UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-K





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





For the
fiscal year ended December 31, 2008





OR





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





For the
transition period from _________________ to





Commission
file number 0-19214





UNION NATIONAL FINANCIAL
CORPORATION


(Exact
Name of Registrant as Specified in its Charter)





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





(Registrant's Telephone Number,
Including Area Code): (717)
492-2222





Securities
registered pursuant to Section 12(b) of the
Act:                        None





Securities
registered pursuant to Section 12(g) of the Act:   Common Stock, $0.25 Par
Value


(Title of
Class)


Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.          Yes ̈No x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.      Yes
 ̈    No
x





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90
days.                Yes
x    No
 ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form
10-K.                          x





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





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




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).   Yes  ̈    No
x





The
aggregate market value of the shares of Common Stock of the Registrant held by
nonaffiliates of the Registrant was $23,466,337 as of June 30,
2008.  As of March 27, 2009 the Registrant had approximately 2,720,076
shares of Common Stock outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE:





Certain
portions of Union National Financial Corporation’s Annual Report to Shareholders
for the year ended December 31, 2008, are incorporated by reference into Parts
I, II and IV of this Annual Report on Form 10-K.  Certain portions of
Union National Financial Corporation's Proxy Statement to be filed in connection
with its 2009 Annual Meeting are incorporated by reference in response to Parts
II and III of this Annual Report on Form 10-K.  However, any
information in Union National Financial Corporation’s Annual Report to
Shareholders and Proxy Statement that is not required to be included in this
Annual Report on Form 10-K shall not be deemed to be incorporated herein or
filed with the Securities and Exchange Commission.









UNION
NATIONAL FINANCIAL CORPORATION


FORM
10-K


TABLE OF
CONTENTS





PAGE NO.PART
      IItem
      1 -
                                    Business
                                    4Item
      1A -
                                    Risk
      Factors
                                    9Item
      1B -
                                    Unresolved
      Staff Comments
                                    17Item
      2 -
                                    Properties
                                    17Item
      3 -
                                    Legal
      Proceedings
                                    18Item
      4 -
                                    Submission
      of Matters to a Vote of Security Holders
                                    18PART
      IIItem
      5 -
                                    Market
      for Registrant's Common Equity, Related StockholderMatters
      and Issuer Purchases of Equity Securities
                                    19Item
      6 -
                                    Selected
      Financial Data
                                    21Item
      7 -
                                    Management's
      Discussion and Analysis ofFinancial
      Condition and Results of Operations
                                    21Item
      7A-
                                    Quantitative
      and Qualitative Disclosure About Market Risk
                                    21Item
      8 -
                                    Financial
      Statements and Supplementary Data
                                    21Item
      9 -
                                    Changes
      In and Disagreements With Accountantson
      Accounting and Financial Disclosure
                                    21Item 9A(T) -
                                    Controls
      and Procedures
                                    21Item
      9B -
                                    Other
      Information
                                    22PART
      IIIItem
      10 -
                                    Directors,
      Executive Officers, and Corporate Governance
                                    23Item
      11 -
                                    Executive
      Compensation
                                    23Item
      12 -
                                    Security
      Ownership of Certain Beneficial Owners and Managementand
      Related Stockholder Matters
                                    23Item
      13 -
                                    Certain
      Relationships and Related Transactions, andDirector
      Independence
                                    23Item
      14 -
                                    Principal
      Accountant Fees and Services
                                    23PART
      IVItem
      15 -
                                    Exhibits,
      Financial Statement Schedules
                                    24Signatures
                                    28Exhibit
      Index
                                    29




2




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





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




3





PART I.





ITEM
      1.
            BUSINESS.





Union
National Financial Corporation (“UNFC”), a Pennsylvania business corporation, is
a bank holding company registered under the Bank Holding Company Act of 1956, as
amended, and is supervised by the Board of Governors of the Federal Reserve
System.  UNFC was incorporated on June 26, 1986, under the Business
Corporation Law of the Commonwealth of Pennsylvania.  UNFC commenced
operations on January 2, 1987, upon consummation of the acquisition of all of
the outstanding shares of The Union National Mount Joy Bank, which effective
February 6, 1998, changed its name to Union National Community
Bank.  UNFC's business consists primarily of managing and supervising
Union National Community Bank (the “Bank”), and its principal source of income
is dividends paid by the Bank.  UNFC has three wholly-owned
subsidiaries: the Bank; Union National Capital Trust I; and, Union National
Capital Trust II.  UNFC’s two trust subsidiaries were formed on
December 19, 2003, and October 23, 2004, respectively, for the purpose of
issuing trust capital securities.  Home Team Financial, LLC, a
subsidiary of the Bank, and its subsidiary, TA of Lancaster, LLC (together,
“Home Team”) began operations in July 2005, and ceased operations in October
2007. Home Team operated a mortgage banking and brokerage business and also
offered title insurance and settlement services. In accordance with agreements
between the Bank and the minority interest owners, the Bank’s ownership interest
in Home Team was 98%, and the Bank’s interest in Home Team’s net profits and
losses was 30% up until June 30, 2007, and 62.31% thereafter until Home Team
ceased operating on October 31, 2007.  The Bank also has a wholly
owned subsidiary, Union National Insurance Agency, Inc. formed on May 21,
2001.





Union
National Community Bank was organized in 1865 under a national bank
charter.  The Bank is a national banking association, a member of the
Federal Reserve System and is regulated by the Office of the Comptroller of the
Currency.  The deposits of the Bank are insured by the Federal Deposit
Insurance Corporation to the maximum extent permitted by law.  It is a
full-service commercial bank, providing a wide range of services to individuals
and small to medium-sized businesses in its south central Pennsylvania market
area.  The Bank accepts time, demand, and savings deposits and makes
secured and unsecured commercial, real estate and consumer loans.  The
Bank also has a full-service trust department.  Through a third party
provider affiliation, the Bank offers certain non-depository products to its
customers to include annuities and brokerage services.





The Bank
has ten branch locations within Lancaster County, Pennsylvania.





UNFC’s
executive offices are located in its corporate office center at 570 Lausch Lane,
Suite 300, Lancaster, Pennsylvania 17601.  Its telephone number is
(717) 492-2222.





The Bank
experiences substantial competition in attracting and retaining deposits and in
lending funds.  Financial institutions compete for deposits by
offering attractive rates and convenient office locations.  Direct
competition for deposits comes primarily from other commercial banks and thrift
institutions.  Competition for deposits also comes from money market
mutual funds, corporate and government securities, and credit
unions.  The primary factors in the competition for loans are interest
rates, loan origination fees and the range of products and services
offered.  Competition for origination of real estate loans normally
comes from other commercial banks, thrift institutions, mortgage bankers and
brokers, and insurance companies.





For
additional information concerning UNFC’s business activities, see Management’s
Discussion and Analysis in Part II, Item 7 of this Annual Report on Form
10-K.





4





Supervision and Regulation -
UNFC





UNFC
operates in a heavily regulated environment.  Changes in laws and
regulations affecting UNFC and its Bank subsidiary may have an impact on
operations.  See “Supervision and Regulation—Union National Financial
Corporation” and “Supervision and Regulation—Union National Community Bank”
below and pages 26 and 63 of the Annual Report to Shareholders for the year
ended December 31, 2008.





Without
the prior approval of the Federal Reserve under the Bank Holding Company Act,
UNFC is prohibited from:





·
            acquiring
      direct or indirect control of more than 5% of the voting stock of any
      bank; or


·
            acquiring
      substantially all of the assets of any bank;
or


·
            merging
      with another bank holding company.





The
Pennsylvania Department of Banking also must approve any similar
consolidation.  Pennsylvania law permits Pennsylvania bank holding
companies to control an unlimited number of banks.  The Bank Holding
Company Act restricts UNFC from engaging in activities other than those that the
Federal Reserve has found to be closely related to banking, and which are
expected to produce benefits for the public that will outweigh any potentially
adverse effects.  To this end, the Bank Holding Company Act prohibits
UNFC from:





·
            engaging
      in most non-banking businesses; or


·
            acquiring
      ownership or control of more than 5% of the outstanding voting stock of
      any company engaged in a non-banking business, unless the Federal Reserve
      has determined that the non-banking business is closely related to
      banking.





Under the
Bank Holding Company Act, the Federal Reserve may require a bank holding company
to end a non-banking business if it constitutes a serious risk to the financial
soundness and stability of any bank subsidiary of the bank holding
company.





