets and servicing liabilities at fair value.
          SFAS 156 is effective as of the beginning of an entity’s first fiscal year
          that begins after September 15, 2006, which for us will be as of January 1,
          2007. We do not believe that the adoption of SFAS 156 will have a material
          effect on our consolidated financial condition and results of operations.
 
 In
          July
          2006, the 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. We do not believe that the
          adoption of FIN 48 will have a material effect on our consolidated financial
          statements.
 
 In
          September 2006, the FASB issued FASB Statement No. 157, “Fair Value
          Measurements”, which defines fair value, establishes a framework for measuring
          fair value under GAAP, and expands disclosures about fair value measurements.
          FASB Statement No. 157 applies to other accounting pronouncements that
          require or permit fair value measurements. The new guidance is effective
          for
          financial statements issued for fiscal years beginning after November 15,
          2007, and for interim periods within those fiscal years. We are currently
          evaluating the potential impact, if any, of the adoption of FASB Statement
          No. 157 on our consolidated financial condition, results of operations and
          cash flows.
 
 On
          September 13, 2006, the Securities and Exchange Commission “SEC” issued
          Staff Accounting Bulleting 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.
          We
          have analyzed SAB 108 and determined that upon adoption it will have no
          impact
          on our reported consolidated results of operations or financial
          condition.
 
 **FINANCIAL
          CONDITION**
 
 **Investment
          Securities**
 
 As
          of
          December 31, 2006 and 2005, all of our investment securities are classified
          as
          available for sale. Securities classified as available for sale are those
          debt
          securities that we intend to hold for an indefinite period of time, but
          not
          necessarily to maturity, and marketable equity securities. We possess the
          ability and intent to hold securities with impairment to maturity or recovery;
          however, we recognize that the investment portfolio serves other functions
          including an ultimate source of liquidity and a tool to manage interest
          rate
          risk. In order to acknowledge these functions, we have designated our investment
          securities as being available for sale. Any decision to sell a security
          classified as available for sale would be based on various factors, including
          significant movements in interest rates, changes in maturity mix of our
          assets
          and liabilities, liquidity needs, regulatory capital considerations, changes
          in
          the creditworthiness of the issuing entity, and other similar factors.
          Changes
          in unrealized gains or losses on available-for-sale securities, net of
          taxes,
          are recorded as Other Comprehensive Income (Loss), a component of Stockholders'
          Equity.
 
 We
          purchase certain types of mortgage-backed and asset-backed securities to
          better
          position our investment portfolio for a subsequent increase or decrease
          in
          interest rates, as aligned with our interest rate risk position. These
          securities may be purchased at premiums or discounts, with short-, mid-,
          or
          long-term average expected lives or maturities. Overall yields on these
          securities will increase or decrease based on changes in prepayment speeds
          and
          subsequent cash flow reinvestments. The weighted-average yield on
          mortgage-backed securities was 5.07% at December 31, 2006, as compared
          to the
          weighted-average yield on mortgage-backed and asset-backed securities of
          4.13%
          at December 31, 2005, and 3.82% at December 31, 2004. We held no asset-backed
          securities at December 31, 2006. Cash flows from these securities and changes
          in
          market interest rates are considered in our net interest income simulation
          model. See sections on Liquidity and Market Risk - Interest Rate Risk for
          further discussion.
  38
 
 Total
          expected cash flows from investment securities, including the de-leveraging
          transaction, estimated prepayments and expected call options, is currently
          estimated at $79,834,000 for 2007, which represents approximately 61% of
          our
          investment securities as compared to $18,211,000 or approximately 15% as
          estimated at December 31, 2005, for 2006.  Due to the de-leveraging
          transaction, 100% of these investment security cash flows will be in 2007.
           The estimated amount of expected cash flows from other investment
          securities will vary significantly with changes in assumed interest rates. 
For example, an increase in
          interest rates will decrease the level of prepayments received on
          mortgage-backed securities.  These factors affecting our investment
          securities are included in our net interest income simulation model.  See
          sections on Liquidity and Market Risk - Interest Rate Risk for further
          discussions on these risks.
 
 We
          periodically assess the strategy of selling mortgage-backed securities
          and other
          available-for-sale securities. Investment security purchases and sales
          are
          effected in order to enhance our net interest margin, while managing liquidity
          and interest rate risk within specified limits. Based on the current interest
          rate environment, we will be evaluating our available-for-sale portfolio
          for
          possible opportunities to increase earnings for the year 2007 and future
          years
          through potential investment security sales.
 
 In
          addition to the credit risk present in the loan portfolio, we also have
          credit
          risk associated with our investment security holdings. Based on recent
          national
          economic trends and other factors, we have increased our monitoring of
          our
          corporate debt securities and changes in their credit ratings as published
          by
          national statistical rating organizations. As of December 31, 2006, we
          had a
          total of 77 debt securities of various types that had aggregated unrealized
          losses of $1,946,000 that amounted to 2.6% of their amortized cost basis.
          Except
          for losses on corporate securities pertaining to major corporations in
          the auto
          industry, we believe that the unrealized losses primarily reflect changes
          in
          interest rates subsequent to the acquisition of specific securities. With
          respect to major auto industry corporate debt securities, amortized cost
          totaled
          $2,026,000 and fair value totaled $1,987,000 on four securities with unrealized
          losses amounting to $39,000, primarily representing a decline in credit
          strength
          of these corporations. At December 31, 2006, with consideration given to
          independent analyst reports, we believed that these corporations had the
          ability
          to service the debt for the foreseeable future and that all amounts due
          upon
          maturity would be collected at maturity. These four securities were sold
          in
          connection with the de-leveraging transaction in January 2007, with realized
          losses totaling $39,000. Based on our assessment of the total investment
          portfolio at December 31, 2006, we did not hold any security that had a
          fair
          value decline that was other than temporary. Consequently, all declines
          in any
          specific security’s fair value 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.
 
