UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
   FORM
10-Q
 
  Quarterly
Report Pursuant to Section 13 or 15(d) of the
 Securities
Exchange Act of 1934
  
 For
      the quarterly period ended March 31, 2009
              Commission
      File Number 0-13823
  
 FNB
UNITED CORP.
 (Exact
name of Registrant as specified in its Charter)
  North
      Carolina
              
              56-1456589(State
      of Incorporation)
              
              (I.R.S.
      Employer Identification No.)150
      South Fayetteville StreetAsheboro,
      North Carolina
              
              27203(Address
      of principal executive offices)
              
              (Zip
      Code)
  (336)
626-8300
 (Registrant's
telephone number, including area code)
 
 
 Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No o
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes o No o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
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
                                                                                                                  o
                                                                                                                  
                                                                                                                  Accelerated
      filer
                                                                                                                  x
                                                                                                                  
                                                                                                                  Non-accelerated
      filer
                                                                                                                  o
                                                                                                                  
                                                                                                                  Smaller
      reporting company
                                                                                                                  o(Do
      not check if a smallerreporting
      company)
 
 Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes o No x
  As of May
6, 2009 (the most recent practicable date), the Registrant had outstanding
11,428,003 shares of Common Stock.
 
   
  PART
I.                    FINANCIAL
INFORMATION
 Item
1.                      Financial
Statements
  FNB
United Corp. and Subsidiary
 Consolidated
Balance Sheets (unaudited)
 
 (dollars
      in thousands, except share and per share data)
                          
                          March
      31,
                          
                          
                          December
      31,2009
                          
                          
                          2008AssetsCash
      and due from banks
                          
                          $
                          28,608
                          
                          
                          $
                          28,743Interest-bearing
      bank balances
                          
                          
                          5,390
                          
                          
                          
                          404Federal
      funds sold
                          
                          
                          235
                          
                          
                          
                          206Investment
      securities:Available
      for sale, at estimated fair value (amortized cost of$264,399 in 2009 and $206,072 in 2008)
                          
                          
                          263,108
                          
                          
                          
                          205,426Held
      to maturity (estimated fair value of $63,777 in 2009 and$27,580
      in 2008)
                          
                          
                          64,989
                          
                          
                          
                          27,794Loans
      held for sale
                          
                          
                          48,948
                          
                          
                          
                          36,138Loans
      held for investment
                          
                          
                          1,583,574
                          
                          
                          
                          1,585,195Less:  Allowance
      for loan losses
                          
                          
                          (38,573
                          )
                          
                          
                          (34,720
                          )Net
      loans held for investment
                          
                          
                          1,545,001
                          
                          
                          
                          1,550,475Premises
      and equipment, net
                          
                          
                          50,112
                          
                          
                          
                          50,947Goodwill
                          
                          
                          52,395
                          
                          
                          
                          52,395Core
      deposit premiums
                          
                          
                          5,564
                          
                          
                          
                          5,762Other
      assets
                          
                          
                          89,676
                          
                          
                          
                          86,144Total
      Assets
                          
                          $
                          2,154,026
                          
                          
                          $
                          2,044,434LiabilitiesDeposits:Noninterest-bearing
      demand deposits
                          
                          $
                          143,146
                          
                          
                          $
                          150,273Interest-bearing
      deposits:Demand,
      savings and money market deposits
                          
                          
                          539,171
                          
                          
                          
                          479,223Time
      deposits of $100,000 or more
                          
                          
                          399,774
                          
                          
                          
                          407,539Other
      time deposits
                          
                          
                          524,605
                          
                          
                          
                          477,712Total
      deposits
                          
                          
                          1,606,696
                          
                          
                          
                          1,514,747Retail
      repurchase agreements
                          
                          
                          22,572
                          
                          
                          
                          18,145Federal
      Home Loan Bank advances
                          
                          
                          172,928
                          
                          
                          
                          238,910Federal
      funds purchased
                          
                          
                          75,000
                          
                          
                          
                          37,000Subordinated
      debt
                          
                          
                          15,000
                          
                          
                          
                          15,000Junior
      subordinated debentures
                          
                          
                          56,702
                          
                          
                          
                          56,702Other
      liabilities
                          
                          
                          12,358
                          
                          
                          
                          16,013Total
      Liabilities
                          
                          
                          1,961,256
                          
                          
                          
                          1,896,517Shareholders'
      EquityPreferred
      stock, $10.00 par value; authorized 200,000 shares,51,500
      shares issued and outstanding at $1,000 stated value
                          
                          
                          47,697
                          
                          
                          
                          -Common
      stock warrant
                          
                          
                          3,891
                          
                          
                          
                          -Common
      stock, $2.50 par value; authorized 50,000,000 shares,issued
      11,428,003 shares in 2009 and 11,428,003 shares in 2008
                          
                          
                          28,570
                          
                          
                          
                          28,570Surplus
                          
                          
                          114,909
                          
                          
                          
                          114,772Retained
      earnings
                          
                          
                          2,420
                          
                          
                          
                          8,904Accumulated
      other comprehensive loss
                          
                          
                          (4,717
                          )
                          
                          
                          (4,329
                          )Total
      Shareholders' Equity
                          
                          
                          192,770
                          
                          
                          
                          147,917Total
      Liabilities and Shareholders' Equity
                          
                          $
                          2,154,026
                          
                          
                          $
                          2,044,434
 
 See
accompanying notes to consolidated financial statements.
  2
  
 FNB
United Corp. and Subsidiary
 Consolidated
Statements of Income (unaudited)
 
 (dollars
      in thousands, except share and per share data)
                                                                      
                                                                      Three
      Months Ended March 31,2009
                                                                      
                                                                      
                                                                      2008Interest
      IncomeInterest
      and fees on loans
                                                                      
                                                                      $
                                                                      21,599
                                                                      
                                                                      
                                                                      $
                                                                      27,537Interest
      and dividends on investment securities:Taxable
      income
                                                                      
                                                                      
                                                                      3,067
                                                                      
                                                                      
                                                                      
                                                                      1,893Non-taxable
      income
                                                                      
                                                                      
                                                                      600
                                                                      
                                                                      
                                                                      
                                                                      527Other
      interest income
                                                                      
                                                                      
                                                                      80
                                                                      
                                                                      
                                                                      
                                                                      253Total
      interest income
                                                                      
                                                                      
                                                                      25,346
                                                                      
                                                                      
                                                                      
                                                                      30,210Interest
      ExpenseDeposits
                                                                      
                                                                      
                                                                      8,874
                                                                      
                                                                      
                                                                      
                                                                      11,806Retail
      repurchase agreements
                                                                      
                                                                      
                                                                      33
                                                                      
                                                                      
                                                                      
                                                                      249Federal
      Home Loan Bank advances
                                                                      
                                                                      
                                                                      1,598
                                                                      
                                                                      
                                                                      
                                                                      1,692Federal
      funds purchased
                                                                      
                                                                      
                                                                      17
                                                                      
                                                                      
                                                                      
                                                                      124Other
      borrowed funds
                                                                      
                                                                      
                                                                      692
                                                                      
                                                                      
                                                                      
                                                                      909Total
      interest expense
                                                                      
                                                                      
                                                                      11,214
                                                                      
                                                                      
                                                                      
                                                                      14,780Net
      Interest Income before Provision for Loan Losses
                                                                      
                                                                      
                                                                      14,132
                                                                      
                                                                      
                                                                      
                                                                      15,430Provision
      for loan losses
                                                                      
                                                                      
                                                                      14,059
                                                                      
                                                                      
                                                                      
                                                                      1,514Net
      Interest Income after Provision for Loan Losses
                                                                      
                                                                      
                                                                      73
                                                                      
                                                                      
                                                                      
                                                                      13,916Noninterest
      IncomeService
      charges on deposit accounts
                                                                      
                                                                      
                                                                      2,074
                                                                      
                                                                      
                                                                      
                                                                      2,084Mortgage
      loan sales
                                                                      
                                                                      
                                                                      2,159
                                                                      
                                                                      
                                                                      
                                                                      1,314Cardholder
      and merchant services income
                                                                      
                                                                      
                                                                      622
                                                                      
                                                                      
                                                                      
                                                                      496Trust
      and investment services
                                                                      
                                                                      
                                                                      341
                                                                      
                                                                      
                                                                      
                                                                      463Bank
      owned life insurance
                                                                      
                                                                      
                                                                      228
                                                                      
                                                                      
                                                                      
                                                                      249Other
      service charges, commissions and fees
                                                                      
                                                                      
                                                                      285
                                                                      
                                                                      
                                                                      
                                                                      232Securities
      (losses)/gains, net
                                                                      
                                                                      
                                                                      (6
                                                                      )
                                                                      
                                                                      
                                                                      -Other
      income
                                                                      
                                                                      
                                                                      179
                                                                      
                                                                      
                                                                      