Other
than making equity investments in low to moderate income housing limited
partnerships, UNFC does not at this time engage in any other permissible
activities, nor does UNFC have any current plans to engage in any other
permissible activities in the foreseeable future.





Subsidiary
banks of a bank holding company are subject to restrictions imposed by the
Federal Reserve Act on any extensions of credit to the Bank holding company or
any of its subsidiaries, on investments in the stock or other securities of the
Bank holding company and on taking of such stock or securities as collateral for
loans to any borrower.





There are
various legal restrictions on the extent to which UNFC and its non-bank
subsidiaries can borrow or otherwise obtain credit from the Bank. In general,
these restrictions require that any such extensions of credit must be secured by
designated amounts of specified collateral and are limited, as to UNFC or any
one of such non-bank subsidiaries, to 10 percent of the Bank’s capital stock and
surplus, and as to UNFC and all such non-bank subsidiaries in the aggregate, to
20 percent of the Bank’s capital stock and surplus.  Further, UNFC and
the Bank are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services.





5





Under the
Community Reinvestment Act, the Bank has a continuing and affirmative
obligation, consistent with its safe and sound operation, to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. However, the Community Reinvestment Act does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution’s discretion to develop the types of products and services
that it believes are best suited to its particular community. The Community
Reinvestment Act also requires:





§
            the
      applicable regulatory agency to assess an institution’s record of meeting
      the credit needs of its community;


§
            public
      disclosure of an institution’s CRA rating;
and


§
            that
      the applicable regulatory agency provides a written evaluation of an
      institution’s CRA performance utilizing a four-tiered descriptive rating
      system.





Legislation and Regulatory
Changes.  From time to time, Congress or the Pennsylvania
legislature enacts legislation which has the effect of increasing the cost of
doing business, limiting or expanding permissible activities or affecting the
competitive balance between banks and other financial
institutions.  Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, and before various bank regulatory
agencies.  Management cannot predict the likelihood of any major
changes or the impact such changes might have on UNFC and its
subsidiary.  The following paragraphs discuss legislative or
regulatory changes of potential significance to UNFC which Congress has recently
enacted and others which Congress or various regulatory or professional agencies
currently are discussing.





The
Federal Reserve Board, the Federal Deposit Insurance Corporation and the
Comptroller of the Currency have issued certain risk-based capital guidelines,
which supplement existing capital requirements.  The guidelines
require all United States banks and bank holding companies to maintain a minimum
risk-based capital ratio of 8%, of which at least 4% must be in the form of
common stockholders' equity.  Assets are assigned to five risk
categories, with higher levels of capital required for the categories perceived
as representing greater risk.  The required capital will represent
equity and (to the extent permitted) nonequity capital as a percentage of total
risk-weighted assets.  The risk-based capital rules are designed to
make regulatory capital requirements more sensitive to differences in risk
profiles among banks and bank holding companies and to minimize disincentives
for holding liquid assets.  On the basis of an analysis of the rules
and the projected composition of UNFC's consolidated assets, management does not
believe that the risk-based capital rules have a material effect on UNFC's
business and capital plans.  The Bank has capital ratios exceeding the
regulatory requirements and meets the Bank regulatory criteria to be considered
“well capitalized”.  For information concerning UNFC’s and the Bank’s
capital ratios, see Note 15 on page 26 in UNFC's Annual Report to Shareholders
for the year ended December 31, 2008, which is included in Exhibit 13 and
incorporated herein by reference.





Pending
Legislation.  Management cannot anticipate what changes
Congress may enact or, if enacted, their impact on UNFC’s financial position and
reported results of operations.  As a consequence of the extensive
regulation of commercial banking activities in the United States, UNFC’s and the
Bank’s businesses may be adversely affected by federal and state legislation and
regulations that may increase the costs of doing business. See also pages 26 and
63 in UNFC's Annual Report to Shareholders for the year ended December 31, 2008,
which is included in Exhibit 13 and incorporated herein by
reference.





Effects of
Inflation.  Inflation has some impact on our operating costs,
but unlike many other corporations, substantially all of our assets and
liabilities are monetary in nature.  As a result, changes in 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.





6




Monetary
Policy.  Domestic economic conditions and the monetary and
fiscal policies of the United States Government and its agencies affect the
earnings of UNFC and the Bank.  An important function of the Federal
Reserve System is to regulate the money supply and interest
rates.  Among the instruments used to implement those objectives are
open market operations in United States government securities and changes in
reserve requirements against member bank deposits.  The Federal
Reserve uses these instruments in varying combinations to influence overall
growth and distribution of bank loans, investments and deposits, and their use
may also affect rates charged on loans or paid for deposits.





Union
National Community Bank is a member of the Federal Reserve
System.  The policies and regulations of the Federal Reserve Board
have a significant effect on the Bank’s deposits, loans and investment growth,
as well as the rate of interest earned and paid, and are expected to affect the
Bank's operations in the future.  The effect of Federal Reserve Board
policies and regulations upon the future business and earnings of UNFC and the
Bank cannot be predicted.





Environmental
Laws.  Neither UNFC nor the Bank anticipates that compliance
with environmental laws and regulations will have any material effect on
capital, expenditures, earnings or on its competitive
position.  However, environmentally related hazards have become a
source of high risk and potentially unlimited liability for financial
institutions.  Environmentally contaminated properties owned by an
institution’s borrowers may result in a drastic reduction in the value of the
collateral securing the institution’s loans to such borrowers, high
environmental clean up costs to the borrower affecting its ability to repay the
loans, the subordination of any lien in favor of the institution to a state or
federal lien securing clean up costs, and liability to the institution for clean
up costs if it forecloses on the contaminated property or becomes involved in
the management of the borrower.  To minimize this risk, the Bank may
require an environmental examination of and report with respect to the property
of any borrower or prospective borrower if circumstances affecting the property
indicate a potential for contamination, taking into consideration a potential
loss to the institution in relation to the borrower.  Such examination
must be performed by an engineering firm experienced in environmental risk
studies and acceptable to the institution, and the cost of such examinations and
reports are the responsibility of the borrower.  These costs may be
substantial and may deter a prospective borrower from entering into a loan
transaction with the Bank.  UNFC is not aware of any borrower who is
currently subject to any environmental investigation or clean up proceeding that
is likely to have a material adverse effect on the financial condition or
results of operations of the Bank.





As
discussed above, there are several federal and state statutes that regulate the
obligations and liabilities of financial institutions pertaining to
environmental issues.  In addition to the potential for attachment of
liability resulting from its own actions, a bank may be held liable under
certain circumstances for the actions of its borrowers, or third parties, when
such actions result in environmental problems on properties that collateralize
loans held by a bank.  Further, the liability has the potential to far
exceed the original amount of the loan issued by a bank.  Currently,
neither UNFC nor the Bank is a party to any pending legal proceeding pursuant to
any environmental statute, nor is UNFC or the Bank aware of any circumstances
that may give rise to liability under any such statute.





Gramm-Leach-Bliley
Act.  Gramm-Leach-Bliley permits commercial banks to affiliate
with investment banks. It also permits bank holding companies which elect
financial holding company status to engage in any type of financial activity,
including securities, insurance, merchant banking/equity investment and other
activities that are financial in nature. The merchant banking provisions allow a
bank holding company to make a controlling investment in any kind of company,
financial or commercial. These powers allow a bank to engage in virtually every
type of activity currently recognized as financial or incidental or
complementary to a financial activity. A commercial bank that wishes to engage
in these activities is required to be well capitalized, well managed and have a
satisfactory or better Community Reinvestment Act rating. Gramm-Leach-Bliley
also allows subsidiaries of banks to engage in a broad range of financial
activities that are not permitted for banks themselves.  UNFC has not
elected financial holding company status at this time, however,
Gramm-Leach-Bliley enables UNFC and the Bank to evaluate new financial
activities that would complement the products already offered to enhance
non-interest income.