 The
          following is a summary of our available-for-sale investment
          securities:
 Carrying
                      Value at December 31,(Dollars
                      in thousands)
                  
                  **2006**
                  
                  2005
                  
                  2004Obligations
                      of State andPolitical
                      Subdivisions
                  
                  **$**
                  **26,939**
                  
                  $
                  35,894
                  
                  $
                  28,049Obligations
                      of U.S.Government
                      Agencies
                  
                  
                  **4,151**
                  
                  
                  4,873
                  
                  
                  5,253Mortgage-Backed
                      Securities
                  
                  
                  **85,646**
                  
                  
                  62,792
                  
                  
                  51,697Asset-Backed
                      Securities
                  
                  
                  -
                  
                  
                  1,459
                  
                  
                  1,659Corporate
                      Securities
                  
                  
                  **12,527**
                  
                  
                  14,142
                  
                  
                  16,253Equity
                      Securities
                  
                  
                  **547**
                  
                  
                  542
                  
                  
                  579Total
                  
                  **$**
                  **129,810**
                  
                  $
                  119,702
                  
                  $
                  103,490
 The
          following table illustrates the stated maturities of available-for-sale
          investment securities and the weighted-average yields based upon amortized
          cost
          as of December 31, 2006. Yields are shown on a taxable equivalent basis,
          assuming a 34% federal income tax rate.
 Within
                  
                  1
                      -
                      5
                  
                  5
                      -
                      10
                  
                  Over(Dollars
                      in thousands)
                  
                  1
                      Year
                  
                  Years
                  
                  Years
                  
                  10
                      Years
                  
                  TotalObligations
                      of State andPolitical
                      Subdivisions:Fair
                      Value
                  
                  $
                  120
                  
                  $
                  2,096
                  
                  $
                  6,559
                  
                  $
                  18,164
                  
                  $
                  26,939Amortized
                      Cost
                  
                  
                  120
                  
                  
                  2,079
                  
                  
                  6,283
                  
                  
                  17,403
                  
                  
                  25,885Yield
                  
                  
                  6.25
                  %
                  
                  6.68
                  %
                  
                  7.36
                  %
                  
                  6.96
                  %
                  
                  7.03
                  %
 Obligations
                      of U.S. Government
                    Agencies
                      by Contractual Maturity:*Fair
                      Value
                  
                  $
                  -
                  
                  $
                  4,151
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  4,151Amortized
                      Cost
                  
                  
                  -
                  
                  
                  4,253
                  
                  
                  -
                  
                  
                  4,253Yield
                  
                  
                  
                  
                  
                  3.03
                  %
                  
                  
                  
                  
                  
                  
                  
                  3.03
                  %
 Mortgage-Backed
                      Securities
                    by
                      Contractual Maturity:*Fair
                      Value
                  
                  $
                  4,797
                  
                  $
                  62,581
                  
                  $
                  16,621
                  
                  $
                  1,647
                  
                  $
                  85,646Amortized
                      Cost
                  
                  
                  4,817
                  
                  
                  63,390
                  
                  
                  16,493
                  
                  
                  1,653
                  
                  
                  86,353Yield
                  
                  
                  4.65
                  %
                  
                  4.84
                  %
                  
                  5.99
                  %
                  
                  6.13
                  %
                  
                  5.07
                  %
 Corporate
                      Securities:Fair
                      Value
                  
                  $
                  2,065
                  
                  $
                  7,703
                  
                  $
                  1,103
                  
                  $
                  1,656
                  
                  $
                  12,527Amortized
                      Cost
                  
                  
                  2,060
                  
                  
                  7,807
                  
                  
                  1,054
                  
                  
                  2,311
                  
                  
                  13,232Yield
                  
                  
                  7.45
                  %
                  
                  5.61
                  %
                  
                  8.74
                  %
                  
                  6.84
                  %
                  
                  6.36
                  %
 Equity
                      Securities:Fair
                      Value
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  547Amortized
                      Cost
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  369Yield
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.3
                  %
 Total
                      Securities:Fair
                      Value
                  
                  $
                  6,982
                  
                  $
                  76,531
                  
                  $
                  24,283
                  
                  $
                  21,467
                  
                  $
                  129,810Amortized
                      Cost
                  
                  
                  6,997
                  
                  
                  77,529
                  
                  
                  23,830
                  
                  
                  21,367
                  
                  
                  130,092Yield
                  
                  
                  5.50
                  %
                  
                  4.87
                  %
                  
                  6.47
                  %
                  
                  6.88
                  %
                  
                  5.53
                  %
 
 *
          It is
          anticipated that these mortgage-backed securities and structured agency
          securities will be repaid prior to their contractual maturity dates. The
          weighted-average yield for these securities is impacted for normal amortization
          and estimated prepayments based on current market interest rates.
 
 **Loans**
 
 Net
          loans
          were $341,113,000 at December 31, 2006, representing a 13.6% increase over
          net
          loans of $300,213,000 at December 31, 2005. As shown in the following table,
          the
          increase in loans was primarily due to an increase in construction and
          commercial loans. There was also nominal growth in residential real estate
          loans
          which was primarily a result of an increase in home equity lines of credit. In
          addition, there has been a decline in the balance of purchased loans
          (residential mortgages and manufactured housing loans) from 2005 to 2006.
          Purchased loans decreased by $1,579,000 during 2006 to a balance of $11,614,000
          at December 31, 2006.
 
 At
          December 31, 2006, there were no loan concentrations over 10% of loans
          outstanding to any one category or borrower. However, loans secured by
          real
          estate constitute
          83% of the
          bank's loan portfolio; consequently, the quality of these loans is affected
          by
          the region's economy and real estate market. Total net loans with variable-rate
          pricing amounted to $222,165,000 at
          December 31, 2006, and $203,534,000 at December 31, 2005. See section on
          Market
          Risk - Interest Rate Risk.
 
 Other
          than as described herein, we do not believe there are any trends, events
          or
          uncertainties that are reasonably expected to have a material impact on
          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. For certain commercial
          loans, we
          have determined that it is probable that all interest and principal payments
          due
          according to the contractual terms of the loan agreements will not be collected.
          These loans are considered to be impaired as defined by current accounting
          principles generally accepted in the United States of America (“GAAP”). At
          December 31, 2006, the recorded investment in loans that are considered
          to be
          impaired under GAAP was
          $6,584,000 as compared
          to $3,270,000 at December 31, 2005. The increase in impaired loans is primarily
          a result of  the
          identification of six seasoned, well-secured loan relationships that meet
          the
          definition of impairment due to poor payment and/or financial performance
          of the
          business. The measure of impairment is primarily based on the fair value
          of
          collateral securing these loans, which is primarily real estate and equipment.
          The related allowance for loan losses on these impaired commercial loans
          amounted to
          $146,200 at
          December 31, 2006, and $251,000 at December 31, 2005. The reduction in
          the
          related allowance for loan losses despite the increased impaired loan total
          is
          reflective of the underlying collateral securing the impaired loans. The
          aforementioned six new impaired relationships have related allowance for
          loan
          losses of $21,000. We currently believe that probable losses on these loans
          have
          already been provided for in the allowance for loan and lease losses. As
          of
          December 31, 2006 and 2005, impaired loans with balances of $1,602,000
          and
          $745,000, respectively, were included with total nonperforming loans detailed
          below. Nonperforming loans below include consumer and residential mortgage
          loans
          which are evaluated collectively for impairment and other commercial loans
          that
          are not considered impaired. In addition, under our current internal risk
          rating
          system, loans with a rating of “substandard” that were not nonperforming or
          impaired amounted to $2,106,000 at December 31, 2006, and $0 at December
          31,
          2005. We consider impaired and substandard loans to be potential problem
          loans
          and currently expect that an additional amount of these loans may be classified
          as nonperforming during 2006. We have increased our monitoring of these
          borrowers' financial strength.
  39
  Loans
                      are composed of the following:December
                      31,(Dollars
                      in thousands)
                  