                                                                      189Total
      noninterest income
                                                                      
                                                                      
                                                                      5,882
                                                                      
                                                                      
                                                                      
                                                                      5,027Noninterest
      ExpensePersonnel
      expense
                                                                      
                                                                      
                                                                      8,167
                                                                      
                                                                      
                                                                      
                                                                      8,884Net
      occupancy expense
                                                                      
                                                                      
                                                                      1,522
                                                                      
                                                                      
                                                                      
                                                                      1,305Furniture
      and equipment expense
                                                                      
                                                                      
                                                                      886
                                                                      
                                                                      
                                                                      
                                                                      1,145Data
      processing services
                                                                      
                                                                      
                                                                      856
                                                                      
                                                                      
                                                                      
                                                                      536Professional
      fees
                                                                      
                                                                      
                                                                      760
                                                                      
                                                                      
                                                                      
                                                                      423Stationery,
      printing and supplies
                                                                      
                                                                      
                                                                      191
                                                                      
                                                                      
                                                                      
                                                                      299Advertising
      and marketing
                                                                      
                                                                      
                                                                      573
                                                                      
                                                                      
                                                                      
                                                                      404Other
      expense
                                                                      
                                                                      
                                                                      2,891
                                                                      
                                                                      
                                                                      
                                                                      2,542Total
      noninterest expense
                                                                      
                                                                      
                                                                      15,846
                                                                      
                                                                      
                                                                      
                                                                      15,538(Loss)/income
      before income taxes
                                                                      
                                                                      
                                                                      (9,891
                                                                      )
                                                                      
                                                                      
                                                                      3,405Income
      taxes (benefit)/expense
                                                                      
                                                                      
                                                                      (4,124
                                                                      )
                                                                      
                                                                      
                                                                      1,082Net
      (Loss)/Income
                                                                      
                                                                      
                                                                      (5,767
                                                                      )
                                                                      
                                                                      
                                                                      2,323Preferred
      stock dividends
                                                                      
                                                                      
                                                                      (431
                                                                      )
                                                                      
                                                                      
                                                                      -Net
      (Loss)/Income to Common Shareholders
                                                                      
                                                                      $
                                                                      (6,198
                                                                      )
                                                                      
                                                                      $
                                                                      2,323Net
      (loss)/income per common share:Basic
                                                                      
                                                                      $
                                                                      (0.54
                                                                      )
                                                                      
                                                                      $
                                                                      0.20Diluted
                                                                      
                                                                      $
                                                                      (0.54
                                                                      )
                                                                      
                                                                      $
                                                                      0.20Weighted
      average number of common shares outstanding:Basic
                                                                      
                                                                      
                                                                      11,410,063
                                                                      
                                                                      
                                                                      
                                                                      11,404,930Diluted
                                                                      
                                                                      
                                                                      11,410,063
                                                                      
                                                                      
                                                                      
                                                                      11,404,930
  See
accompanying notes to consolidated financial statements.
  3
  FNB
United Corp. and Subsidiary
 Consolidated
Statements of Shareholders’ Equity and Comprehensive Income
(unaudited)
  For
the Three Months Ended March 31, 2009 and 2008
  
 Accumulated(in
      thousands, except share and per share data)
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                Common
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                OtherPreferred
      Stock
                                                                
                                                                
                                                                Common
      Stock
                                                                
                                                                
                                                                Stock
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                Retained
                                                                
                                                                ComprehensiveShares
                                                                
                                                                
                                                                Amount
                                                                
                                                                
                                                                Shares
                                                                
                                                                
                                                                Amount
                                                                
                                                                
                                                                Warrant
                                                                
                                                                
                                                                Surplus
                                                                
                                                                
                                                                Earnings
                                                                
                                                                
                                                                (Loss)
      Income
                                                                
                                                                
                                                                TotalBalance,
      December 31, 2007
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                
                                                                11,426,902
                                                                
                                                                
                                                                $
                                                                28,567
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                114,119
                                                                
                                                                
                                                                $
                                                                74,199
                                                                
                                                                
                                                                $
                                                                (629
                                                                )
                                                                
                                                                $
                                                                216,256Cumulative
      effect of a change in accountingprinciple - adoption of EITF 06-4
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (357
                                                                )
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (357
                                                                )Comprehensive
      income:Net
      income
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                2,323
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                2,323Other
      comprehensive income, net of taxes:Change
      in unrealized gains (losses) on securities,net
      of tax
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                449
                                                                
                                                                
                                                                
                                                                449Pension
      and post-retirement liability, net of tax
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                14
                                                                
                                                                
                                                                
                                                                14Total
      comprehensive income
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                2,786Cash
      dividends declared, $.15 per share
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (1,713
                                                                )
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (1,713
                                                                )Stock
      options:Proceeds
      from options exercised
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                150
                                                                
                                                                
                                                                
                                                                1
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                1
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                2Compensation
      expense recognized
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                111
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                111Restricted
      stock:Shares
      issued/terminated, subject to restriction
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (2,000
                                                                )
                                                                
                                                                
                                                                (5
                                                                )
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                5
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -Compensation
      expense recognized
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                57
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                57Balance,
      March 31, 2008
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                
                                                                11,425,052
                                                                
                                                                
                                                                $
                                                                28,563
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                114,293
                                                                
                                                                
                                                                $
                                                                74,452
                                                                
                                                                
                                                                $
                                                                (166
                                                                )
                                                                
                                                                $
                                                                217,142Balance,
      December 31, 2008
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                
                                                                11,428,003
                                                                
                                                                
                                                                $
                                                                28,570
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                114,772
                                                                
                                                                
                                                                $
                                                                8,904
                                                                
                                                                
                                                                $
                                                                (4,329
                                                                )
                                                                
                                                                $
                                                                147,917Comprehensive
      income (loss):Net
      loss
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (5,767
                                                                )
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (5,767
                                                                )Other
      comprehensive income, net of taxes:Unrealized
      holding (losses) arising duringthe
      period on securities available-for-sale,net
      of tax
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (390
                                                                )
                                                                
                                                                
                                                                (390
                                                                )Interest
      rate swap, net of tax
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                2
                                                                
                                                                
                                                                
                                                                2Total
      comprehensive loss
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (6,155
                                                                )Issuance
      of preferred stock
                                                                
                                                                
                                                                51,500
                                                                
                                                                
                                                                
                                                                47,609
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                3,891
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                51,500Accretion
      of discount on preferred stock
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                88
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (88
                                                                )
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -Cash
      dividends declared on common stock,$0.025
      per share
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (286
                                                                )
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (286
                                                                )Cash
      dividends declared on Series A preferred stock,$12.50
      per share
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (343
                                                                )
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (343
                                                                )Stock
      options:Compensation
      expense recognized
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                58
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                58Restricted
      stock:Compensation
      expense recognized
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                79
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                79Balance,
      March 31, 2009
                                                                
                                                                
                                                                51,500
                                                                
                                                                
                                                                $
                                                                47,697
                                                                
                                                                
                                                                
                                                                11,428,003
                                                                
                                                                
                                                                $
                                                                28,570
                                                                
                                                                
                                                                $
                                                                3,891
                                                                
                                                                
                                                                $
                                                                114,909
                                                                
                                                                
                                                                $
                                                                2,420
                                                                
                                                                
                                                                $
                                                                (4,717
                                                                )
                                                                
                                                                $
                                                                192,770
 
 See
accompanying notes to consolidated financial statements.
   4
  FNB
United Corp. and Subsidiary
 Consolidated
Statements of Cash Flows (unaudited)
  (dollars
      in thousands)
                            
                            Three
      Months Ended March 31,2009
                            
                            
                            2008Operating
      ActivitiesNet
      (loss)/income
                            
                            $
                            (5,767
                            )
                            
                            $
                            2,323Adjustments
      to reconcile net income/(loss) to cash provided by operatings
      activities:Depreciation
      and amortization of premises and equipment
                            
                            
                            909
                            
                            
                            
                            871Provision
      for loan losses
                            
                            
                            14,059
                            
                            
                            
                            1,514Deferred
      income taxes
                            
                            
                            64
                            
                            
                            
                            (13
                            )Deferred
      loan fees and costs, net
                            
                            
                            (631
                            )
                            
                            
                            931Premium
      amortization and discount accretion of investment securities,
      net
                            
                            
                            (163
                            )
                            
                            
                            (107
                            )Amortization
      of core deposit premiums
                            
                            
                            198
                            
                            
                            
                            202Stock
      compensation expense
                            
                            
                            137
                            
                            
                            
                            168Income
      from bank owned life insurance
                            
                            
                            (228
                            )
                            
                            
                            (249
                            )Mortgage
      loans held for sale:Origination
      of mortgage loans held for sale
                            
                            
                            (83,543
                            )
                            