7




Sarbanes-Oxley Act of
2002.  The Sarbanes-Oxley Act of 2002 implemented a broad range
of corporate governance, accounting and reporting measures for companies that
have securities registered under the Exchange Act, including publicly-held bank
holding companies.  The more significant reforms of the Sarbanes-Oxley
Act of 2002 include: (1) new requirements for audit committees, including
independence, expertise, and responsibilities; (2) certification of financial
statements by the Chief Executive Officer and Chief Financial Officer of the
reporting company; (3) new standards for auditors and regulation of audits,
including independence provisions that restrict non-audit services that
accountants may provide to their audit clients; (4) increased disclosure and
reporting obligations for the reporting company and their directors and
executive officers, including accelerated reporting of stock transactions and a
prohibition on trading during pension blackout periods; and (5) a range of new
and increased civil and criminal penalties for fraud and other violations of the
securities laws.  Section 404 of the Sarbanes-Oxley Act required UNFC
to include in its Annual Report of Form 10-K a report on management’s assessment
of the effectiveness of internal control over financial reporting as of December
31, 2008.  To support our report on the internal control over
financial reporting, we used contracted, independent internal audit services to
identify, document and test key controls over the financial reporting
process.  In 2009, we expect to incur additional external audit costs
associated with complying with the provisions of Sarbanes-Oxley requiring a
report by the independent external auditors on the effectiveness of internal
control over financial reporting.  We expect the additional costs
associated with this requirement to be $30,000 pretax for the year-ended
December 31, 2009.





USA Patriot
Act.  The Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA
Patriot Act) imposes additional obligations on financial institutions, including
banks and broker-dealer subsidiaries, to implement policies, procedures and
controls which are reasonably designed to detect and report instances of money
laundering and the financing of terrorism.  In addition, provisions of
the USA Patriot Act require the federal financial institution regulatory
agencies to consider the effectiveness of a financial institution’s anti-money
laundering activities when reviewing bank mergers and bank holding company
acquisitions.





As a
public company, UNFC is subject to the Securities and Exchange Commission’s
rules and regulations relating to periodic reporting, proxy solicitation and
insider trading.





Supervision and Regulation -
Union National Community Bank





The
operations of Union National Community Bank are subject to federal and state
statutes applicable to banks chartered under the banking laws of the United
States, to members of the Federal Reserve System and to banks whose deposits are
insured by the FDIC.  Bank operations are also subject to regulations
of the Office of the Comptroller of the Currency, the Federal Reserve Board and
the FDIC.





The
primary supervisory authority of the Bank is the Office of the Comptroller of
the Currency, which regulates and examines the Bank.  The Comptroller
of the Currency has the authority under the Financial Institutions Supervisory
Act to prevent a national bank from engaging in an unsafe or unsound practice in
conducting its business.








8




As a
subsidiary of a bank holding company, the Bank is subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the parent bank holding company or its subsidiaries, on investments in the stock
or other securities of the Bank holding company or its subsidiaries, and on
taking such stock or securities as collateral for loans.  The Federal
Reserve Act and Federal Reserve Board regulations also place certain limitations
and reporting requirements on extensions of credit by a bank to principal
shareholders of its parent holding company, among others, and to related
interests of such principal shareholders.  In addition, such
legislation and regulations may affect the terms upon which any person becoming
a principal shareholder of a holding company may obtain credit from banks with
which the subsidiary bank maintains a correspondent relationship.





The Union
National Insurance Agency, Inc. provides insurance-related products to the
Bank’s customers.  The agency is subject to supervision and regulation
by the Insurance Department of the Commonwealth of Pennsylvania, the Office of
the Comptroller of Currency and other regulatory agencies.





Other.  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 Bank’s
business.  It cannot be predicted whether any such legislation will be
adopted or, if adopted, how such legislation would affect the Bank’s
business.  As a consequence of the extensive regulation of commercial
banking activities in the United States, the Bank’s business is particularly
susceptible to being affected by federal legislation and regulations that may
increase the costs of doing business.  Additional information on
regulatory activity and the potential impact to Union National for 2009 is
incorporated herein by reference to page 63 of Union National Financial
Corporation's Annual Report to Shareholders for the year ended December 31,
2008, which is included in Exhibit 13 to this Annual Report on Form
10-K.





Statistical
Data.  The information required by this Item is incorporated by
reference from pages 39 through 68 of UNFC’s Annual Report to Shareholders for
the year ended December 31, 2008.





Employees.  As
of March 23, 2009, the Bank had 125 full-time and 25 part-time employees, of
which, no one is represented by a collective bargaining
agent.   Management believes it has good relations with its
personnel.





The
Corporation’s website address is www.uncb.com.  The
Corporation makes available free of charge its Annual Report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports as soon as reasonably practicable after it electronically files
such reports with the Securities and Exchange Commission.  Copies of
such reports are available at no charge by contacting Michael D. Peduzzi, Chief
Financial Officer and Treasurer of Union National Financial Corporation, 570
Lausch Lane, Suite 300, Lancaster, Pennsylvania 17601.  (The
information found on the Corporation’s website does not constitute a part of
this or any other report.)





ITEM
      1A.
            RISK
      FACTORS.





An
investment in UNFC’s common stock is subject to risks inherent to our business.
The material risks and uncertainties that management believes affect us are
described below. Before making an investment decision, you should carefully
consider the risks and uncertainties described below together with all of the
other information included or incorporated by reference in this report. The
risks and uncertainties described below are not the only ones facing us.
Additional risks and uncertainties that we not aware of or focused on or that we
currently deem immaterial may also impair our business operations. This report
is qualified in its entirety by these risk factors.




If any of
the following risks actually occur, our financial condition and results of
operations could be materially and adversely affected. If this were to happen,
the value of our common stock could decline significantly, and you could lose
all or part of your investment.




9




The
soundness of other financial institutions may adversely affect us.





Financial
services institutions are interrelated as a result of trading, clearing,
counterparty, or other relationships. The Corporation has exposure to many
different industries and counterparties, and routinely executes transactions
with counterparties in the financial services industry, including commercial
banks, brokers and dealers, investment banks, and other institutional clients.
Many of these transactions expose the Corporation to credit risk in the event of
a default by a counterparty or client. In addition, the Corporation’s credit
risk may be exacerbated when the collateral held by the Corporation cannot be
realized upon or is liquidated at prices not sufficient to recover the full
amount of the credit or derivative exposure due to the Corporation. Any such
losses could have a material adverse affect on the Corporation’s financial
condition and results of operations.





Current
levels of market volatility are unprecedented and may have materially adverse
effects on our liquidity and financial condition.





The
capital and credit markets have been experiencing extreme volatility and
disruption for more than 12 months. In recent weeks, the volatility and
disruption have reached unprecedented levels. In some cases, the markets have
exerted downward pressure on stock prices, security prices and credit capacity
for certain issuers without regard to those issuers’ underlying financial
strength.  If the current levels of market disruption and volatility
continue or worsen, there can be no assurance that we will not experience
adverse effects, which may be material, on our liquidity, financial condition
and profitability.





We
are Subject to Interest Rate Risk, and Variations in Interest Rates May
Negatively Affect our Financial Performance.





Changes
in the interest rate environment may reduce profits. Our primary source of
income is the differential or “spread” between the interest earned on loans,
securities and other interest-earning assets, and interest paid on deposits,
borrowings and other interest-bearing liabilities. As prevailing interest rates
change, net interest spreads are affected by the difference between the
maturities and repricing characteristics of interest-earning assets and
interest-bearing liabilities. In addition, loan volume and yields are affected
by market interest rates on loans, and rising interest rates generally are
associated with a lower volume of loan originations.  Substantial
decreases in the general level of interest rates may reduce our net interest
spread and margin as a substantial portion of our wholesale borrowings are at
fixed interest rates.  An increase in the general level of interest
rates may also adversely affect the ability of certain borrowers to pay the
interest on and principal of their obligations. Although we believe we have
implemented effective asset and liability management strategies to reduce the
potential effects of changes in interest rates on the results of operations, any
substantial, unexpected and/or prolonged change in market interest rates could
have a material adverse effect on our net interest spread, asset quality, loan
origination volume and overall profitability.





We
are Subject to Lending Risk





There are
inherent risks associated with our lending activities. These risks include,
among other things, the impact of changes in interest rates and changes in the
economic conditions in the markets where we operate as well as those across the
Commonwealth of Pennsylvania and the United States. As noted above, increases in
interest rates and/or weakening economic conditions could adversely impact the
ability of borrowers to repay outstanding loans, or reduce the value of the
collateral securing these loans. We are also subject to various laws and
regulations that affect our lending activities. Failure to comply with
applicable laws and regulations could subject us to regulatory enforcement
action that could result in the assessment of significant civil money
penalties.





10




As of
December 31, 2008, approximately 71% of our loan portfolio consisted of
commercial, industrial, agricultural, construction, and commercial and
agricultural real estate loans.  Because our loan portfolio contains a
significant number of commercial, industrial, agricultural, construction, and
commercial and agricultural real estate loans with relatively large balances,
the deterioration of one or a few of these loans could cause a significant
increase in non-performing loans. An increase in non-performing loans could
result in a net loss of earnings from these loans, an increase in the provision
for loan and lease losses and an increase in loan charge-offs, all of which
could have a material adverse effect on our financial condition and results of
operations.