                  **2006**
                  
                  2005
                  
                  2004
                  
                  2003
                  
                  2002Real
                      Estate Mortgages:First
                      and Second Residential
                  
                  **$**
                  **130,363**
                  
                  $
                  124,259
                  
                  $
                  121,799
                  
                  $
                  116,173
                  
                  $
                  114,441Commercial
                      and Industrial
                  
                  
                  **105,158**
                  
                  
                  94,016
                  
                  
                  79,711
                  
                  
                  64,589
                  
                  
                  48,411Construction
                      and Land Development
                  
                  
                  **23,634**
                  
                  
                  10,618
                  
                  
                  9,396
                  
                  
                  5,337
                  
                  
                  5,405Agricultural
                  
                  
                  **24,133**
                  
                  
                  23,488
                  
                  
                  17,423
                  
                  
                  8,400
                  
                  
                  7,147Commercial
                      and Industrial
                  
                  
                  **27,226**
                  
                  
                  20,291
                  
                  
                  12,674
                  
                  
                  10,075
                  
                  
                  9,109Consumer
                      (Net of Unearned Income)
                  
                  
                  **7,893**
                  
                  
                  8,159
                  
                  
                  9,678
                  
                  
                  11,029
                  
                  
                  5,363Agricultural
                  
                  
                  **3,733**
                  
                  
                  3,300
                  
                  
                  4,614
                  
                  
                  478
                  
                  
                  516Lease
                      Financing Receivables(Net
                      of Unearned Income)
                  
                  
                  **8,339**
                  
                  
                  3,707
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Other
                  
                  
                  **10,602**
                  
                  
                  12,290
                  
                  
                  7,515
                  
                  
                  8,929
                  
                  
                  8,315Total
                      Loans
                  
                  
                  **341,081**
                  
                  
                  300,128
                  
                  
                  262,810
                  
                  
                  225,010
                  
                  
                  198,707Add:
                      Unamortized Premiumon
                      Purchased Loans
                  
                  
                  **32**
                  
                  
                  85
                  
                  
                  191
                  
                  
                  371
                  
                  
                  358Loans
                      (Net of Unearned Income)
                  
                  **$**
                  **341,113**
                  
                  $
                  300,213
                  
                  $
                  263,001
                  
                  $
                  225,381
                  
                  $
                  199,065
  The
          loan
          maturities and interest sensitivity of total loans, excluding residential
          real
          estate mortgages, leases, and consumer loans at December 31, 2006, are
          as
          follows:
 Years
                      to Maturity *Within
                  
                  1
                      -
                      5
                  
                  Over(Dollars
                      in thousands)
                  
                  1
                      Year
                  
                  Years
                  
                  5
                      Years
                  
                  TotalCommercial,
                      Agricultural and Other
                  
                  $
                  39,467
                  
                  $
                  13,253
                  
                  $
                  118,082
                  
                  $
                  170,802Construction
                      and Land Development
                  
                  
                  13,597
                  
                  
                  5,513
                  
                  
                  4,524
                  
                  
                  23,634Total
                  
                  $
                  53,064
                  
                  $
                  18,766
                  
                  $
                  122,606
                  
                  $
                  194,436Fixed
                      Interest Rates
                  
                  $
                  6,435
                  
                  $
                  13,618
                  
                  $
                  9,130
                  
                  $
                  29,183Floating
                      or Adjustable Interest Rates
                  
                  
                  46,629
                  
                  
                  5,148
                  
                  
                  113,476
                  
                  
                  165,253Total
                  
                  $
                  53,064
                  
                  $
                  18,766
                  
                  $
                  122,606
                  
                  $
                  194,436
 
 *
          Due to
          interest rate levels, economic conditions and other relevant factors, it
          is
          anticipated that there will be loans that are repaid prior to their contractual
          maturity dates.
 
 **Nonperforming
          Assets**
 
 Nonperforming
          loans consist of nonaccruing loans and loans 90 days or more past due.
          Nonaccruing loans are comprised of loans for which we are no longer accruing
          interest income because of apparent financial difficulties of the borrower.
          Interest on nonaccruing loans is recorded when received only after the
          past due
          principal is brought current and deemed collectible in full. If nonaccrual
          loans
          had been current and in accordance with their original terms, gross interest
          income of approximately $201,000 and $83,000 would have been recorded on
          such
          loans for the years ended December 31, 2006 and 2005, respectively. Interest
          income of $4,000, $0, and $0 was recognized on such loans for the years
          ended
          December 31, 2006, 2005, and 2004, respectively. At December 31, 2006,
          total
          nonperforming loans amounted to $2,533,000, or 0.7%, of net loans, as compared
          to $2,112,000, or 0.7% of net loans, at December 31, 2005. The increase
          in
          non-performing loans primarily related to numerous additions to nonaccrual
          loans
          during 2006. Historically, the percent of nonperforming loans to net
          loans
          as of December 31, for the previous five-year period, was an average of
          0.7%.
          There are no
          troubled debt restructurings.
 