                            
                            (71,238
                            )Proceeds
      from sale of mortgage loans held for sale
                            
                            
                            72,402
                            
                            
                            
                            74,626Gain
      on mortgage loan sales
                            
                            
                            (2,159
                            )
                            
                            
                            (1,423
                            )Mortgage
      servicing rights capitalized
                            
                            
                            (478
                            )
                            
                            
                            (399
                            )Mortgage
      servicing rights amortization and impairment
                            
                            
                            1,086
                            
                            
                            
                            324Changes
      in assets and liabilities:(Increase)/decrease
      in interest receivable
                            
                            
                            (738
                            )
                            
                            
                            610(Increase)
      in other assets
                            
                            
                            (694
                            )
                            
                            
                            (291
                            )(Decrease)/increase
      in accrued interest and other liabilities
                            
                            
                            (2,680
                            )
                            
                            
                            1,276Net
      cash (used in) provided by operating activities
                            
                            
                            (8,226
                            )
                            
                            
                            9,125Investing
      ActivitiesAvailable-for-sale
      securities:Proceeds
      from maturities and calls
                            
                            
                            18,080
                            
                            
                            
                            17,126Purchases
                            
                            
                            (76,418
                            )
                            
                            
                            (58,047
                            )Held-to-maturity
      securities:Proceeds
      from maturities and calls
                            
                            
                            1,812
                            
                            
                            
                            7,602Purchases
                            
                            
                            (38,833
                            )
                            
                            
                            -Net
      increase in loans held for investment
                            
                            
                            (9,929
                            )
                            
                            
                            (98,081
                            )Purchases
      of premises and equipment
                            
                            
                            (232
                            )
                            
                            
                            (2,327
                            )Purchases
      of SBIC investments
                            
                            
                            (100
                            )
                            
                            
                            -Net
      cash (used in) investing activities
                            
                            
                            (105,620
                            )
                            
                            
                            (133,727
                            )Financing
      ActivitiesNet
      increase in deposits
                            
                            
                            91,949
                            
                            
                            
                            44,607Increase
      in retail repurchase agreements
                            
                            
                            4,427
                            
                            
                            
                            6,682(Decrease)/increase
      in Federal Home Loan Bank advances
                            
                            
                            (66,008
                            )
                            
                            
                            60,493Increase
      in federal funds purchased
                            
                            
                            38,000
                            
                            
                            
                            14,500Proceeds
      from exercise of stock options
                            
                            
                            -
                            
                            
                            
                            2Proceeds
      from issuance of Series A preferred stock and common stock
      warrant
                            
                            
                            51,500
                            
                            
                            
                            -Cash
      dividends paid on common stock
                            
                            
                            (1,142
                            )
                            
                            
                            (1,714
                            )Net
      cash provided by financing activities
                            
                            
                            118,726
                            
                            
                            
                            124,570Net
      Increase/(Decrease) in Cash and Cash Equivalents
                            
                            
                            4,880
                            
                            
                            
                            (32
                            )Cash
      and Cash Equivalents at Beginning of Period
                            
                            
                            29,353
                            
                            
                            
                            39,117Cash
      and Cash Equivalents at End of Period
                            
                            $
                            34,233
                            
                            
                            $
                            39,085Supplemental
      disclosure of cash flow informationCash
      paid during the period for:Interest
                            
                            $
                            11,370
                            
                            
                            $
                            14,897Income
      taxes, net of refunds
                            
                            
                            -
                            
                            
                            
                            254Noncash
      transactions:Foreclosed
      loans transferred to other real estate
                            
                            
                            2,431
                            
                            
                            
                            1,923Unrealized
      securities (losses) gains, net of income taxes
      (benefit)/expense
                            
                            
                            (390
                            )
                            
                            
                            449Application
      of SFAS No. 158 to employee benefit plan costs, net of income
      taxes
                            
                            
                            -
                            
                            
                            
                            14Interest
      rate swap
                            
                            
                            2
                            
                            
                            
                            -
 
 
 See
accompanying notes to consolidated financial statements.
  5
  FNB
United Corp. and Subsidiary
 Notes
to Consolidated Financial Statements
 
 1.
              Basis
      of Presentation
 
 Nature
of Operations
 
 FNB
United Corp. (“FNB United”), formerly known as FNB Corp., is a bank holding
company incorporated under the laws of the State of North Carolina in 1984. On
July 2, 1985, through an exchange of stock, FNB United acquired a wholly owned
subsidiary, CommunityONE Bank, National Association (the “Bank”), a national
banking association founded in 1907 and formerly known as First National Bank
and Trust Company. The Bank has two operating subsidiaries, Dover Mortgage
Company (“Dover”) and First National Investor Services, Inc. It also has an
inactive subsidiary, Premier Investment Services, Inc., acquired through its
merger with Alamance Bank. Through the Bank, FNB United offers a complete line
of consumer, mortgage and business banking services, including loan, deposit,
cash management, investment management and trust services, to individual and
business customers. The Bank has offices in Alamance, Alexander, Ashe, Catawba,
Chatham, Gaston, Guilford, Iredell, Mecklenburg, Montgomery, Moore, Orange,
Randolph, Richmond, Rowan, Scotland, Watauga and Wilkes counties in North
Carolina. Dover has a retail origination network based in Charlotte with
wholesale operations in North Carolina, South Carolina, Georgia, Tennessee,
Virginia and Maine.
 
 General
 
 The
accompanying consolidated financial statements, prepared without audit, include
the accounts of FNB United and its subsidiary (collectively, the “Company”). All
significant intercompany balances and transactions have been
eliminated.
 
 The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates. Operating results for the three-month
period ended March 31, 2009 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2009.
 
 In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for the fair presentation of the consolidated financial
statements have been included. Certain reclassifications have been made to the
prior period consolidated financial statements to place them on a comparable
basis with the current period consolidated financial statements. These
reclassifications have no effect on net income or shareholders’ equity as
previously reported.
 
 Descriptions
of the organization and business of FNB United, accounting policies followed by
the Company and other relevant information are contained in the Company’s 2008
Annual Report on Form 10-K, including in the notes to the Consolidated Financial
Statements filed as part of that report. This quarterly report should be read in
conjunction with that Annual Report.
 
 2.
              Cash
      and Cash Equivalents
 
 For
purposes of reporting cash flows, cash and cash equivalents include the balance
sheet captions:  cash and due from banks, interest-bearing bank
balances and federal funds sold. Generally, federal funds are purchased and sold
for one-day periods.
 
 
 
  6
  3.
              Earnings
      Per Share
 
 Basic net
income per share, or basic earnings per share (“EPS”), is computed by dividing
net income/ (loss) to common shareholders by the weighted average number of
common shares outstanding for the period. In 2009, the Company accrued dividends
of approximately $343,000 on Series A preferred stock, which combined with the
$88,000 accretion of the discount on the preferred stock, increased the net loss
per common share by $431,000. Diluted EPS reflects the potential dilution that
could occur if the Company’s potential common stock, which consists of dilutive
stock options and a common stock warrant, were exercised. As required for
entities with complex capital structures, a dual presentation of basic and
diluted EPS is included on the face of the income statement, and a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation is provided in a
footnote.
  Three
      Months EndedMarch
      31,2009
                                    
                                    
                                    2008Basic
      EPS denominator - weighted average numberof
      common shares outstanding
                                    
                                    
                                    11,410,063
                                    
                                    
                                    
                                    11,404,930Dilutive
      share effect arising from potential commonshare
      issuances
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Diluted
      EPS denominator
                                    
                                    
                                    11,410,063
                                    
                                    
                                    
                                    11,404,930
 
 Due to a
net loss for the three months ended March 31, 2009, all stock options and the
common stock warrant were considered anti-dilutive and thus are not included in
this calculation. Additionally, for the three months ended March 31, 2009 and
2008 there were 1,772,392 and 666,036 shares, respectively, related to stock
options and the common stock warrant that were anti-dilutive because the
exercise price exceeded the average market price for the period and were omitted
from the calculation of diluted earnings per share for their respective
periods.
 