Our
Allowance for Loan and Lease Losses May Be Insufficient





Our loan
customers may not repay their loans according to their terms, and the collateral
securing the payment of their loans may be insufficient to assure repayment. We
maintain an allowance for loan and lease losses, which is a reserve established
through a provision for losses charged to expense that represents our best
estimate of probable losses that have been incurred within the existing
portfolio of loans and leases (“loans”). The allowance, in our judgment, is
necessary to reserve for estimated loan losses and risks inherent in the loan
portfolio. The level of the allowance reflects our continuing evaluation of
industry concentrations; specific credit risks; loan loss experience; current
loan portfolio quality; present economic, political and regulatory conditions;
and unidentified losses inherent in the current loan portfolio. The
determination of the appropriate level of the allowance for loan losses
inherently involves a high degree of subjectivity and requires us to make
significant estimates of current credit risks and future trends, all of which
may undergo material changes. Changes in economic conditions affecting
borrowers, new information regarding existing loans, identification of
additional problem loans and other factors, both within and outside of our
control, may require an increase in the allowance for loan losses. In addition,
bank regulatory agencies periodically review our allowance for loan losses and
may require an increase in the provision for loan losses or the recognition of
further loan charge-offs, based on judgments different than ours. Also, if
charge-offs in future periods exceed the allowance for loan losses, we will need
additional provisions to increase the allowance for loan losses. Any increases
in the allowance for loan losses will result in a decrease in net income and,
possibly, capital, and may have a material adverse effect on our financial
condition and results of operations.





We
are Subject to Extensive Government Regulation and Supervision





We are
subject to extensive federal and state regulation and supervision. Banking
regulations are primarily intended to protect depositors’ funds, federal deposit
insurance funds and the banking system as a whole, not shareholders. These
regulations affect our lending practices, capital structure, investment
practices, dividend policy and growth, among other things. Congress and federal
regulatory agencies continually review banking laws, regulations and policies
for possible changes. Changes to statutes, regulations or regulatory policies,
including changes in interpretation or implementation of statutes, regulations
or policies, could affect us in substantial and unpredictable ways. Such changes
could subject us to additional costs, limit the types of financial services and
products we may offer, and/or increase the ability of non-banks to offer
competing financial services and products, among other things. Failure to comply
with laws, regulations or policies could result in sanctions by regulatory
agencies, civil money penalties, and/or reputation damage, which could have a
material adverse effect on our business, financial condition, and results of
operations. While we have policies and procedures designed to prevent any such
violations, there can be no assurance that such violations will not occur. In
addition, we are subject to changes in federal and state tax laws, accounting
principles, and governmental economic and monetary policies. We cannot predict
whether any of these changes may adversely and materially affect us. Compliance
with the various statutes and other regulations increases our expense, requires
management's attention, and can be a disadvantage from a competitive standpoint
with respect to non-regulated competitors.  Additional information on
regulatory activity and the potential impact to Union National for 2009 is
incorporated herein by reference to page 63 of Union National Financial
Corporation's Annual Report to Shareholders for the year ended December 31,
2008, which is included in Exhibit 13 to this Annual Report on Form
10-K.





11




We
May Not be Able to Successfully Manage Growth





Continued
quality growth is a key aspect of our business strategy.  Our ability
to continue to grow depends, in part, upon our ability to:





·
            Identify
      attractive loan and investment opportunities;
  and


·
            Expand
      our core deposit base; and


·
            Obtain
      capital necessary for growth on terms that are
  favorable.





We may
need to expand our market service areas by opening new branch offices and
attracting deposits to the new locations.  We may not be able to
successfully implement an expansion strategy if attractive locations and
opportunities to expand in the future cannot be identified.  The
ability to manage growth successfully will also depend upon whether it is
possible to maintain capital levels adequate to support growth, maintain cost
controls and asset quality, and introduce new products and
services.  We anticipate that some growth will be supported through
the generation of additional deposits at existing branch locations; however, it
may be necessary to raise additional capital through other means.  Our
ability to raise capital through the sale of securities will depend primarily
upon our financial condition and the condition of financial markets at the time,
and it may not be possible to obtain additional capital in the amounts or on
terms satisfactory to us.  Future growth may be constrained if we are
unable to raise additional capital as needed.





When we
continue to expand by opening new branches, we expect to incur increased
personnel, occupancy, and other operating expenses.  These higher
expenses must be absorbed while new deposits are beginning to be generated, and
there also will be a time lag in deploying the new deposits into attractively
priced loans and other higher-yielding earning assets. Thus, our plans to grow
aggressively could depress earnings in the short run, even if the growth
strategy is well executed.





We
are Subject to Environmental Liability Risk Associated With Lending
Activities





A
significant portion of our loan portfolio is secured by real property. During
the ordinary course of business, we may foreclose on and take title to
properties securing certain loans. In doing so, there is a risk that hazardous
or toxic substances could be found on these properties. If hazardous or toxic
substances are found, we may be liable for remediation costs, as well as for
personal injury and property damage. Environmental laws may require us to incur
substantial expenses and may materially reduce the affected property’s value or
limit our ability to use or sell the affected property. In addition, future laws
or more stringent interpretations or enforcement policies with respect to
existing laws may increase our exposure to environmental liability. The
remediation costs and any other financial liabilities associated with an
environmental hazard could have a material adverse effect on our financial
condition and results of operations.




12




Declines
in value may adversely impact the investment portfolio




We
reported non-cash, other-than-temporary impairment charges totaling $1,290,000
for the year ended December 31, 2008, representing reductions in fair value
below original cost of investments on two investment securities. We may be
required to record future impairment charges on our investment securities if
they suffer further declines in value that are considered other-than-temporary.
Considerations used to determine other-than-temporary impairment status to
individual holdings include the length of time the investment has remained in an
unrealized loss position, and the percentage of unrealized loss compared to the
carrying cost of the investment, interest payment reduction or suspension,
market analyst reviews and expectations, and other pertinent news that would
affect expectations for recovery or further decline.





Our
Profitability Depends Significantly on Economic Conditions in the Commonwealth
of Pennsylvania





Our
success depends primarily on the general economic conditions of the Commonwealth
of Pennsylvania and the specific local markets in which we operate. Unlike
larger national or other regional banks that are more geographically
diversified, we provide banking and financial services to customers primarily in
Lancaster County, PA. The local economic conditions in this area have a
significant impact on the demand for our products and services as well as the
ability of our customers to repay loans, the value of the collateral securing
loans, and the stability of our deposit funding sources. A significant decline
in general economic conditions, caused by inflation, recession, acts of
terrorism, outbreak of hostilities or other international or domestic
occurrences, unemployment, changes in securities markets, or other factors could
impact these local economic conditions and, in turn, have a material adverse
effect on our financial condition and results of operations.





We
Operate In a Highly Competitive Industry and Market Area





We
compete for loans, deposits and investment dollars with numerous regional and
national banks and other community banking institutions, as well as other kinds
of financial institutions and enterprises, such as securities firms, insurance
companies, savings associations, credit unions, mortgage brokers, and private
lenders. Many competitors have substantially greater resources than we do, and
operate under less stringent regulatory environments. The differences in
resources and regulations may make it harder for us to compete profitably,
reduce the rates that we can earn on loans and investments, increase the rates
we must offer on deposits and other funds, and adversely affect our overall
financial condition and earnings.





Our
ability to compete successfully depends on a number of factors, including, among
other things:


·
            The
      ability to develop, maintain and build upon long-term customer
      relationships based on top quality service, high ethical standards and
      safe, sound assets;


·
            The
      ability to expand our market
position;


·
            The
      scope, relevance and pricing of products and services offered to meet
      customer needs and demands;


·
            The
      rate at which we introduce new products and services relative to our
      competitors;


·
            Customer
      satisfaction with our level of service;
and


·
            Industry
      and general economic trends.





Failure
to perform in any of these areas could significantly weaken our competitive
position, which could adversely affect our growth and
profitability.  This could, in turn, have a material adverse effect on
our financial condition and results of operations.




13





Our
Controls and Procedures May Fail or Be Circumvented





We
regularly review and update our internal controls, disclosure controls and
procedures, and corporate governance policies and procedures. Any internal
control process and structure, however well designed and operated, can provide
only reasonable, not absolute, assurances that the internal control objectives
are met. Any failure or circumvention of our internal controls and procedures,
or unintentional failure to comply with laws and regulations related to controls
and procedures, could have a material adverse effect on our business, results of
operations, and financial condition.