 The
          following is a summary of our nonperforming loans:
 December
                      31,(Dollars
                      in thousands)
                  
                  **2006**
                  
                  2005
                  
                  2004
                  
                  2003
                  
                  2002Nonaccruing
                      Loans
                  
                  **$**
                  **2,280**
                  
                  $
                  1,814
                  
                  $
                  1,192
                  
                  $
                  1,334
                  
                  $
                  1,310Accruing
                      Loans - 90 days or more past due
                  
                  
                  **253**
                  
                  
                  298
                  
                  
                  761
                  
                  
                  8
                  
                  
                  364Total
                      Nonperforming Loans
                  
                  **$**
                  **2,533**
                  
                  $
                  2,112
                  
                  $
                  1,953
                  
                  $
                  1,342
                  
                  $
                  1,674Nonperforming
                      Loans as a % of Net Loans
                  
                  
                  **0.7**
                  **%**
                  
                  0.7
                  %
                  
                  0.7
                  %
                  
                  0.6
                  %
                  
                  0.8
                  %Allowance
                      for Loan Losses as a % ofNonperforming
                      Loans
                  
                  
                  **121**
                  **%**
                  
                  127
                  %
                  
                  117
                  %
                  
                  148
                  %
                  
                  108
                  %
 40
  Foreclosed
          real estate includes assets acquired through foreclosure and loans identified
          as
          in-substance foreclosures. A loan is classified as an in-substance foreclosure
          when Union National has taken possession of the collateral regardless of
          whether
          formal foreclosure proceedings have taken place. Foreclosed real estate
          is held
          for sale and is initially recorded at fair value less cost to sell at the
          date
          of foreclosure, establishing a new cost basis. Subsequent to foreclosure,
          valuations are periodically performed by management and the assets are
          carried
          at the lower of carrying amount or fair value less cost to sell. Revenue
          and
          expenses from operations and changes in the valuation allowance are included
          in
          net expenses from foreclosed assets, included in other expenses. Union
          National
          had foreclosed real estate with a carrying value of $186,000 at December
          31,
          2006 and had no foreclosed real estate at December 31, 2005.
 
 **LOAN
          QUALITY/ALLOWANCE FOR LOAN LOSSES**
 
 The
          allowance for loan losses is maintained at a level believed adequate by
          management to absorb estimated probable loan losses.  Management is
          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
          used
          in making the evaluation.  In addition, various regulatory agencies, as an
          integral part of their examination process, review our 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’s) most recent examination.
 
 During
          2006, an ongoing loan review was performed on selected portions of the
          loan
          portfolio by an independent consultant.  Senior management evaluates credit
          risk on a quarterly basis, or more frequently, as circumstances dictate. 
At December 31, 2006, the percent of loans secured by real estate was 83%
          of the
          overall loan portfolio.  Our current policy requires that the borrower
          generally provides at least 20% equity for commercial real estate loans. 
Residential mortgage loans require 20% equity or the purchase of private
          mortgage insurance.  Certain home equity loans are made with less than 20%
          equity, but the interest rate on the loan is adjusted to reflect this increased
          risk.
 
 The
          allowance for loan losses at December 31, 2006 increased by $395,000 over
          the
          prior year.  This increase was primarily a result of increased loan
          balances.  The ratio of the allowance for loan losses to net loans was
          0.90% at December 31, 2006, as compared to 0.89% at December 31, 2005.  The
          overall level of the allowance for loan losses has increased over the previous
          five-year period primarily as a result of loan growth.  We believe, based
          on information currently available, that the current allowance for loan
          losses
          of $3,070,000 is adequate to meet potential loan losses.  For 2007, we
          expect loan charge-offs, net of recoveries, to be comparable to or below
          the
          level of net loan charge-offs for 2006.
 
 The
          allowance for loan losses is evaluated based on an assessment of the losses
          inherent in the loan portfolio.  This assessment results in an allowance
          that consists of specific, general and unallocated components.  The
          specific component relates to loans that are classified as impaired.  For
          such loans, an allowance is established when the discounted cash flows
          (or
          collateral value or observable market price) of the impaired loan is lower
          than
          the carrying value of that loan.  The general component covers all other
          loans and is based on historical loss experience adjusted for qualitative
          factors.  An unallocated component is maintained to cover uncertainties
          that could affect our estimate of probable losses.  The unallocated
          component of the allowance reflects the margin of imprecision inherent
          in the
          underlying assumptions used in the methodologies for estimating specific
          and
          general losses in the portfolio.
 
 **Analysis
          of Allowance for Loan* Losses**
 Years
                      Ended December 31,(Dollars
                      in thousands)
                  
                  **2006**
                  
                  2005
                  
                  2004
                  
                  2003
                  
                  2002Average
                      Loans Outstanding
                  
                  **$**
                  **318,251**
                  
                  $
                  280,245
                  
                  $
                  244,752
                  
                  $
                  200,808
                  
                  $
                  201,976Allowance
                      for Loan Losses,Beginning
                      of Year
                  
                  **$**
                  **2,675**
                  
                  $
                  2,288
                  
                  $
                  1,985
                  
                  $
                  1,812
                  
                  $
                  1,893Loans
                      Charged Off During Year:Real
                      Estate**
                  
                  
                  **11**
                  
                  
                  150
                  
                  
                  112
                  
                  
                  98
                  
                  
                  112Consumer
                  
                  
                  **43**
                  
                  
                  77
                  
                  
                  25
                  
                  
                  23
                  
                  
                  86Commercial,
                      Industrial and Agricultural
                  
                  
                  **285**
                  
                  
                  100
                  
                  
                  24
                  
                  
                  1
                  
                  
                  177Total
                      Charge-Offs
                  
                  
                  **339**
                  
                  
                  327
                  
                  
                  161
                  
                  
                  122
                  
                  
                  375Recoveries
                      of Loans PreviouslyCharged
                      Off:Real
                      Estate**
                  
                  
                  **5**
                  
                  
                  5
                  
                  
                  24
                  
                  
                  -
                  
                  
                  53Consumer
                  
                  
                  **14**
                  
                  
                  9
                  
                  
                  35
                  
                  
                  21
                  
                  
                  52Commercial,
                        Industrial and Agricultural
                  
                  
                  **43**
                  
                  
                  19
                  
                  
                  1
                  
                  
                  -
                  
                  
                  5Total
                      Recoveries
                  
                  
                  **62**
                  
                  
                  33
                  
                  
                  60
                  
                  
                  21
                  
                  
                  110Net
                      Loans Charged Off
                  
                  
                  **277**
                  
                  
                  294
                  
                  
                  101
                  
                  
                  101
                  
                  
                  265Provision
                      for Loan LossesCharged
                      to Operations
                  
                  
                  **672**
                  
                  
                  681
                  
                  
                  404
                  
                  
                  274
                  
                  
                  184Allowance
                      for Loan Losses,End
                      of Year
                  
                  $
                  **3,070**
                  
                  $
                  2,675
                  
                  $
                  2,288
                  
                  $
                  1,985
                  
                  $
                  1,812Ratio
                      of Net LoansCharged
                      Off to AverageLoans
                      Outstanding
                  
                  
                  **0.09**
                  **%**
                  
                  0.10
                  %
                  
                  0.04
                  %
                  
                  0.05
                  %
                  
                  0.13
                  %Ratio
                      of Allowance forLoan
                      Losses to Net Loansat
                      End of Year
                  