 4.
              Allowance
      for Loan Losses
 
 Changes
in the allowance for loan losses were as follows:
 
 (dollars
      in thousands)
                              
                              Three
      Months EndedMarch
      31,2009
                              
                              
                              2008Balance,
      beginning of year
                              
                              $
                              34,720
                              
                              
                              $
                              17,381Provision
      charged to operations
                              
                              
                              14,059
                              
                              
                              
                              1,514Net
      charge-offs:Charge-offs
                              
                              
                              (10,812
                              )
                              
                              
                              (1,046
                              )Recoveries
                              
                              
                              606
                              
                              
                              
                              366Net
      charge-offs
                              
                              
                              (10,206
                              )
                              
                              
                              (680
                              )Balance,
      end of period
                              
                              $
                              38,573
                              
                              
                              $
                              18,215Annualized
      net charge-offs during theperiod
      to average loans
                              
                              
                              2.58
                              %
                              
                              
                              0.18
                              %Annualized
      net charge-offs during theperiod
      to allowance for loan losses
                              
                              
                              105.84
                              %
                              
                              
                              14.93
                              %Allowance
      for loan losses to loans heldfor
      investment
                              
                              
                              2.44
                              %
                              
                              
                              1.18
                              %
 
 
  7
  5.
              Postretirement
      Employee Benefit Plans
 
 The
accompanying table details the components of the net periodic costs of the
Company’s postretirement benefit plans as recognized in the Company’s
Consolidated Statements of Income:
 
 (dollars
      in thousands)
                                        
                                        Three
      Months EndedMarch
      31,2009
                                        
                                        
                                        2008Pension
      PlanService
      cost
                                        
                                        $
                                        53
                                        
                                        
                                        $
                                        66Interest
      cost
                                        
                                        
                                        172
                                        
                                        
                                        
                                        165Expected
      return on plan assets
                                        
                                        
                                        (136
                                        )
                                        
                                        
                                        (235
                                        )Amortization
      of prior service cost
                                        
                                        
                                        1
                                        
                                        
                                        
                                        1Amortization
      of net actuarial loss
                                        
                                        
                                        83
                                        
                                        
                                        
                                        2Net
      periodic pension cost (income)
                                        
                                        $
                                        173
                                        
                                        
                                        $
                                        (1
                                        )Supplemental Executive
      Retirement PlanService
      cost
                                        
                                        $
                                        63
                                        
                                        
                                        $
                                        34Interest
      cost
                                        
                                        
                                        42
                                        
                                        
                                        
                                        36Expected
      return on plan assets
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Amortization
      of prior service cost
                                        
                                        
                                        12
                                        
                                        
                                        
                                        17Amortization
      of net actuarial loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2Net
      periodic SERP cost
                                        
                                        $
                                        117
                                        
                                        
                                        $
                                        89Other Postretirement
      Defined Benefit PlansService
      cost
                                        
                                        $
                                        5
                                        
                                        
                                        $
                                        4Interest
      cost
                                        
                                        
                                        22
                                        
                                        
                                        
                                        18Expected
      return on plan assets
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Amortization
      of prior service cost (credit)
                                        
                                        
                                        (1
                                        )
                                        
                                        
                                        (1
                                        )Amortization
      of net actuarial loss (gain)
                                        
                                        
                                        5
                                        
                                        
                                        
                                        -Net
      periodic postretirement benefit cost
                                        
                                        $
                                        31
                                        
                                        
                                        $
                                        21
 
 The
Company expects to contribute $680,000 to its pension plan in 2009. The other
postretirement benefit plans are unfunded plans; and consequently, there are no
plan assets or cash contribution requirements other than for the direct payment
of benefits.
 
 6.
              Recent
      Accounting Pronouncements
 
 In
February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No.
157.This FSP delays the effective date of SFAS No. 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years. The Company adopted the provisions of SFAS 157 for financial
assets and liabilities effective January 1, 2008 and for nonfinancial assets and
nonfinancial liabilities effective January 1, 2009. Refer to Note 9 for
additional disclosures.
 
 In
October 2008, the FASB issued Staff Position (FSP) 157-3, Determining the Fair Value of a
Financial Asset when the Market for That Asset Is Not Active.This FSP
clarifies the application of SFAS No. 157 in a market that is not active. The
impact of adoption was not material.
 
 SFAS No.
141 (R), Business
Combinations. This statement requires the acquiring entity in a business
combination to recognize all (and only) the assets acquired and liabilities
assumed in the transaction; establishes the acquisition-date fair value as the
measurement objective for all assets acquired and
  8
  liabilities
assumed; and requires the acquirer to disclose to investors and other users all
of the information they need to evaluate and understand the nature and financial
effect of the business combination. In addition, this statement expands the
scope of acquisition accounting to all transactions and circumstances under
which control of a business is obtained. This statement applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008.  Earlier adoption is prohibited. The effective date of this
statement is the same as that of the related SFAS No. 160.
 
 SFAS No.
160, “Noncontrolling Interests
in Consolidated Financial Statements.” This statement  improves
the relevance, comparability and transparency of financial information provided
to investors by requiring all entities to report noncontrolling (minority)
interests in subsidiaries in the same way - as equity in the Consolidated
Financial Statements. Moreover, SFAS No. 160 eliminates the diversity that
currently exists in accounting for transactions between an entity and
noncontrolling interests by requiring they be treated as equity transactions.
This statement is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. The adoption of the
provisions of SFAS No. 160 had no effect on financial position or results of
operations.
 
 In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161 (“SFAS
No. 161”), “Disclosures about Derivative Instruments and Hedging Activities – an
amendment of SFAS No. 133.” SFAS No. 161 requires that an entity provide
enhanced disclosures related to derivative and hedging activities. SFAS No. 161
is effective January 1, 2009 and has been adopted by the Company. See Note 8 for
additional disclosures.
 
 In April
2009, the FASB issued FASB Staff Position No. 115-2 and 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments,” (“FSP FAS 115-2 and 124-2”).
FSP FAS 115-2 and 124-2 creates a new model for evaluating other-than-temporary
impairment on debt securities. If an entity intends to sell a debt
security, or cannot assert it is more likely than not that it will not have to
sell the security before recovery, OTTI must be taken. If the entity does not
intend to sell the debt security before recovery, but the entity does not expect
to recover the entire amortized cost basis, then OTTI must be taken, but the
amount of impairment is to be bifurcated between impairment due to credit (which
is recorded through earnings) and noncredit impairment (which becomes a
component of other comprehensive income (“OCI”) for both available-for-sale
(“AFS”) and held-to-maturity securities (“HTM”)). For HTM securities, the amount
in OCI will be amortized prospectively over the security’s remaining life. Upon
adoption, a cumulative effect adjustment must be made to opening retained
earnings in the period adopted that reclassifies the noncredit portion of
previously taken OTTI from retained earnings to accumulated OCI. This FSP also
requires that annual disclosures required by SFAS 115 be presented in
interim financial statements, and new disclosures are also required. FSP FAS
115-2 and 124-2 is effective for periods ending after June 15, 2009, with
earlier adoption permitted. The Company has assessed the impact of adoption of
FSP FAS 115-2 and 124-2 and does not expect a material effect on its financial
position and results of operations.
 
 In April
2009, the FASB issued FASB Staff Position No. 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments,” (“FSP FAS 107-1 and APB
28-1”). FSP FAS 107-1 and APB 28-1 requires company’s to disclose the fair value
of financial instruments within interim financial statements, adding to the
current requirement to provide those disclosures annually. Since FSP FAS 107-1
and APB 28-1 addresses financial statement disclosure only, its adoption,
effective June 30, 2009 will not impact the Company’s consolidated financial
position of results of operations.
 
 From time
to time the FASB issues exposure drafts for proposed statements of financial
accounting standards. Such exposure drafts are subject to comment from the
public, to revisions by the FASB and to final issuance by the FASB as statements
of financial accounting standards. Management considers the effect of the
proposed statements on the consolidated financial statements of the Company and
monitors the status of changes to and proposed effective dates of exposure
drafts.
  9
  7.
              Comprehensive
      Income
 
 Comprehensive
income is defined as the change in equity of an enterprise during a period from
transactions and other events and circumstances from nonowner sources and,
accordingly, includes both net income and amounts referred to as other
comprehensive income. The items of other comprehensive income are included in
the Consolidated Statements of Shareholders’ Equity and Comprehensive
Income.  The accumulated balance of other comprehensive income is
included in the shareholders’ equity section of the consolidated balance sheet.
The Company’s components of accumulated other comprehensive income at March 31,
2009 include unrealized gains/(losses) on investment securities classified as
available-for-sale and the changes in the value of the interest rate swap on one
issue of trust preferred securities.
 
 For the
three months ended March 31, 2009 and 2008, total other comprehensive
(loss)/income was $(0.4) million and $0.5 million, respectively. The deferred
income tax benefit/(liability) related to the components of other comprehensive
income amounted to $0.3 million and $(0.3) million respectively.
 
 8.
              Derivative
      Financial Instruments
 
 The
Company is exposed to interest rate risk relating to its ongoing business
operations. In connection with its asset / liability management objectives, the
Company has entered into interest rate swaps.
 
 The
Company adopted SFAS 161, “Disclosures about Derivative Instruments and Hedging
Activities – an amendment of FASB Statement No. 133,” at the beginning of the
first quarter of 2009, and has included here the expanded disclosures required
by that statement.
 