New
Lines of Business or New Products and Services May Subject Us to Additional
Risk





From time
to time, we may implement new lines of business or offer new products and
services within existing lines of business. There are substantial risks and
uncertainties associated with these efforts, particularly in instances where the
markets are not fully developed.  In developing and marketing new
lines of business and/or new products and services, we may invest significant
time and resources. Initial timetables for the introduction and development of
new lines of business and/or new products or services may not be achieved and
price and profitability targets may not prove feasible. External factors, such
as compliance with regulations, competitive alternatives, and shifting market
preferences, may also impact the successful implementation of a new line of
business or a new product or service. Furthermore, any new line of business
and/or new product or service could have a significant impact on the
effectiveness of our system of internal controls. Failure to successfully manage
these risks in the development and implementation of new lines of business or
new products or services could have a material adverse effect on our business,
results of operations, and financial condition.





We
Rely On Dividends from Our Subsidiaries for Most of Our Revenue





Union
National Financial Corporation is a separate and distinct legal entity from its
subsidiaries.  It receives a substantial portion of its revenue from
dividends from its subsidiary, Union National Community Bank. These dividends
are the principal source of funds to pay dividends on our common stock and
interest and principal on our debt. Various federal and/or state laws and
regulations limit the amount of dividends that the Bank may pay. Also, our right
to participate in a distribution of assets upon a subsidiary’s liquidation or
reorganization is subject to the prior claims of the subsidiary’s creditors. In
the event the Bank is unable to pay dividends to us, we may not be able to
service debt, pay obligations, or pay dividends on our common stock. The
inability to receive dividends from the Bank could have a material adverse
effect on our business, financial condition, and results of
operations.





We
May Not be Able to Attract and Retain Skilled People





We are a
customer-focused and relationship-driven organization.  Our success
depends, in large part, on our ability to attract and retain key people. We
currently have employment agreements with certain key executive officers;
however, the existence of such agreements does not necessarily assure that we
will be able to continue to retain their services. We also maintain bank-owned
life insurance that would help cover some of the economic impact of a loss of
key personnel caused by death.  The unexpected loss of services of one
or more of our key personnel could have a material adverse impact on our
business because of their skills, knowledge of our market, years of industry
experience, and the difficulty of promptly finding qualified replacement
personnel.  Competition for the best people in most activities we
engage in can be intense, and we may not be able to hire people or to retain
them.




14





Our
Information Systems May Experience an Interruption or Breach in
Security





We rely
heavily on communications and information systems to conduct our business. Any
failure, interruption, or breach in security of these systems could result in
failures or disruptions in our customer relationship management, general ledger,
deposit, loan, and other systems. While we have policies and procedures designed
to prevent or limit the effect of the failure, interruption, or security breach
of our information systems, there can be no assurance that any such failures,
interruptions, or security breaches will not occur or, if they do occur, that
they will be adequately addressed. The occurrence of any failures,
interruptions, or security breaches of our information systems could damage our
reputation, result in a loss of customer business, subject us to additional
regulatory scrutiny, or expose us to civil litigation and possible financial
liability, any of which could have a material adverse effect on our financial
condition and results of operations.





We
Continually Encounter Technological Change





The
financial services industry is continually undergoing rapid technological change
with frequent introductions of new technology-driven products and services. The
effective use of technology increases efficiency and enables financial
institutions to better serve customers and to reduce costs. Our future success
depends, in part, upon our ability to address the needs of our customers by
using technology to provide products and services that will satisfy customer
demands, as well as to create additional efficiencies in our operations. Many of
our competitors have substantially greater resources to invest in technological
improvements. We may not be able to effectively implement new technology-driven
products and services or be successful in marketing these products and services
to our customers. Failure to successfully keep pace with technological change
affecting the financial services industry could have a material adverse impact
on our business and, in turn, our financial condition and results of
operations.





Technology
and other changes are allowing parties to complete financial transactions that
historically have involved banks through alternative methods. For example,
consumers can now maintain funds that would have historically been held as bank
deposits in brokerage accounts or mutual funds. Consumers can also complete
transactions such as paying bills and/or transferring funds directly, without
the assistance of banks. The process of eliminating banks as intermediaries,
known as “disintermediation,” could result in the loss of fee income, as well as
the loss of customer deposits and the related income on earning assets that
could be generated from those deposits. The loss of these revenue streams and
the possible reduction of deposits as a source of funds could have a material
adverse effect on our financial condition and results of
operations.





We
are Subject to Claims and Litigation Pertaining to Fiduciary
Responsibility





From time
to time, customers may make claims and take legal action pertaining to our
performance of our fiduciary responsibilities. Whether customer claims and legal
action related to our performance of fiduciary responsibilities are founded or
unfounded, if such claims and legal actions are not resolved in a manner
favorable to us they may result in significant financial liability and/or
adversely affect the market perception of us and our products and services as
well as impact customer demand for those products and services. Any financial
liability or reputation damage could have a material adverse effect on our
business, which, in turn, could have a material adverse effect on our financial
condition and results of operations.




15





Severe
Weather, Natural Disasters, Acts of War or Terrorism, and Other External Events
Could Significantly Impact Our Business





Severe
weather, natural disasters, acts of war or terrorism, and other adverse external
events could have a significant impact on our ability to conduct business. Such
events could affect the stability of our deposit base, impair the ability of
borrowers to repay outstanding loans, impair the value of collateral securing
loans, cause significant property damage, result in loss of revenue, and/or
cause us to incur additional expenses. Severe weather or natural disasters, acts
of war or terrorism, or other adverse external events may occur in the future.
Although we have established disaster recovery policies and procedures, the
occurrence of any such event could have a material adverse effect on our
business, which, in turn, could have a material adverse effect on our financial
condition and results of operations.





Our
Stock Price Can Be Volatile





Stock
price volatility may make it more difficult for stockholders to resell common
stock at times and at prices suitable to their requirements. Our stock price can
fluctuate significantly in response to a variety of factors including, among
other things:





•
            Actual
      or anticipated variations in our results of operations and financial
      condition;


•
            Recommendations
      by securities analysts;


•
            Operating
      and stock price performance of other companies that investors deem
      comparable to us;


•
            News
      reports relating to trends, concerns, and other issues in the financial
      services industry;


•
            Perceptions
      in the marketplace regarding us and/or our
  competitors;


•
            New
      technology used, or services offered, by
  competitors;


•
            Changes
      in government regulations; or


•
            Geopolitical
      conditions such as acts or threats of terrorism or military
      conflicts.





General
market fluctuations, industry factors, and general economic and political
conditions and events, such as economic slowdowns or recessions, interest rate
changes, or credit loss trends, could also cause our stock price to decrease
regardless of operating results.





The
Trading Volume in Our Common Stock is Less Than That of Some Other Financial
Services Companies





Our
common stock is traded on the OTC Bulletin Board and the trading volume is less
than that of many other financial services companies. A public trading market
having the desired characteristics of depth, liquidity, and orderliness depends
on the presence in the marketplace of willing buyers and sellers of our common
stock at any given time. This presence depends on the individual decisions of
investors and general economic and market conditions over which we have no
control. Given the lower trading volume of our common stock, significant sales
of the common stock or the expectation of these sales could cause our stock
price to fall.





Our
Articles of Incorporation, By-Laws and Certain Banking Laws May Have an
Anti-Takeover Effect





Provisions
of our articles of incorporation and by-laws, and federal banking laws,
including regulatory approval requirements, could make it more difficult for a
third party to acquire Union National, even if doing so would be perceived to be
beneficial to our stockholders. The combination of these provisions effectively
inhibits a non-negotiated merger or other business combination, which, in turn,
could adversely affect the market price of our common stock.





16




ITEM
      1B.
            UNRESOLVED STAFF
      COMMENTS.





None.





ITEM
      2.
            PROPERTIES.





The Bank
owns six branch offices, the administration services center and certain parking
facilities related to its banking offices, all of which are free and clear of
any lien.  Below is a table containing the location and date of
acquisition of the Bank’s properties.  In addition, the Bank leases
office space for four branch offices and a professional office center, which
serves as the corporate headquarters.  The Bank’s executive offices
are located at 570 Lausch Lane, Suite 300, Lancaster, Pennsylvania
17601.