                  
                  **0.90**
                  **%**
                  
                  0.89
                  %
                  
                  0.87
                  %
                  
                  0.88
                  %
                  
                  0.91
                  %
  *
          Loans
          include financing leases in 2006 and 2005. There were no charge-offs or
          recoveries of financing leases.
 **
          During
          this five-year period, there were no charge-offs or recoveries of real
          estate
          construction loans.
  41
 
 The
          following sets forth an allocation of the allowance for loan losses by
          category.
          The specific allocation in any particular category may be reallocated in
          the
          future to reflect current conditions. Accordingly, we consider the entire
          allowance to be available to absorb losses in any category.
  Percent
                          of loans(Dollars
                      in thousands)
                  
                  Amount
                  
                  in
                      each Category**December
                      31, 2006:****Commercial,
                      Industrial and Agricultural**
                  
                  $
                  2,228
                  
                  
                  **58**
                  **%****Lease
                      Financing Receivables**
                  
                  
                  **63**
                  
                  
                  **2****Real
                      Estate - Residential Mortgages**
                  
                  
                  **469**
                  
                  
                  **38****Consumer**
                  
                  
                  **92**
                  
                  
                  **2****Unallocated**
                  
                  
                  **218**
                  
                  
                  **-****Total
                      Allowance for Loan Losses**
                  
                  $
                  3,070
                  
                  
                  **100**
                  **%**December
                      31, 2005:Commercial,
                      Industrial and Agricultural
                  
                  $
                  1,778
                  
                  
                  55
                  %Lease
                      Financing Receivables
                  
                  
                  25
                  
                  
                  1Real
                      Estate - Residential Mortgages
                  
                  
                  379
                  
                  
                  41Consumer
                  
                  
                  135
                  
                  
                  3Unallocated
                  
                  
                  358
                  
                  
                  -Total
                      Allowance for Loan Losses
                  
                  $
                  2,675
                  
                  
                  100
                  %December
                      31, 2004:Commercial,
                      Industrial and Agricultural
                  
                  $
                  1,293
                  
                  
                  50
                  %Real
                      Estate - Residential Mortgages
                  
                  
                  514
                  
                  
                  46Consumer
                  
                  
                  147
                  
                  
                  4Unallocated
                  
                  
                  334
                  
                  
                  -Total
                      Allowance for Loan Losses
                  
                  $
                  2,288
                  
                  
                  100
                  %December
                      31, 2003:Commercial,
                      Industrial and Agricultural
                  
                  $
                  1,091
                  
                  
                  43
                  %Real
                      Estate - Residential Mortgages
                  
                  
                  450
                  
                  
                  52Consumer
                  
                  
                  152
                  
                  
                  5Unallocated
                  
                  
                  292
                  
                  
                  -Total
                      Allowance for Loan Losses
                  
                  $
                  1,985
                  
                  
                  100
                  %December
                      31, 2002:Commercial,
                      Industrial and Agricultural
                  
                  $
                  1,078
                  
                  
                  39
                  %Real
                      Estate - Residential Mortgages
                  
                  
                  231
                  
                  
                  58Consumer
                  
                  
                  184
                  
                  
                  3Unallocated
                  
                  
                  319
                  
                  
                  -Total
                      Allowance for Loan Losses
                  
                  $
                  1,812
                  
                  
                  100
                  %
 42
 
 **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;
 ·
                overnight
                    correspondent bank borrowings on various credit lines and borrowing
                    capacity available from the FHLB;
 ·
                acquisition
                    of CDs and brokered CDs through the CDARS program as discussed
                    below;
                    and
 ·
                payments
                    on loans and mortgage-backed securities.
 
 We
          believe that our core deposits are fairly stable even in periods of changing
          interest rates. Liquidity management is governed by policies and measured
          on a
          monthly basis. These measurements indicate that liquidity generally remains
          stable and exceeds our minimum defined level. As of December 31, 2006 and
          2005,
          the ratio of aggregated FHLB advances and brokered CDs to total assets
          was 29%
          and 31%, respectively. In January 2007, we decided to de-leverage our Balance
          Sheet.  We reduced the size of our securities portfolio by approximately
          $66,000,000 while paying down FHLB advances and other short-term borrowings.
          Except for the item noted above, there are no known trends, other than
          the trend
          of continued competitive pressures, 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.
 
 Membership
          in the FHLB provides us with additional liquidity alternatives such as
          short- or
          long-term funding on fixed- or variable-rate terms. As of December 31,
          2006, we
          had received total long-term advances of $117,571,000 from our available
          credit
          of $163,506,000 at the FHLB for purposes of funding loan demand and
          mortgage-backed security purchases.  As of December 31, 2005, we had
          received long-term advances of $105,815,000, short-term advances of $10,000,000,
          and $3,000,000 drawn on a line of credit.  As of December 31, 2006,
          advances of $10,877,000, all of which were paid off in the de-leveraging
          transaction, were due in 2007 and advances of $30,000,000 are currently
          convertible by the FHLB on a quarterly basis.  The FHLB’s convertible
          fixed-rate advances allow the FHLB the periodic option to convert to LIBOR
          adjustable-rate advances. Upon the FHLB’s conversion, we have the option to
          repay the respective advances in full.  See section on Market Risk -
          Interest Rate Risk for further analysis of these advances.
 
 In
          January 2004, we became the first bank in Lancaster County to offer our
          customers FDIC insurance coverage beyond $100,000 through a unique program
          called the Certificate of Deposit Account Registry Service (“CDARS”). 
Through this program, customers may be able to invest up to $10 million
          with us
          and maintain full FDIC insurance coverage.  We are also able to bid for and
          obtain additional brokered CDs through this program as an additional source
          of
          liquidity.  As of December 31, 2006 and 2005, we had $42,287,000 and
          $30,075,000, respectively, outstanding in brokered CDs and in CDs acquired
          through the CDARS program.
 
 On
          July
          28, 2006, we issued $6,000,000 of subordinated debentures due September
          15,
          2021, with a five-year initial fixed rate of 7.17%, and then at an annual
          coupon
          rate, reset quarterly, based on three-month LIBOR plus 1.65%.  The
          debentures were issued in order to fund growth and to raise our risk-based
          capital ratio above the 10% well-capitalized level.  These securities are
          redeemable at our option beginning after five years.
 