 In
connection with its asset / liability management objectives, the Company in 2004
entered into an interest rate swap on a $7 million Federal Home Loan Bank
(“FHLB”) advance that converts the fixed rate cash flow exposure on the FHLB
advance to a variable rate cash flow. As structured, the pay-variable,
receive-fixed swap is evaluated as being a fair value hedge with no
ineffectiveness; and, consequently, the difference in cash flows in each period
between the variable rate interest payments that the Company makes and the fixed
rate interest payments received is currently reported in earnings. This interest
rate swap matured on January 26, 2009.
 
 On March
14, 2008, FNB United entered into an interest rate swap to convert the floating
rate cash flows on a $20 million trust preferred security to a fixed rate cash
flow. As structured, the pay-fixed, receive-floating swap is evaluated, using
the long-haul method, as being a cash flow hedge in which the ineffectiveness
would be determined by any difference in valuation.  Consequently, the
difference in cash flows in each period between the fixed rate interest payments
that the Company makes and the variable interest payments received is currently
reported in earnings, while gains and losses on the value of the swap instrument
are recorded in shareholders’ equity.
 
 Mortgage
banking derivatives used in the ordinary course of business consist of mandatory
forward sales contracts (“forward contracts”) and rate lock loan commitments.
The fair value of the Company’s derivative instruments is primarily measured by
obtaining pricing from broker-dealers recognized to be market
participants.
 
 The table
below provides data about the carrying values of derivative
instruments:
  10
  March
      31, 2009
                                                                                                  
                                                                                                  
                                                                                                  December
      31, 2008Assets
                                                                                                  
                                                                                                  
                                                                                                  (Liabilities)
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  Assets
                                                                                                  
                                                                                                  
                                                                                                  (Liabilities)(dollars
      in thousands)
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  Derivative
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  DerivativeCarrying
                                                                                                  
                                                                                                  
                                                                                                  Carrying
                                                                                                  
                                                                                                  
                                                                                                  Net
      Carrying
                                                                                                  
                                                                                                  
                                                                                                  Carrying
                                                                                                  
                                                                                                  
                                                                                                  Carrying
                                                                                                  
                                                                                                  
                                                                                                  Net
      CarryingValue
                                                                                                  
                                                                                                  
                                                                                                  Value
                                                                                                  
                                                                                                  
                                                                                                  Value
                                                                                                  
                                                                                                  
                                                                                                  Value
                                                                                                  
                                                                                                  
                                                                                                  Value
                                                                                                  
                                                                                                  
                                                                                                  ValueDerivatives
      designated ashedging
      instruments:Interest rate contracts(1)
                                                                                                  
                                                                                                  $
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  (459
                                                                                                  )
                                                                                                  
                                                                                                  $
                                                                                                  (459
                                                                                                  )
                                                                                                  
                                                                                                  $
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  (457
                                                                                                  )
                                                                                                  
                                                                                                  $
                                                                                                  (457
                                                                                                  )Derivatives
      not designated ashedging
      instruments:Mortgage loan forward sales
      commitments(1)
                                                                                                  
                                                                                                  $
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  (139
                                                                                                  )
                                                                                                  
                                                                                                  $
                                                                                                  (139
                                                                                                  )
                                                                                                  
                                                                                                  $
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  $
                                                                                                  -Mortgage loan rate lock
      commitments(2)
                                                                                                  
                                                                                                  
                                                                                                  266
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  266
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  -
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  -(1)
      Included in "Other liabilities" on the Company's consolidated balance
      sheets.(2)
      Included in "Other assets" on the Company's consolidated balance
      sheets.
 
 The table
below provides data about the amount of gains and losses related to derivative
instruments designated as hedges included in the “Accumulated other
comprehensive income/(loss)” section of “Shareholders’ equity” on the Company’s
Consolidated Balance Sheets, and in “Other income, net” in the Company’s
Consolidated Statements of Income:
 
 Gain
      or (Loss), Net of Tax
                                      
                                      
                                      Gain
      or (Loss) in IncomeRecognized
      in Accumulated Other
                                      
                                      
                                      (Ineffective
      Portion and Amount(dollars
      in thousands)
                                      
                                      Comprehensive
      Loss (Effective Portion)
                                      
                                      
                                      Excluded
      from Effectiveness Testing)As
      of
                                      
                                      
                                      As
      of
                                      
                                      
                                      Three
      months ended
                                      
                                      
                                      Three
      months endedMarch
      31, 2009
                                      
                                      
                                      December
      31, 2008
                                      
                                      
                                      March
      31, 2009
                                      
                                      
                                      December
      31, 2008Derivatives
      designated ashedging
      instruments:Interest
      rate contracts
                                      
                                      $
                                      (299
                                      )
                                      
                                      $
                                      (301
                                      )
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -
 
 The table
below provides data about the amount of gains and losses recognized in income on
derivative instruments not designated as hedging instruments:
 
 Gain
      or (Loss) During(dollars
      in thousands)
                                      
                                      Three
      Months EndedMarch
      31,
                                      
                                      
                                      December
      31,2009
                                      
                                      
                                      2008Derivatives
      not designated as hedging instruments:Mortgage loan forward sales
      commitments(1)
                                      
                                      $
                                      (212
                                      )
                                      
                                      $
                                      -Mortgage loan rate lock
      commitments(2)
                                      
                                      
                                      266
                                      
                                      
                                      
                                      -Total
                                      
                                      $
                                      54
                                      
                                      
                                      $
                                      -(1)
      Recognized in "Other expense" in the Company's consolidated statements of
      income.(2)
      Recognized in "Mortgage loan sales" in the Company's consolidated
      statements of income.
  9.
              Fair
      Values of Assets and Liabilities
 
 The
Company utilizes fair value measurements to record fair value adjustments to
certain assets and liabilities and to determine fair value disclosures.
Securities available-for-sale, derivative assets, and mortgage servicing rights
are recorded at fair value on a recurring basis. Additionally, from
time-to-time, the Company may be required to record at fair value other assets
and liabilities on a non-recurring basis, such as loans held for sale, loans
held for investment and certain other assets and liabilities. These
non-recurring fair value adjustments typically involve application of lower or
cost or market accounting or write-downs of individual assets or
liabilities.
 
 
 
  11
  Fair Value
Hierarchy
 
 Under
SFAS 157, the Company groups assets and liabilities at fair value in three
levels, based on the markets in which the assets and liabilities are traded and
the reliability of the assumptions used to determine fair
value.  These levels are:
 
 Level
1:  Valuation is based upon quoted prices for identical instruments
traded in active markets.
  Level
2:  Valuation is based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments in markets
that are not active, and model-based valuation techniques for which all
significant assumptions are observable in the market.
  Level
3:  Valuation is generated from model-based techniques that use at
least one significant assumption not observable in the market. These
unobservable assumptions reflect estimates of assumptions that market
participants would use in pricing the asset or liability. Valuation techniques
include use of option pricing models, discounted cash flow models and similar
techniques.
 
 Following
is a description of valuation methodologies used for assets and liabilities
recorded at fair value.
 
 Investments Securities
Available-for-Sale
 
 Investment
securities available-for-sale are recorded at fair value on a recurring basis.
Fair value measurement is based upon quoted prices, if available. If quoted
prices are not available, fair values are measured using independent pricing
models or other model-based valuation techniques such as the present value of
future cash flows, adjusted for the security’s credit rating, prepayment
assumptions and other factors such as credit loss assumptions. Level 1
securities include those traded on an active exchange, such as the New York
Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers
in active over-the-counter markets and money market funds. Level 2 securities
include mortgage-backed securities issued by government sponsored entities,
municipal bonds and corporate debt securities. Securities classified as Level 3
may include asset-backed securities in less liquid markets.
 
 Loans Held for
Sale
 
 Loans
held for sale are carried at the lower of cost or market value. The fair value
of loans held for sale is based on what secondary markets are currently offering
for portfolios with similar characteristics. As such, the Company classifies
loans subjected to nonrecurring fair value adjustments as Level 2.
 
 Loans
 
 The
Company does not record loans at fair value on a recurring basis. However, from
time to time, a loan is considered impaired and the related impairment is
charged against the allowance or a specific allowance is established. Loans for
which it is probable that payment of interest and principal will not be made in
accordance with the contractual terms of the loan agreement are considered
impaired. Once a loan is identified as individually impaired, management
measures impairment in accordance with SFAS 114, “Accounting by Creditors for
Impairment of a Loan,” (SFAS 114). The fair value of impaired loans is estimated
using one of several methods, including collateral net liquidation value, market
value of similar debt, enterprise value, and discounted cash flows. Those
impaired loans not requiring a specific allowance represent loans for which the
fair value of the expected repayments or collateral meet or exceed the recorded
investments in such loans. At March 31, 2009, substantially all of the total
impaired loans were evaluated based on the fair value of the collateral. In
accordance with SFAS 157, impaired loans where an allowance is established based
on the fair value of collateral require classification in the fair value
hierarchy. When the fair value of the collateral is based on an observable
market price or a current appraised value, the Company records the impaired loan
as nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired
below
  12
  the
appraised value and there is no observable market price, the Company records the
impaired loans as nonrecurring Level 3.
 