PROPERTIES
OWNED BY UNION NATIONAL COMMUNITY BANK





Office and Address
              
              Description of Property
              
              Date AcquiredMount
      Joy Branch Office
                101
      East Main Street
                Mount
      Joy, PA 17552
              
              Branch
      Bank, cut limestone and brick.  1995 addition is concrete over
      steel construction containing approximately 22,251 sq. ft. of
      space.
              
              1911MotorBank
      Branch Office
                21
      North Barbara Street
                Mount
      Joy, PA 17552
              
              Drive-up
      Bank Branch, brick on frame containing approximately 445 sq. ft. of
      space.
              
              November
      1972Maytown
      Branch Office
                100
      West High Street
                Maytown,
      PA 17550
              
              Branch
      Bank, brick veneer, shingled roof with wood trusses containing
      approximately 4,960 sq. ft. of space.
              
              April
      1972Hempfield
      Branch Office
                190
      Stony Battery Road
                Salunga,
      PA 17538
              
              Branch
      Bank, brick with wood shingle roof containing approximately 4,619 sq. ft.
      of space.
              
              June
      1979Administrative
      Services Center –
                Bank
      Administration Building
                25
      North Barbara Street
                Mount
      Joy, PA 17552
              
              Brick
      on concrete block with wood and steel frame containing approximately
      12,798 sq. ft. of space.
              
              December
      1984Elizabethtown
      Branch Office
                1275
      South Market Street
                Elizabethtown,
      PA 17022
              
              Branch
      Bank, brick veneer, shingled roof with wood trusses containing
      approximately 6,808 sq. ft. of space.
              
              January
      1988Columbia
      Branch Office
                901
      Lancaster Avenue
                Columbia,
      PA 17512
              
              Branch
      Bank, one-story brick building containing approximately 2,257 sq. ft. of
      space.
              
              October
      1992Elizabethtown
      Motorbank Office
              
              Drive-up
      Bank Branch, brick on frame containing approximately 574 sq. ft. of
      space.
              
              September
      2001Centerville
      Branch Office
                301
      Centerville Road
                Lancaster,
      PA 17602
              
              Branch
      Bank, one-story masonry and brick building with metal trusses, containing
      approximately 3,575 sq. ft. of space.
              
              May
      2008




17




PROPERTY
LEASED BY UNION NATIONAL COMMUNITY BANK




Office and Address
            
            Description of Property
            
            Date AcquiredManheim
      Branch Office
              701
      Lancaster Road
              Manheim,
      PA 17545
            
            Concrete
      block building containing 4,266 sq. ft. of space, of which, approximately
      2,600 sq. ft. of space is used for banking purposes.
            
            January
      1995Manheim
      Township Branch Office
              38
      E. Roseville Road
              Lancaster,
      PA 17601
            
            Branch
      Bank, one story brick and metal siding building containing approximately
      2,000 sq. ft. of space
            
            April
      2003HACC
      Branch Office
              1625
      Old Philadelphia Pike
              Lancaster,
      PA 17602
            
            Branch
      Bank, one story masonry and brick building with metal trusses, containing
      approximately 3,486 sq. ft. of space.
            
            February
      2005Ephrata
      Branch Office
              108
      North Reading Road
              Ephrata,
      PA 17522
            
            Branch
      Bank, one story masonry and brick building with metal trusses, containing
      approximately 1,300 sq. ft. of space.
            
            April
      2007Union
      National Professional Center
              570
      Lausch Lane, Suite 300
              Lancaster,
      PA 17601
            
            Three
      story masonry, stone and brick over steel building with concrete floors,
      containing approximately 27,000 sq. ft. of office space, of which,
      approximately 9,000 sq. ft. is used for  administrative purposes
      and the remainder is sub-leased.
            
            February
      2006





In
management’s opinion, the above properties are in good condition and are
adequate for Union National Financial Corporation’s and Union National Community
Bank's purposes.





ITEM
      3.
            LEGAL
      PROCEEDINGS.





Management,
after consulting with legal counsel, is not aware of any litigation that would
have a material adverse effect on the consolidated financial position of
UNFC.  There are no proceedings pending other than ordinary routine
litigation incident to the business of UNFC and its subsidiary, Union National
Community Bank.





ITEM
      4.
            SUBMISSION OF MATTERS
      TO A VOTE OF SECURITY
HOLDERS.





None.  There
were no matters submitted to a vote of security holders during the fourth
quarter of 2008.





18





PART II





ITEM
      5.
            MARKET FOR
      REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY
SECURITIES.





Market
and dividend information required by this Item is incorporated herein by
reference to page 68 of Union National Financial Corporation's Annual Report to
Shareholders for the year ended December 31, 2008,  which is included
in Exhibit 13 to this Annual Report on Form 10-K.  Union National
Financial Corporation's common stock is traded on a limited basis in the local
over-the-counter market and on the OTCBB under the symbol UNNF.  Bid
and asked information is available on some internet websites providing financial
market news.  Information concerning actual trades is included on page
68 of Union National Financial Corporation's Annual Report to Shareholders for
the year ended December 31, 2008, and is also available on financial market
internet websites.  This information represents a limited amount of
share transfer activity.





Prior to
2008, Union National Financial Corporation and, prior to organizing as a bank
holding company, Union National Community Bank, had paid regular cash dividends
on their common stock for more than forty years.  Given the level of
earnings realized in 2007, the Board of Directors of Union National Financial
Corporation believed it prudent to temporarily suspend the payment of dividends
to ensure that a strong capital position is maintained.  Union
National Financial Corporation expects to restore payment of future dividends;
however, payment of such dividends will depend upon earnings of Union National
Financial Corporation and of Union National Community Bank, their financial
condition, capital requirements and other factors, such as regulatory and legal
requirements.  It is anticipated that substantially all of the funds
available for the payment of dividends by Union National Financial Corporation
will be derived from dividends paid to the holding company by Union National
Community Bank.





Securities
Authorized for Issuance under Equity Compensation Plans





The
following table discloses the number of outstanding options, warrants and rights
granted by the Corporation to participants in equity compensation plans, as well
as the number of securities remaining available for future issuance under these
plans, as of December 31, 2008.  The table provides this information
separately for equity compensation plans that have and have not been approved by
security holders.





(A)
                      
                      
                      (B)
                      
                      
                      (C)Number of Securities
                        to be Issued Upon Exercise
                        of Outstanding Options,
                        Warrants, and Rights
                      
                      
                      Weighted Average Exercise
                        Price of Outstanding
                        Options,
                        Warrants, and Rights
                      
                      
                      Number of Securities
                        Remaining Available for Future Issuance Under
                        Equity Compensation Plans Excluding Securities
                        Reflected in Column (A)Equity Compensation
      Plans Approved by Shareholders(1)
                      
                      
                      93,511
                      
                      
                      $
                      18.82
                      
                      
                      
                      0Equity
      Compensation Plans Not Approved by Shareholders
                      
                      
                      0
                      
                      
                      
                      0.00
                      
                      
                      
                      0Totals
                      
                      
                      93,511
                      
                      
                      $
                      18.82
                      
                      
                      
                      0





(1)
Includes outstanding options issued under Union National Financial Corporation’s
1988 and 1997 Stock Incentive Plans, 1997 Stock Purchase Plan (which expired in
2003) and 1997 Independent Director Plan (expired).





Additional
information required by this item regarding dividend restrictions is
incorporated herein by reference to Note 15 on page 26 and to page 63 of Union
National Financial Corporation's Annual Report to Shareholders for the year
ended December 31, 2008, which is included in Exhibit 13 to this Annual Report
on Form 10-K.





As of
March 23, 2009, there were approximately 1,405 holders of record of UNFC's
common stock.





19





Issuer
Purchases of Equity Securities:





Period
                              
                              Total Number of
                                Shares Purchased
                              
                              
                              Average Price Paid
                                per Share
                              
                              
                              Total Number of Shares
                                Purchased as Part of
                                Publicly Announced
                                Plansor Programs*
                              
                              
                              Maximum Number of
                                Shares that May Yet
                                BePurchased Under
                                thePlans or Programs*October
      1, 2008 to October 31, 2008
                              
                              
                              0
                              
                              
                              $
                              0.00
                              
                              
                              
                              0
                              
                              
                              
                              49,700November
      1, 2008 to November 30, 2008
                              
                              
                              0
                              
                              
                              $
                              0.00
                              
                              
                              
                              0
                              
                              
                              
                              49,700December
      1, 2008 to December 31, 2008
                              
                              
                              0
                              
                              
                              $
                              0.00
                              
                              
                              
                              0
                              
                              
                              
                              49,700Total
                              
                              
                              0
                              
                              
                              $
                              0.00
                              
                              
                              
                              0





*
              On
      April 21, 2005, the Board of Directors of Union National authorized and
      approved a plan to purchase up to 100,000 shares of its outstanding common
      stock in open market or privately negotiated
  transactions.