 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 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 of approximately three years, at which point the
          coupon
          rate will be reset quarterly based on three-month LIBOR plus 2.00%.  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 LIBOR
          plus
          2.85%.  The coupon rate was 8.23% at December 31, 2006, 7.09% at December
          31, 2005, and 5.01% at December 31, 2004.  The securities in both trusts
          have a 30-year maturity, but are callable at our option, at par, after
          5 years
          from date of issuance. Union National used the net proceeds from these
          offerings
          to fund an additional $7,000,000 capital investment in Union National Community
          Bank to fund its operations and future growth.  We used the balance of the
          funding for the repurchase of common stock and general corporate purposes.
          During 2006, 2005, and 2004, we repurchased 8,709, 53,276, and 100,489
          shares of
          common stock, respectively, at a total cost of $168,000, $1,192,000, and
          $2,260,000 respectively.
  43
  **Off-Balance
          Sheet Arrangements and Aggregate Contractual Obligations**
 
 The
          following table represents Union National’s on- and off-balance sheet aggregate
          contractual obligations to make future payments as of December 31,
          2006:
 (Dollars
                      in thousands)
                  
                  Less
                      Than
                    1
                      Year
                  
                  1
                      to 3
                    Years
                  
                  4
                      to 5
                    Years
                  
                  Over
                      5
                    Years
                  
                  TotalTime
                      Deposits
                  
                  $
                  94,795
                  
                  $
                  23,918
                  
                  $
                  27,950
                  
                  $
                  2,076
                  
                  $
                  148,739Long-Term
                      Debt
                  
                  
                  10,877
                  
                  
                  45,643
                  
                  
                  46,997
                  
                  
                  14,054
                  
                  
                  117,571Junior
                      Subordinated Debentures
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  17,341
                  
                  
                  17,341Operating
                      Leases
                  
                  
                  886
                  
                  
                  1,791
                  
                  
                  1,766
                  
                  
                  8,177
                  
                  
                  12,620Total
                  
                  $
                  106,558
                  
                  $
                  71,352
                  
                  $
                  76,713
                  
                  $
                  41,648
                  
                  $
                  296,271
 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.  We have contracted with our core data
          processor for certain services including transaction processing, branch
          automation and communication services, trust processing, ATM processing
          and
          various other services.  Payments under these contracts amounted to
          $927,000 for the year ended December 31, 2006.  Future payments under these
          contracts will vary based on transaction and account volumes and may also
          reflect inflationary cost adjustments.  Formerly, the majority of this
          contract expired in November 2008; however, the contract was renegotiated
          in
          January 2007 and 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 in data processing and ATM processing expenses for 2007. We are
          not
          aware of any other commitments or contingent liabilities which may have
          a
          material adverse impact on our liquidity or capital resources.
 
 We
          are
          also party to financial instruments with off-balance sheet risk in the
          normal
          course of business to meet the financing needs of our customers.  These
          financial instruments include commitments to extend credit and standby
          letters
          of credit (See Note 14 to the Consolidated Financial Statements for additional
          details).
 
 **Inflation**
 
 Inflation
          has some impact on our operating costs, but unlike many other companies,
          substantially all of our assets and liabilities are monetary in nature.  As
          a result, interest rates have a more significant impact on our performance
          than
          the general level of inflation.  Interest rates do not necessarily move in
          the same direction or in the same magnitude as prices of goods and
          services.  The effects of changes in interest rates are discussed in the
          following section on Market Risk - Interest Rate 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
          objective of interest rate risk management is 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
          addition, we utilize an interest rate-sensitivity report called a "GAP"
          report,
          which illustrates the time intervals of cash flows or the next repricing
          date of
          interest-earning assets and interest-bearing liabilities.  Our GAP report
          at December 31, 2006 reflects a negative rate-sensitivity position throughout
          the first year, in that rate-sensitive liabilities exceed rate-sensitive
          assets.  The following analysis reflects cumulative rate-sensitive assets
          of $236,212,000 as compared to cumulative rate-sensitive liabilities of
          $256,225,000 as of the one-year time frame.  Our cumulative
          interest-sensitivity gap for the one-year time frame is a negative 3.9%
          of total
          assets at December 31, 2006, as compared to a negative 5.3% at December
          31,
          2005.  We manage the interest-sensitivity gap for the one-year time frame
          with a guideline of plus 15% to negative 15% of total assets.
  44
 
 The
          interest rate sensitivity analysis at December 31, 2006, with investment
          securities presented at amortized cost, is as follows:
 
 **Interest
          Rate Sensitivity**
 (Dollars
                    in thousands)
                  
                  1
                      -
                      90
                    Days
                  
                  91
                      - 365Days
                  
                  1
                      -
                      3
                    Years
                  
                  3
                      -
                      5
                    Years
                  
                  Over
                      5
                    Years
                  
                  TotalASSETSEarning
                      Assets:Mortgage-Backed
                      andAsset-Backed
                      Securities:Variable
                  
                  $
                  228
                  
                  $
                  866
                  
                  $
                  952
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  2,046Fixed
                  
                  
                  55,060
                  
                  
                  7,240
                  
                  
                  12,479
                  
                  
                  6,789
                  
                  
                  6,994
                  
                  
                  88,562Other
                      Investment Securitiesand
                      Other Earning Assets
                  
                  
                  21,344
                  
                  
                  1,824
                  
                  
                  5,281
                  
                  
                  4,558
                  
                  
                  12,804
                  
                  
                  45,811Net
                      Loans:Variable
                  
                  
                  101,431
                  
                  
                  13,262
                  
                  
                  44,446
                  
                  
                  52,095
                  
                  
                  10,934
                  
                  
                  222,168Fixed
                  
                  
                  13,773
                  
                  
                  21,184
                  
                  
                  36,022
                  
                  
                  25,102
                  
                  
                  22,864
                  
                  
                  118,945TOTAL
                  
                  $
                  191,836
                  
                  $
                  44,376
                  
                  $
                  99,180
                  
                  $
                  88,544
                  
                  $
                  53,596
                  
                  $
                  477,532
 LIABILITIESDeposits:Interest-Bearing
                      Demand
                  
                  $
                  1,083
                  
                  $
                  375
                  
                  $
                  -
                  
                  $
                  -
                  
                  $
                  37,747
                  
                  $
                  39,205Money
                      Market
                  
                  
                  77,694
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  77,694Savings
                  
                  
                  750
                  
                  
                  974
                  
                  
                  -
                  
                  
                  -
                  
                  
                  24,401
                  
                  
                  26,125Time
                  
                  
                  29,829
                  
                  
                  66,216
                  
                  
                  22,876
                  
                  
                  27,722
                  
                  
                  2,097
                  
                  
                  148,740
 FHLB
                      Advances andOther
                      Borrowings
                  