 Other Real Estate
Owned
 
 Other
real estate owned (“OREO”) is adjusted to fair value upon transfer of the loans
to OREO. Subsequently, OREO is carried at the lower of carrying value or fair
value. Fair value is based upon independent market prices, appraised values of
the collateral or management’s estimation of the value of the collateral. When
the fair value of the collateral is based on an observable market price or a
current appraised value, the Company records the foreclosed asset as
nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the
appraised value and there is no observable market price, the Company records the
OREO as nonrecurring Level 3.
 
 Derivative Assets and
Liabilities
 
 Substantially
all derivative instruments held or issued by the Company for risk management or
customer-initiated activities are traded in over-the-counter markets where
quoted market prices are not readily available. For those derivatives, the
Company measures fair value using models that use primarily market observable
inputs, such as yield curves and option volatilities, and include the value
associated with counterparty credit risk. The Company classifies derivatives
instruments held or issued for risk management or customer-initiated activities
as Level 2.
 
 Mortgage Servicing
Rights
 
 Mortgage
servicing rights are recorded at fair value on a recurring basis, with changes
in fair value recorded as a component of mortgage loan sales.  A
valuation model, which utilizes a discounted cash flow analysis using interest
rates and prepayment speed assumptions currently quoted for comparable
instruments and a discount rate, is used to determine fair value. Loan servicing
rights are adjusted to fair value through a valuation allowance as determined by
the model. As such, the Company classifies mortgage servicing rights as Level
3.
 
 
 Assets and Liabilities
Recorded at Fair Value on a Recurring Basis
 
 The
following table presents the recorded amount of assets and liabilities measured
at fair value on a recurring basis:
  March
31, 2009
 
 (dollars
      in thousands)
                          
                          Total
                          
                          
                          Level
      1
                          
                          
                          Level
      2
                          
                          
                          Level
      3Investment
      securities available-for-sale
                          
                          $
                          263,108
                          
                          
                          $
                          1,377
                          
                          
                          $
                          261,117
                          
                          
                          $
                          614Derivative
      assets
                          
                          
                          266
                          
                          
                          
                          -
                          
                          
                          
                          266
                          
                          
                          
                          -Mortgage
      servicing rights
                          
                          
                          3,436
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          3,436Total
      assets at fair value
                          
                          $
                          266,810
                          
                          
                          $
                          1,377
                          
                          
                          $
                          261,383
                          
                          
                          $
                          4,050Derivative
      liabilities
                          
                          
                          (598
                          )
                          
                          
                          -
                          
                          
                          
                          (598
                          )
                          
                          
                          -Total
      liabilities at fair value
                          
                          $
                          (598
                          )
                          
                          $
                          -
                          
                          
                          $
                          (598
                          )
                          
                          $
                          -
  December 31,
2008
  (dollars
      in thousands)
                        
                        Total
                        
                        
                        Level
      1
                        
                        
                        Level
      2
                        
                        
                        Level
      3Investment
      securities available for sale
                        
                        $
                        205,426
                        
                        
                        $
                        1,829
                        
                        
                        $
                        203,597
                        
                        
                        $
                        -Mortgage
      servicing rights
                        
                        
                        4,043
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        4,043Total
      assets at fair value
                        
                        $
                        209,469
                        
                        
                        $
                        1,829
                        
                        
                        $
                        203,597
                        
                        
                        $
                        4,043Derivative
      liabilities
                        
                        
                        (456
                        )
                        
                        
                        -
                        
                        
                        
                        (456
                        )
                        
                        
                        -Total
      liabilities at fair value
                        
                        $
                        (456
                        )
                        
                        $
                        -
                        
                        
                        $
                        (456
                        )
                        
                        $
                        -
 The
following are reconciliations of the beginning and ending balances for
assets and liabilities measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) during the periods ended March 31,
2009 and 2008:
  13
  Fair
      Value Measurements Using SignificantUnobservable
      Inputs (Level 3)(dollars
      in thousands)
                                                                
                                                                InvestmentSecurities
                                                                
                                                                
                                                                MortgageAvailable-
                                                                
                                                                
                                                                Servicing
                                                                
                                                                
                                                                Derivativefor-Sale
                                                                
                                                                
                                                                Rights
                                                                
                                                                
                                                                Assets
                                                                
                                                                
                                                                TotalBeginning
      balance at December 31, 2008
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                4,043
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                4,043Total
      gains or losses (realized/unrealized):Included
      in earnings
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (1,085
                                                                )
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (1,085
                                                                )Included
      in other comprehensive income
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -Purchases,
      issuances and settlements
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                478
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                478Transfers
      in and/or out of Level 3
                                                                
                                                                
                                                                614
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                614Ending
      balance at March 31, 2009
                                                                
                                                                $
                                                                614
                                                                
                                                                
                                                                $
                                                                3,436
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                4,050
  Fair
      Value Measurements Using SignificantUnobservable
      Inputs (Level 3)(dollars
      in thousands)
                                          
                                          InvestmentSecurities
                                          
                                          
                                          MortgageAvailable-
                                          
                                          
                                          Servicing
                                          
                                          
                                          Derivativefor-Sale
                                          
                                          
                                          Rights
                                          
                                          
                                          Assets
                                          
                                          
                                          TotalBeginning
      balance at December 31, 2007
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -Total
      gains or losses (realized/unrealized):Included
      in earnings
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Included
      in other comprehensive income
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Purchases,
      issuances and settlements
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Transfers
      in and/or out of Level 3
                                          
                                          
                                          4,265
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          500
                                          
                                          
                                          
                                          4,765Ending
      balance at March 31, 2008
                                          
                                          $
                                          4,265
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          500
                                          
                                          
                                          $
                                          4,765
  Assets and Liabilities
Recorded at Fair Value on a Nonrecurring Basis
 
 The
Company may be required, from time to time, to measure certain assets at fair
value on a nonrecurring basis in accordance with U.S. generally accepted
accounting principles. These include assets that are measured at the lower of
cost or market that were recognized at fair value below cost at the end of the
period. Assets measured at fair value on a nonrecurring basis are included in
the following tables:
  March
31, 2009
  (dollars
      in thousands)
                        
                        Total
                        
                        
                        Level
      1
                        
                        
                        Level
      2
                        
                        
                        Level
      3Loans
                        
                        $
                        79,707
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        79,707Other
      real estate owned
                        
                        
                        2,431
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,431Total
      assets at fair value
                        
                        $
                        82,138
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        82,138
  December 31,
2008
  (dollars
      in thousands)
                          
                          Total
                          
                          
                          Level
      1
                          
                          
                          Level
      2
                          
                          
                          Level
      3Loans
                          
                          $
                          94,782
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          94,782Total
      assets at fair value
                          
                          $
                          94,782
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          94,782
 10.
              Goodwill
 
 Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets, requires goodwill to be tested for impairment on an annual basis,
or more frequently if circumstances indicate that an asset might be impaired, by
comparing the fair value of such goodwill to its recorded or carrying amount. If
the carrying amount of goodwill exceeds the fair value, an impairment charge
must be recorded in an amount equal to the excess. The Company typically tests
goodwill for impairment on an annual basis, or more often if events or
circumstances indicate there may be impairment.
 
 During
2008, FNB United performed impairment evaluations resulting in impairment
charges of $57.8 million. As a result of continued market devaluation during the
first quarter of 2009, the Company has reviewed the remaining entity-wide
goodwill for further potential impairment and determined that the fair value of
the Company exceeds its carrying value as of March 31, 2009 with no additional
impairment charges required.
 
 Item 2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
 
 The
following presents management’s discussion and analysis of the financial
condition, changes in financial condition and results of operations of FNB
United Corp. (“FNB United”) and its wholly owned subsidiary, CommunityONE Bank,
National Association (the “Bank”).  FNB United and its subsidiary are
collectively referred to as the “Company.”  This discussion should be
read in conjunction with the financial statements and related notes included
elsewhere in the quarterly report.  This discussion may contain
forward-looking statements that involve risks and uncertainties. Our actual
results could differ
  14
  significantly
from those anticipated in forward-looking statements as a result of various
factors.  The following discussion is intended to assist in
understanding the financial condition and results of operations of the
Company.
 
 Executive
Overview
 
 Description
of Operations
 
 FNB
United is a bank holding company with a full-service subsidiary bank,
CommunityONE Bank, National Association, which offers a complete line of
consumer, mortgage and business banking services, including loan, deposit, cash
management, investment management and trust services, to individual and business
customers.  The Bank has offices in Alamance, Alexander, Ashe,
Catawba, Chatham, Gaston, Guilford, Iredell, Mecklenburg, Montgomery, Moore,
Orange, Randolph, Richmond, Rowan, Scotland, Watauga and Wilkes counties in
North Carolina.
 