Union National’s stock performance
graph on page 66 of the Union National Financial Corporation Annual Report to
Shareholders for the year ended December 31, 2008 is herein incorporated by
reference.




20




ITEM
      6.
            SELECTED FINANCIAL
      DATA.





The
information required by this Item is incorporated herein by reference from page
67 of Union National Financial Corporation's Annual Report to Shareholders for
the year ended December 31, 2008, which is included in Exhibit 13 to this Annual
Report on Form 10-K.




ITEM
      7.
            MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.





The
information required by this Item is incorporated by reference from pages 39
through 64 of Union National Financial Corporation's Annual Report to
Shareholders for the year ended December 31, 2008, which pages are included in
Exhibit 13 to this Annual Report on Form 10-K.





ITEM
      7A.
            QUANTITATIVE AND
      QUALITATIVE DISCLOSURE ABOUT MARKET
RISK.





The
information required by this Item is incorporated herein by reference from pages
61 through 63 of Union National Financial Corporation's Annual Report to
Shareholders for the year ended December 31, 2008, which pages are included in
Exhibit 13 to this Annual Report on Form 10-K.





ITEM
      8.
            FINANCIAL STATEMENTS
      AND SUPPLEMENTARY DATA.





The
information required by this Item is incorporated herein by reference from pages
2 through 35 of Union National Financial Corporation's Annual Report to
Shareholders for the year ended December 31, 2008, which pages are included in
Exhibit 13 to this Annual Report on Form 10-K.





ITEM
      9.
            CHANGES IN AND
      DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.





None.





ITEM
      9A(T).
            CONTROLS AND
      PROCEDURES





(a)           Evaluation
of disclosure controls and procedures.





Under the
supervision and with the participation of management, including the Chief
Executive Officer and Chief Financial Officer, the effectiveness of the design
and operation of the Corporation’s disclosure controls and procedures (as
defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, as amended
(the Exchange Act), was evaluated as of December 31, 2008.  Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Corporation’s disclosure controls and procedures were
effective in alerting them to the material information relating to the
Corporation (or the Corporation’s consolidated subsidiaries) required to be
included in its periodic SEC filings.




(b)           The
Report on Management’s Assessment of Internal Control over Financial Reporting
on page 66 of the Union National Financial Corporation Annual Report to
Shareholders for the year ended December 31, 2008 is herein incorporated by
reference.




21




(c)           Changes
in internal controls.





There
were no changes made in the Corporation’s internal controls during the period
covered by this report or, to management’s knowledge, in other factors that have
materially affected or are reasonably likely to materially affect these controls
subsequent to the date of management’s evaluation.





ITEM
      9B.
            OTHER
      INFORMATION





None.





22





PART III





ITEM
      10.
            DIRECTORS, EXECUTIVE
      OFFICERS, AND CORPORATE
GOVERNANCE.





The
information required by this Item is incorporated herein by reference from the
information under the captions “Election of Directors – Information about
Nominees and Continuing Directors”, “Share Ownership – Executive Officers”,
“Section 16(a) Beneficial Ownership Reporting Compliance”, “Governance of the
Company – Nomination of Directors” and “Governance of the Company – Meetings and
Committees of the Board of Directors” of Union National Financial Corporation's
Proxy Statement for its 2009 Annual Meeting of Shareholders.  As of
July 2003, Union National Financial Corporation put in place the Directors and
Senior Management Code of Ethics.  The code of ethics encourages
individuals to report any conduct that they believe in good faith to be an
actual or apparent violation of the code of ethics.  The code of
ethics is incorporated herein by reference from Exhibit 14, filed
herewith.





ITEM
      11.
            EXECUTIVE
      COMPENSATION.





The
information required by this Item is incorporated herein by reference from the
information under the captions “Compensation and Plan Information”, “Potential
Payments Upon Termination or Change-In-Control”, “Compensation Discussion and
Analysis”, “Compensation Committee Report” and “Compensation Committee
Interlocks and Insider Participation” of Union National Financial Corporation's
Proxy Statement for its 2009 Annual Meeting of Shareholders.





ITEM
      12.
            SECURITY OWNERSHIP OF
      CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS.





The
information required by this Item is incorporated herein by reference from the
information under the caption “Share Ownership” of Union National Financial
Corporation's Proxy Statement for its 2009 Annual Meeting of
Shareholders.  The information related to Equity Compensation Plans as
required is incorporated herein by reference to Part II, Item 5 of this Annual
Report on Form 10-K.





ITEM
      13.
            CERTAIN RELATIONSHIPS
      AND RELATED TRANSACTIONS, AND DIRECTOR
  INDEPENDENCE.





The
information required by this Item is incorporated herein by reference from the
information under the captions “Transactions with Directors and Executive
Officers” and “Governance of the Company – Director Independence” of Union
National Financial Corporation's Proxy Statement for its 2009 Annual Meeting of
Shareholders.





ITEM
      14.
            PRINCIPAL ACCOUNTING
      FEES AND SERVICES.





The
information required by this Item is incorporated herein by reference from the
information under the caption “Report of the Audit Committee” of Union National
Financial Corporation’s Proxy Statement for its 2009 Annual Meeting of
Shareholders.





23





PART IV





ITEM
      15.
            EXHIBITS, FINANCIAL
      STATEMENT SCHEDULES





(a)        1.
            Financial
      Statements.


The
following financial statements are included by reference in Part II, Item 8
hereof.





Consolidated
Statements of Financial Condition


Consolidated
Statements of Income


Consolidated
Statements of Changes in Stockholders' Equity


Consolidated
Statements of Cash Flows


Notes to
Consolidated Financial Statements


Report of
Management’s Assessment of Internal Control Over Financial
Reporting


Report of
Independent Registered Public Accounting Firm





2.
            The
      financial statement schedules required by this Item are omitted because
      the information is either inapplicable, not required or is in the
      consolidated financial statements as a part of this
  Report.





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





3(i)
            Union
      National Community Bank’s Amended Articles of
      Incorporation.  (Incorporated by reference to Exhibit 3(i) to
      Union National Financial Corporation’s Registration Statement No.
      333-27837 on Form S-8, filed with the Commission on May 27,
      1997.)





3(ii)
            Union
      National Financial Corporation’s Amended and Restated
      By-laws.   (Incorporated by reference to Exhibit 3(ii) to
      Union National Financial Corporation’s current report on Form 8-K, filed
      with the Commission on February 27,
2009.)





4
            Rights
      Agreement, dated August 27, 2007, between Registrar and Transfer Company
      and Union National Financial Corporation.  (Incorporated by
      reference to Exhibit 4 to Union National Financial Corporation’s current
      report on Form 8-K, filed August 30,
2007.)





10.1
            Union
      National Financial Corporation 1988 Stock Incentive Plan. (Incorporated by
      reference to Exhibit 4.3 to Union National Financial Corporation’s
      Registration Statement No. 333-27837 on Form S-8, filed with the
      Commission on May 27, 1997.)





10.2
            Union
      National Financial Corporation 1997 Stock Incentive
      Plan.  (Incorporated by reference to Exhibit 4.5 to Union
      National Financial Corporation’s Registration Statement No. 333-27837 on
      Form S-8, filed with the Commission on May 27, 1997 and incorporated by
      reference to Amendment 1 to Union National Financial Corporation’s
      Registration Statement No. 333-107326 on Form S-8 filed with the
      commission on July 25, 2003.)





10.3
            Union
      National Financial Corporation’s Employee Stock Purchase Plan
      (Incorporated by Reference to Exhibit 4.4 to Union National Financial
      Corporation’s Registration Statement No. 333-27837 on Form S-8, filed with
      the Commission on May 27, 1997).





24




10.4
            Group
      Term Replacement Plan for Certain Officers, CEO, dated January 1, 2004
      between Mark D. Gainer and Union National Community
      Bank.  (Incorporated by reference to Exhibit 10.12 to Union
      National Financial Corporation’s Annual Report on Form 10-K, filed with
      the Commission on March 30, 2004.)





10.5
            Union
      National Financial Corporation, 1999 Independent Directors Stock Option
      Plan.  (Incorporated by Reference to Exhibit 4.3 to Union
      National Financial Corporation’s Registration Statement No. 333-80739 on
      Form S-8, filed with the Commission on June 15,
  1999.)