                  
                  76,304
                  
                  
                  3,000
                  
                  
                  8,257
                  
                  
                  43,500
                  
                  
                  14,054
                  
                  
                  145,115TOTAL
                  
                  $
                  185,660
                  
                  $
                  70,565
                  
                  $
                  31,133
                  
                  $
                  71,222
                  
                  $
                  78,299
                  
                  $
                  436,879Cumulative
                      Interest-Sensitivity
                      Gap
                  
                  $
                  6,176
                  
                  $
                  (20,013)
                  
                  $
                  48,034
                  
                  $
                  48,034
                  
                  $
                  40,653Cumulative
                      Interest-Sensitivity
                      Gap as a Percentof
                      Total Assets
                  
                  
                  1.2
                  %
                  
                  (3.9)
                  %
                  
                  9.3
                  %
                  
                  12.6
                  %
                  
                  7.9
                  %
 
 The
          amount of assets and liabilities shown, which reprice or mature during
          a
          particular period, were determined based on the earlier of when each asset
          or
          liability reprices or when it is to be repaid.  Callable investment
          securities are reflected based on the security's anticipated call date
          where the
          call on the security is likely when compared to the current interest rate
          yield
          curve.  Also, loans and mortgage-backed securities are reflected based on
          contractual amortization or contractual interest rate adjustments and on
          estimates for prepayments and refinancings based on current market interest
          rates.  Interest-bearing demand and savings deposits have always been
          considered a stable source of funds, and although the rates are subject
          to
          change, rates on these accounts historically have not changed as quickly
          or as
          often as other loan and deposit rates.  Based on an historical analysis
          during periods of rising interest rates, a portion of these deposits will
          invest
          in higher yielding instruments.  This portion is deemed to be sensitive to
          interest rate fluctuations in the earliest periods.  We believe that the
          remaining balances of these deposits are not repriceable based on current
          industry experience.  We currently do not expect to adjust the interest
          rates on these deposit balances in any significant amount that would materially
          affect our GAP or income simulation models.
 
 Certain
          shortcomings are inherent in the method of analysis presented in the foregoing
          schedule.  For example, although certain assets and liabilities may have
          similar maturities or periods to repricing, they may react in different
          degrees
          to changes in market interest rates.  Interest rates on certain types of
          assets and liabilities may fluctuate in advance of or lag behind changes
          in
          market interest rates.  Additionally, certain repriceable assets, such as
          adjustable-rate securities or loans, have features like annual and lifetime
          rate
          caps or floors that restrict changes in interest rates both on a short-term
          basis and over the life of the asset.  Further, a change in market interest
          rates from the interest rate scenarios that existed on December 31, 2006
          would
          likely cause assumptions, such as estimated prepayment speeds, refinancings,
          embedded options, early withdrawals, and FHLB advance conversion clauses
          to
          significantly change the GAP results above.  Based on current market
          interest rates, the $30,000,000 in FHLB convertible advances that are currently
          convertible on a quarterly basis are presented in the GAP report above
          in the
          earliest time frame.  These may convert with an additional mild increase in
          market interest rates and are reflected accordingly in the bank’s simulation
          model.
  45
 
 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 of changes in
          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 percentage declines in the table below are
          measured as percentage changes from the values of simulated net interest
          income
          in the current rate scenario and the impact of those changes on the prior
          year’s
          net income.
 
 The
          Sensitivity Analysis schedule indicates that as of December 31, 2006, a
          hypothetical 2% decline in prevailing market interest rates would cause
          our net
          interest income to decline less than 3% from the current rate scenario. 
After adjusting for income taxes, a 2% decline in rates would cause less
          than a
          10% impact to our net income in comparison to the net income earned for
          2006.  A 2% increase in interest rates as of December 31, 2006 and 2005
          would have an insignificant impact on our net interest income and net
          income.  These computations do not contemplate any actions management or
          the Asset and Liability Management Committee could undertake in response
          to
          changes in market conditions or market interest rates.
 
 We
          managed our interest rate risk position in 2006 by the following:
 
 ·
                managing
                    the use of adjustable- and floating-rate loans in comparison
                    to fixed-rate
                    loans for new or refinanced commercial and agricultural loans;
 ·
                repositioning
                    of our investment security portfolio mix by using certain types
                    of
                    mortgage-backed and municipal securities to better prepare for
                    any future
                    changes in interest rates;
 ·
                managing
                    and expanding the bank's core deposit base including deposits
                    obtained in
                    our commercial cash management programs and premium money market
                    accounts;
 ·
                adding
                    to or restructuring of fixed-rate, floating-rate, or callable
                    positions in
                    advances from the FHLB or brokered CDs; and
 ·
                use
                    of derivatives in a cap transaction to mitigate impact in the
                    rising rates
                    scenario.
 
 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.  The Sensitivity Analysis includes our de-leveraging
          transaction, reflected as cash flows in January, 2007.  The effect of the
          de-leveraging transaction reduced our interest rate risk exposure to rising
          rates.  See the related discussions in the section on Net Interest
          Income.
 
 Based
          upon the simulation model, the following reflects our net interest income
          and
          net income sensitivity analysis as of December 31, 2006 and 2005:
 
 Sensitivity
          Analysis
 Percent
                      Decrease in CategoriesMarket
                      Interest
                  
                  Market
                      InterestRate
                      Increase
                  
                  Rate
                      Declineof
                      2%
                  
                  of
                      2%**Net
                      Interest Income:**Policy
                      Limit
                  
                  
                  <10
                  %
                  
                  <10
                  %Hypothetical
                      Percent Decrease in Net Interest Incomefrom
                      Current Rate Scenario:As
                      of December 31, 2006
                  
                  
                  –
                  
                  
                  <3
                  %As
                      of December 31, 2005
                  
                  
                  –
                  
                  
                  <4
                  %**Net
                      Income:**Hypothetical
                      Percent Decrease from PriorYear's
                      Net Income:As
                      of December 31, 2006
                  
                  
                  –
                  
                  
                  <10
                  %As
                      of December 31, 2005
                  
                  
                  –
                  
                  
                  <10
                  %
 46
  **Stockholders'
          Equity**
 
 Union
          National and the bank maintain capital ratios that are above the minimum
          total
          capital levels required by federal regulatory authorities.  See Note 15 to
          the Consolidated Financial Statements for additional details.
 