 Additionally,
the Bank has a mortgage banking subsidiary, Dover Mortgage Company, which
originates, underwrites and closes loans for sale into the secondary
market.  Dover has a retail origination network based in Charlotte and
conducts wholesale operations in North Carolina, South Carolina, Georgia,
Tennessee, Virginia, and Maine.
 
 Executive
Summary
 
 The
Company’s total assets at March 31, 2009, were $2.2 billion, an increase of 5%,
or $109.6 million from year-end 2008.  Investments grew $94.9 million,
or 41%, reflecting the Company’s leveraging strategy to offset the earnings
dilution resulting from participation in the Capital Purchase Program. Loans
held for sale increased $12.8 million, or 35%, due to refinancing of residential
mortgages. Gross loans held for investment totaled $1.6 billion at March 31,
2009, essentially flat from the prior year end.
 
 Total
deposits grew $91.9 million, to $1.6 billion in 2009, representing a 6% increase
due primarily to increased consumer use of deposit account products in the
current economic environment and an increase in the general consumer rate
of savings.  Borrowings decreased $23.6 million or 6%, during the
first three months of 2009, compared to the period ended December 31,
2008.  Total shareholders’ equity increased $44.9 million compared to
December 31, 2008 primarily as a result of $51.5 million of capital invested by
the U.S. Treasury in the first quarter of 2009 partially offset by the $5.8
million net loss for the quarter.
 
 The
Company experienced a net loss of $5.8 million in the first quarter of 2009
compared to net income of $2.3 million for the same quarter in 2008 and is
primarily the result of a $12.5 million increase in the provision for loan
losses. These losses were partially offset by $5.2 million in lower income
taxes.
 
 Noninterest
income increased 17.0% to $5.9 million for the first three months in 2009,
compared to $5.0 million for the same period in 2008.  Cardholder and
merchant services income increased $126,000 due to increased interchange fees
and surcharge fees, and income from mortgage loan sales increased by $845,000
attributable to sizable increases in 2009 production driven by refinancing
activity.
 
 Noninterest
expense for the first quarter increased 2% to $15.8 million in 2009 from $15.5
million in 2008.  The Company undertook a major noninterest expense
improvement project during the second half of 2008, which included consolidation
of operational functions, strong vendor management and tighter staffing
models.  This effort resulted in an 8%, or $717,000 decrease, in
personnel expense when comparing the first three months of 2009 to the same
period in 2008.  This reduction was offset by increases in other
expenses, primarily auditing fees and FDIC insurance costs, which were $325,000
and $262,000, respectively, higher than the same period in 2008. The Company
also incurred noninterest expense of $290,000 in the first quarter of 2009
related to its write-off of an investment in a failed banker’s
bank.
  15
  Financial
highlights are presented in the accompanying table.
 
 Table
1 - Selected Financial Data
  (dollars
      in thousands, except per share data)
                                              
                                              As
      of / For the Quarter Ended March 31,2009
                                              
                                              
                                              2008Income
      Statement DataNet
      interest income
                                              
                                              $
                                              14,132
                                              
                                              
                                              $
                                              15,430Provision
      for loan losses
                                              
                                              
                                              14,059
                                              
                                              
                                              
                                              1,514Noninterest
      income
                                              
                                              
                                              5,882
                                              
                                              
                                              
                                              5,027Noninterest
      expense
                                              
                                              
                                              15,846
                                              
                                              
                                              
                                              15,538Net
      (loss)/income
                                              
                                              
                                              (5,767
                                              )
                                              
                                              
                                              2,323Preferred
      stock dividends
                                              
                                              
                                              (431
                                              )
                                              
                                              
                                              -Net
      (loss)/income to common shareholders
                                              
                                              
                                              (6,198
                                              )
                                              
                                              
                                              2,323Balance
      Sheet DataAssets
                                              
                                              $
                                              2,154,026
                                              
                                              
                                              $
                                              2,035,283Loans
      held for sale
                                              
                                              
                                              48,948
                                              
                                              
                                              
                                              15,121Loans held for investment(1)
                                              
                                              
                                              1,583,574
                                              
                                              
                                              
                                              1,541,119Allowance
      for loan losses
                                              
                                              
                                              38,573
                                              
                                              
                                              
                                              18,215Goodwill
                                              
                                              
                                              52,395
                                              
                                              
                                              
                                              110,195Deposits
                                              
                                              
                                              1,606,696
                                              
                                              
                                              
                                              1,485,649Borrowings
                                              
                                              
                                              342,202
                                              
                                              
                                              
                                              312,901Shareholders'
      equity
                                              
                                              
                                              192,770
                                              
                                              
                                              
                                              217,142Per
      Common Share DataNet
      (loss)/income per common share:Basic
                                              
                                              $
                                              (0.54
                                              )
                                              
                                              $
                                              0.20Diluted(2)
                                              
                                              
                                              (0.54
                                              )
                                              
                                              
                                              0.20Cash
      dividends declared
                                              
                                              
                                              0.025
                                              
                                              
                                              
                                              0.150Book
      value
                                              
                                              
                                              12.69
                                              
                                              
                                              
                                              19.01Tangible
      book value
                                              
                                              
                                              7.62
                                              
                                              
                                              
                                              8.80Performance
      RatiosReturn
      on average assets
                                              
                                              
                                              (1.11
                                              )
       %
                                              
                                              
                                              0.48
                                              %Return
      on average tangible assets
                                              
                                              
                                              (1.14
                                              )
                                              
                                              
                                              0.51Return on average
      equity(3)
                                              
                                              
                                              (13.34
                                              )
                                              
                                              
                                              4.29Return
      on average tangible equity
                                              
                                              
                                              (19.96
                                              )
                                              
                                              
                                              9.24Net
      interest margin (tax equivalent)
                                              
                                              
                                              3.03
                                              
                                              
                                              
                                              3.68Dividend payout on common shares(4)
                                              
                                              
                                              N/A
                                              
                                              
                                              
                                              73.74Asset
      Quality RatiosAllowance
      for loan losses to period end loans held for investment
                                              
                                              
                                              2.44
                                              %
                                              
                                              
                                              1.18
                                              %Nonperforming
      loans to period end allowance for loan losses
                                              
                                              
                                              308.02
                                              
                                              
                                              
                                              89.87Net
      chargeoffs (annualized) to average loans held for
    investment
                                              
                                              
                                              2.58
                                              
                                              
                                              
                                              0.18Nonperforming
      assets to period end loans held for investmentand
      foreclosed property(5)
                                              
                                              
                                              8.03
                                              
                                              
                                              
                                              1.33Capital
      and Liquidity RatiosAverage
      equity to average assets
                                              
                                              
                                              8.31
                                              %
                                              
                                              
                                              11.11
                                              %Leverage
      capital
                                              
                                              
                                              9.59
                                              
                                              
                                              
                                              7.23Tier
      1 risk based capital
                                              
                                              
                                              10.86
                                              
                                              
                                              
                                              7.43Total
      risk based capital
                                              
                                              
                                              12.94
                                              
                                              
                                              
                                              9.70Average
      loans to average deposits
                                              
                                              
                                              105.66
                                              
                                              
                                              
                                              103.76Average
      loans to average deposits and borrowings
                                              
                                              
                                              85.28
                                              
                                              
                                              
                                              87.42(1)
      Loans held for investment, net of unearned income, before allowance for
      loan losses.(2)
      Assumes the exercise of outstanding dilutive options to acquire common
      stock. See Note 15 to FNB United'sconsolidated
      financial statements.(3)
      Net (loss) income to common shareholders, which excludes preferred stock
      dividends, divided by average realizedcommon equity which excludes accumulated other comprehensive income
      (loss).(4)
      Not applicable to 2009 due to net loss.(5)
      Nonperforming loans and nonperforming assets include loans past due 90
      days or more that are still accruing interest.
  16
  
 Application
of Critical Accounting Policies
 
 FNB
United's accounting policies are in accordance with accounting principles
generally accepted in the United States and with general practice within the
banking industry and are fundamental to understanding management's discussion
and analysis of results of operations and financial condition. FNB United's
significant accounting policies are discussed in detail in Note 1 of the
Consolidated Financial Statements contained in the Annual Report on Form 10-K
for the year ended December 31, 2008.
 
 Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses and goodwill
impairment. Actual results could differ from those estimates.
 