10.6
            Board
      of Director Fees




10.7
              Office
      Lease between Lausch Lane Associates LP as Landlord
      and  Union  National Community Bank as Tenant for 570
      Lausch Lane, Lancaster,  PA 17601. (Incorporated by reference to
      Exhibit 99.1 to Union National Financial Corporation’s Current Report of
      Form 8-K, filed with the Commission on May 17,
  2005.)
 
 10.8
              Employment
      agreement between Michael A. Frey, Executive Vice  President and
      Chief Operating Officer and Union National Financial Corporation and its
      subsidiary, Union National Community Bank. (Incorporated by reference to
      Exhibit 99.1 to Union National Financial Corporation’s Current Report of
      Form 8-K, filed with the Commission on June 23,
  2005.)




10.9
            Amended
      and Restated Employment Agreement and Amended and Restated Executive
      Salary Continuation Agreement dated as of December 29, 2006, with Mark D.
      Gainer, Chairman, President and Chief Executive
      Officer.  (Incorporated by reference to Exhibit 10.15 to Union
      National Financial Corporation’s 2006 Annual Report on Form 10-K, filed
      with the Commission on March 28,
2007.)





10.10
            Amended
      and Restated Declaration of Trust of Union National Capital Trust II,
      dated as of October 14, 2004, among Union National Financial Corporation,
      as sponsor, the Delaware and institutional trustee named therein, and the
      administrators named therein.  (Incorporated by reference to
      Exhibit 10.15 to Union National Financial Corporation’s 2006 Annual Report
      on Form 10-K, filed with the Commission on March 28,
  2007.)





10.11
            Indenture,
      dated as of October 14, 2004, between Union National Financial
      Corporation, as issuer, and the trustee named therein, relating to the
      Junior Subordinated Debt Securities due 2034.  (Incorporated by
      reference to Exhibit 10.15 to Union National Financial Corporation’s 2006
      Annual Report on Form 10-K, filed with the Commission on March 28,
      2007.)





10.12
            Guarantee
      Agreement, dated as of October 14, 2004, between Union National Financial
      Corporation and the guarantee trustee named
      therein.  (Incorporated by reference to Exhibit 10.15 to Union
      National Financial Corporation’s 2006 Annual Report on Form 10-K, filed
      with the Commission on March 28,
2007.)





25




10.13
            Indenture,
      dated as of July 27, 2006, between Union National Community Bank, as
      issuer, and the trustee named therein, relating to the Junior Subordinated
      Debt Securities due 2036.  (Incorporated by reference to Exhibit
      4 to Union National Financial Corporation’s quarterly  report on
      Form 10-Q, filed with the Commission on August 14,
  2006.)





10.14
            Employment
      Agreement, dated March 8, 2007, between Stephen D. Staman, Executive Vice
      President and Chief Revenue Officer and Union National Financial
      Corporation and its subsidiary, Union National Community
      Bank.  (Incorporated by reference to Exhibit 10.16 to Union
      National Financial Corporation’s 2007 Annual Report on Form 10-K, filed
      with the Commission on April 1,
2008.)





10.15
              Change
      of Control Agreement, dated September 4, 2007, between Michael D. Peduzzi,
      Senior Vice President, Chief Financial Officer and Union National
      Financial Corporation and its subsidiary, Union National Community
      Bank.  (Incorporated by reference to Exhibit 99.1 to Union
      National Financial Corporation’s current report on Form 8-K, filed with
      the Commission on September 6,
2007.)





10.16
            Form
      of Change of Control Agreement among Union National Financial Corporation,
      Union National Community Bank and each of the following officers: Michael
      L. Maurer and Bradley A. Willow, filed August 13, 2008, as Item 10.18
      to Form 10-Q for the fiscal quarter ended June 30, 2008
      (No. 0-19214) and incorporated herein by
  reference.





10.17
            Form
      of Change of Control Agreement among Union National Financial Corporation,
      Union National Community Bank and each of the following officers: R.
      Michael Mohn and Steve D. Garber, filed August 13, 2008, as
      Item 10.19 to Form 10-Q for the fiscal quarter ended June 30,
      2008 (No. 0-19214) and incorporated herein by
    reference.





10.18
              Stock
      Bonus Plan and the 2009 Stock Purchase Plan, dated November 26, 2008.
      (Incorporated by reference to Exhibit 99.1 to Union National Financial
      Corporation’s current report on Form 8-K, filed with the Commission on
      December 3, 2008.)





13
            Excerpts
      from Union National Financial Corporation’s Annual Report to Shareholders
      for the year ended December 31,
2008.





14
            Union
      National Financial Corporation Directors and Senior Management Code of
      Ethics, filed herewith.





21
            Subsidiaries
      of the Union National Financial
Corporation.





23.1
            Consent
      of Beard Miller Company LLP, Independent Registered Public Accounting
      Firm.





31.1
            Certification
      of Principal Executive Officer Pursuant to Exchange Act Rules
      13a-14(a)/15d-14(a) as added by Section 302 of the Sarbanes-Oxley Act of
      2002.





26




31.2
            Certification
      of Principal Financial Officer Pursuant to Exchange Act Rules
      13a-14(a)/15d-14(a) as added by Section 302 of the Sarbanes-Oxley Act of
      2002.





32
            Certification
      of Principal Executive Officer and Principal Financial Officer Pursuant to
      U.S.C. Section 1350 as added by Section 906 of the Sarbanes-Oxley Act of
      2002.





(b)
            The
      exhibits required to be filed by this Item are listed under Item 15(a)3,
      above.





(c)
            NOT
      APPLICABLE.





27





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.




UNION NATIONAL FINANCIAL
      CORPORATION(Registrant)By
                /s/ Mark D. GainerMark
      D. Gainer,Chairman
      of the Board of Directors,Chief
      Executive Officer and PresidentDate:
      March 30,
2009





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of Union National Financial
Corporation and in the capacities and on the dates indicated.





DateBy
            /s/
      Mark D. Gainer
            
            
            March
      30, 2009Mark
      D. Gainer,
              Chairman
      of the Board of Directors, Chief Executive Officer and
              President
      (principal executive officer)By
            /s/
      Michael D. Peduzzi, CPA
            
            
            March
      30, 2009Michael
      D. Peduzzi, CPA,
              Chief
      Financial Officer (principal financial officer and principal accounting
      officer)By
            /s/
      Donald Cargas, Jr.
            
            
            March
      30, 2009Donald
      Cargas, Jr., DirectorBy
            /s/
      Kevin D. Dolan
            
            
            March
      30, 2009Kevin
      D. Dolan, DirectorBy
            /s/
      James R. Godfrey
            
            
            March
      30, 2009James
      R. Godfrey, DirectorBy
            /s/
      Barry C. Huber, CPA
            
            
            March
      30, 2009Barry
      C. Huber, CPA, DirectorBy
            /s/
      Thomas J. McGrath, DVM
            
            
            March
      30, 2009Thomas
      J. McGrath, DVM, DirectorBy
            /s/
      William M. Nies
            
            
            March
      30, 2009William
      M. Nies, DirectorBy
            /s/
      Darwin A. Nissley
            
            
            March
      30, 2009Darwin
      A. Nissley, DirectorBy
            /s/
      Lloyd C. Pickell
            
            
            March
      30, 2009Lloyd
      C. Pickell, Director




28




EXHIBIT
INDEX




Exhibit Number10.6
              
              Board
      of Director Fees.13
              
              Excerpts
      from Union National Financial Corporation’s 2008 Annual Report to
      Shareholders.14
              
              Union
      National Financial Corporation Directors and Senior Management Code of
      Ethics21
              
              Subsidiaries
      of Union National Financial Corporation.23.1
              
              Consent
      of Beard Miller Company LLP, Independent Registered Public Accounting
      Firm.31.1
              
              Certification
      of Principal Executive Officer Pursuant to Exchange Act Rules
      13a-14(a)/15d-14(a) as added by Section 302 of the Sarbanes-Oxley Act of
      2002.31.2
              
              Certification
      of Principal Financial Officer Pursuant to Exchange Act Rules
      13a-14(a)/15d-14(a) as added by Section 302 of the Sarbanes-Oxley Act of
      2002.32
              
              Certification
      of Principal Executive Officer and Principal Financial Officer Pursuant to
      U.S.C. Section 1350 as added by Section 906 of the Sarbanes-Oxley Act of
      2002.





29