 Our
          average stockholders’ equity to average assets ratio, which measures the
          adequacy of capital, was 5.67% for 2006, as compared to 6.25% for 2005. 
The decline in this ratio is primarily a result of growth in average assets
          and
          repurchases of common stock during 2005.  The dividend payout ratio, which
          represents the percentage of earnings returned to the stockholders in the
          form
          of cash dividends, was 63.8% for 2006 and 47.0% for 2005.
 
 On
          July
          28, 2006, we issued $6,000,000 of subordinated debentures due September
          15,
          2021, with a five-year initial fixed rate of 7.17%, and then at an annual
          coupon
          rate, reset quarterly, based on three-month LIBOR plus 1.65%.  The
          debentures were issued in order to fund growth and to raise our risk-based
          capital ratio above the 10% well-capitalized level.  These securities are
          redeemable at our option beginning after five years.
 
 In
          January 2007, we decided to de-leverage our Balance Sheet. The de-leveraging
          strategy will strengthen our equity position, enhance our income tax
          effectiveness, and facilitate our future core banking growth strategies
          for
          loans and deposits.  Consequently, we reduced the size of our securities
          portfolio by $66,000,000 while paying down Federal Home Loan Bank debt
          and other
          short-term borrowings, thereby reducing our overall capital needs.  The
          results of the transaction will significantly increase the Corporation
          and
          Bank’s capital ratios.
 
 Except
          as
          discussed above, 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
          subject to restrictions on the payment of dividends to our stockholders
          pursuant
          to the Pennsylvania Business Corporation Law of 1988, as amended (the
          BCL).  The BCL operates generally to preclude dividend payments if the
          effect thereof would render us insolvent.  Our payment of dividends is
          contingent upon our ability to obtain funding in the form of dividends
          from the
          bank.  Payment of dividends to Union National by the bank is subject to the
          restrictions set forth in the National Bank Act.  Generally, the National
          Bank Act would permit the bank to declare dividends in 2007 of approximately
          $2,522,000, plus an amount equal to the net profits of the bank in 2007
          up to
          the date of any such dividend declaration.
 
 We
          maintain a Dividend Reinvestment and Stock Purchase Plan.  Holders of
          common stock may participate in the plan, which provides that additional
          shares
          of common stock may be purchased with reinvested dividends and optional
          cash
          payments within specified limits at prevailing market prices.  At December
          31, 2006, the enrollment in the plan was approximately 19% of the shares
          outstanding.  As of December 31, 2006, 160,589 shares have been issued
          under the Dividend Reinvestment and Stock Purchase Plan.
 
 **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 our ability
          to
          realize the value of deferred tax assets.
 
 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.  The full impact of
          the  Sarbanes-Oxley
          Act Section 404 and the increased costs related to our compliance are still
          uncertain and evolving.  The
          currently expected increase in outside professional fees is estimated to
          be
          approximately $125,000 pre-tax for complying with the Act’s Section 404 in
          2007.
  47
 
 The
          Federal Deposit Insurance Reform Act of 2005 (“ACT”) allows eligible insured
          depository institutions to share in a one-time assessment credit.  The
          currently estimated credit amount available to the bank is $228,000.  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 new ACT’s regulations and
          the resulting available credit amount, we currently expect an immaterial
          impact
          on our results of operations for 2007 as compared to 2006.
  We
          cannot
          predict what other legislation might be enacted or what regulations might
          be
          adopted, or if enacted or adopted, the effect thereof on our operations. 
Other than the cost of the compliance with the Sarbanes-Oxley Act described
          above, management is not aware of any current specific proposed regulations
          or
          legislation, which if implemented, would have a material adverse effect
          upon the
          liquidity, capital resources or results of operations.  However, the
          general cost of compliance with numerous federal and state laws and regulations
          does have, and in the future may have, a negative impact on our results
          of
          operations.
 
 Further,
          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.
  48




BOARD
                  OF DIRECTORSDONALD
                  CARGAS, JR.
                President/CEO,
                Cargas
                  Systems, Inc.
            NANCY
                SHAUB COLARIK
              Retired
                Senior Officer
              from
                Banking
            KEVIN
              DOLAN
              Partner,
                Gingrich, Smith,
              Klingensmith
                & Dolan
            MICHAEL
              A. FREY
              Vice
                President, Union National
              Financial
                Corporation and
              President/COO,
                Union
              National
                Community BankMARK
              D. GAINER
              Chairman/President/CEO,
              Union
                National Financial
              Corporation
                and Chairman/CEO,
              Union
                National Community Bank
            JAMES
              R. GODFREY
              Executive
                Vice President,
              Teachers
                Protective Mutual Life
              Insurance
                Company
            CARL
              R. HALLGREN, ESQ.
              Attorney-Treasurer,
                Morgan,
              Hallgren,
                Crosswell and Kane P.C.
            BARRY
              C. HUBER, CPA
              Managing
                partner,
              Trout,
                Ebersole and Groff, LLPTHOMAS
                J. MCGRATH, DVM
              President
                and Owner of Donegal
              Animal
                Hospital, P.C.
            WILLIAM
                M. NIES
              Real
                Estate Developer/Sales,
              L.M.S.
                Commercial Real Estate
            DARWIN
                A. NISSLEY
              Partner,
                Nissley Brothers
            LLOYD
              C. PICKELL
              Lloyd
                C. Pickell, P.A.RETIRED
                  DIRECTORSWILLIAM
                H. EBY
              Retired
                Bank President/CEO
              Bill
                retired from the Financial Corporation in August
              2006
                and from the Bank’s Board of Directors on
              December
                31, 2006, after serving more than 48
              years
                in the financial industry, beginning his career
              in
                1958. He started at Union National as a bookkeeper
              and
                progressed on through the ranks to
              become
                its President/CEO in 1984 and retiring in
              1998.
                Bill’s leadership and dedication will surely be
              missed.
                Bill will continue to assist various community
              non-profit
                organizations with his financial expertise.
              More
                importantly, he looks forward to spending
              more
                time with his wife Janet, family and fishing the
              trout
                streams of Perry County.
            
            BENJAMIN
                W. PIERSOL, JR., R.P.H.
              Retired
                from Sloan’s Pharmacy, Inc.
              Ben
                retired from the Financial Corporation
              and
                the Bank’s Board of Directors on December 31,
              2006,
                after serving 10 years at Union National.
              For
                30 years, Ben was an active co-owner of
              Sloan’s
                Pharmacy, Inc. Ben’s dedication and loyalty
              has
                been a great asset to Union National. Being an
              avid
                sportsman, Ben and his wife Judy will retire to
              their
                ranch in Montana fulfilling their enjoyment of
              raising
                and training horses.




49