 Allowance
for Loan Losses
 
 The
allowance for loan losses, which is utilized to absorb actual losses in the loan
portfolio, is maintained at a level consistent with management’s best estimate
of probable loan losses incurred as of the balance sheet date.  FNB
United’s allowance for loan losses is also analyzed quarterly by
management.  This analysis includes a methodology that separates the
total loan portfolio into homogeneous loan classifications for purposes of
evaluating risk.  The required allowance is calculated by applying a
risk adjusted reserve requirement to the dollar volume of loans within a
homogenous group.  Major loan portfolio subgroups include: risk graded
commercial loans, mortgage loans, home equity loans, retail loans and retail
credit lines.  Management also analyzes the loan portfolio on an
ongoing basis to evaluate current risk levels, and risk grades are adjusted
accordingly.  While management uses the best information available to
make evaluations, future adjustments may be necessary, if economic or other
conditions differ substantially from the assumptions used. See additional
discussion under “Asset
Quality.”
 
 Goodwill
 
 FNB
United has procedures to test goodwill for impairment on an annual basis or more
frequently if necessary.  The testing procedures evaluate possible
impairment based on the following:
 
 The test
assigns tangible assets and liabilities, identified intangible assets and
goodwill to a reporting unit and compares the fair value of this reporting unit
to its carrying value including goodwill.  The value is determined
assuming a freely negotiated transaction between a willing buyer and a willing
seller, neither being under any compulsion to buy or sell and both having
reasonable knowledge of relevant facts. Accordingly, to derive the fair value of
the reporting unit, the following common approaches to valuing business
combination transactions involving financial institutions are utilized by FNB
United:  (1) the comparable transactions approach – specifically
based on earnings, book, assets and deposit premium multiples received in recent
sales of comparable bank franchises; and (2) the discounted cash flow
approach.  The application of these valuation techniques takes into
account the reporting unit’s operating history, the current market environment
and future prospects. As of the most recent quarter, the Bank was carrying
goodwill.
 
 If the
fair value of a reporting unit exceeds its carrying amount, goodwill of the
reporting unit is considered not impaired and no second step is required. If
not, a second test is required to measure the amount of goodwill impairment. The
second test of the overall goodwill impairment compares the implied fair value
of the reporting unit goodwill with the carrying amount of the goodwill. The
impairment loss is equal to the excess of carrying value over fair
value.
 
 During
2008, FNB United performed impairment evaluations resulting in impairment
charges of $57.8 million. Continued stock price weakness and an operating loss
during the first quarter of 2009
  17
  necessitated
another test of impairment. In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, the Company has reviewed entity-wide goodwill for impairment and
determined that the fair value of the Company exceeds its carrying value as of
March 31, 2009.
 
 Summary
 
 Management
believes the accounting estimates related to the allowance for loan losses and
the goodwill impairment test are “critical accounting estimates” because:
(1) the estimates are highly susceptible to change from period to period as
they require management to make assumptions concerning the changes in the types
and volumes of the portfolios and anticipated economic conditions, and
(2) the impact of recognizing an impairment or loan loss could have a
material effect on FNB United’s assets reported on the balance sheet as well as
its net earnings.
 
 Results
of Operations
 
 Net
Interest Income
 
 Net
interest income is the difference between interest income, principally from
loans and investments, and interest expense, principally on customer
deposits.  Changes in net interest income result from changes in
interest rates and in the volume, or average dollar level, and mix of earning
assets and interest-bearing liabilities.  An analysis is presented in
Table 2 of the Company’s net interest income on a taxable-equivalent basis and
average balance sheets for the three-month period ended March 31, 2009 and
2008.
 
 For the
three months ended March 31, 2009, net interest income before the provision for
loan losses was $14.1 million, a decrease of $1.3 million, or 8%, from $15.4
million for the same quarter in 2008.  The decrease was primarily due
to a 176 basis point decrease in the yield on average earning assets, which
increased $218.2 million, partially offset by a 124 basis point decrease in the
cost of average interest-bearing liabilities, which increased $209.0
million.
 
 The net
interest margin (taxable-equivalent net interest income divided by average
earning assets) compressed 65 basis points to 3.03% for the three months ended
March 31, 2009, compared to 3.68% in the same period in 2008.  The
decline in the net interest margin is due in part to a decline in the Federal
Funds target rate from 2.25% at March 31, 2008 to 0.25% at March 31, 2009.
Another variable impacting net interest margin is interest-earning assets
repricing down faster than interest bearing liabilities. While the Company
experienced a 176 basis point decrease in the yield on earning assets, the cost
of interest-bearing liabilities only decreased 124 basis points. The $218.2
million growth in average earning assets was funded by higher cost deposits and
wholesale borrowings.
 
 The 2009
and 2008 changes in net interest income on a taxable equivalent basis, as
measured by volume and rate variances, are analyzed in the table
below.  Volume refers to the average dollar level of earning assets
and interest-bearing liabilities.
 
 
 
 
 
  18
  
 Table
2
 Average
Balances and Net Interest Income Analysis
 
 Three
      Months Ended March 31,2009
                                                                                          
                                                                                          
                                                                                          2008(dollars
      in thousands)
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          Average
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          AverageAverage
                                                                                          
                                                                                          
                                                                                          Income
      /
                                                                                          
                                                                                          
                                                                                          Yield
      /
                                                                                          
                                                                                          
                                                                                          Average
                                                                                          
                                                                                          
                                                                                          Income
      /
                                                                                          
                                                                                          
                                                                                          Yield
      /Balance(3)
                                                                                          
                                                                                          
                                                                                          Expense
                                                                                          
                                                                                          
                                                                                          Rate
                                                                                          
                                                                                          
                                                                                          Balance(3)
                                                                                          
                                                                                          
                                                                                          Expense
                                                                                          
                                                                                          
                                                                                          RateInterest
      earning assets:Loans(1)(2)
                                                                                          
                                                                                          $
                                                                                          1,636,850
                                                                                          
                                                                                          
                                                                                          $
                                                                                          21,642
                                                                                          
                                                                                          
                                                                                          
                                                                                          5.36
                                                                                          %
                                                                                          
                                                                                          $
                                                                                          1,506,582
                                                                                          
                                                                                          
                                                                                          $
                                                                                          27,589
                                                                                          
                                                                                          
                                                                                          
                                                                                          7.37
                                                                                          %Taxable
      investment securities
                                                                                          
                                                                                          
                                                                                          224,403
                                                                                          
                                                                                          
                                                                                          
                                                                                          3,067
                                                                                          
                                                                                          
                                                                                          
                                                                                          5.54
                                                                                          
                                                                                          
                                                                                          
                                                                                          142,048
                                                                                          
                                                                                          
                                                                                          
                                                                                          1,893
                                                                                          
                                                                                          
                                                                                          
                                                                                          5.36Tax-exempt investment securities(1)
                                                                                          
                                                                                          
                                                                                          55,607
                                                                                          
                                                                                          
                                                                                          
                                                                                          923
                                                                                          
                                                                                          
                                                                                          
                                                                                          6.73
                                                                                          
                                                                                          
                                                                                          
                                                                                          55,441
                                                                                          
                                                                                          
                                                                                          
                                                                                          811
                                                                                          
                                                                                          
                                                                                          
                                                                                          5.88Other
      earning assets
                                                                                          
                                                                                          
                                                                                          23,321
                                                                                          
                                                                                          
                                                                                          
                                                                                          80
                                                                                          
                                                                                          
                                                                                          
                                                                                          1.39
                                                                                          
                                                                                          
                                                                                          
                                                                                          17,893
                                                                                          
                                                                                          
                                                                                          
                                                                                          253
                                                                                          
                                                                                          
                                                                                          
                                                                                          5.69Total earning assets
                                                                                          
                                                                                          
                                                                                          1,940,181
                                                                                          
                                                                                          
                                                                                          
                                                                                          25,712
                                                                                          
                                                                                          
                                                                                          
                                                                                          5.37
                                                                                          
                                                                                          
                                                                                          
                                                                                          1,721,964
                                                                                          
                                                                                          
                                                                                          
                                                                                          30,546
                                                                                          
                                                                                          
                                                                                          
                                                                                          7.13Non-earning
      assets:Cash
      and due from banks
                                                                                          
                                                                                          
                                                                                          27,567
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          32,163Goodwill
      and core deposit premium
                                                                                          
                                                                                          
                                                                                          58,087
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          116,655Other
      assets, net
                                                                                          
                                                                                          
                                                                                          84,303
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          89,483Total assets
                                                                                          
                                                                                          $
                                                                                          2,110,138
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          $
                                                                                          1,960,265Interest-bearing
      liabilities:Interest-bearing
      demand deposits
                                                                                          
                                                                                          
                                                                                          179,681
                                                                                          
                                                                                          
                                                                                          
                                                                                          427
                                                                                          
                                                                                          
                                                                                          
                                                                                          0.96
                                                                                          
                                                                                          
                                                                                          
                                                                                          161,910
                                                                                          
                                                                                          
                                                                                          
                                                                                          533
                                                                                          
                                                                                          
                                                                                          
                                                                                          1.32Savings
      deposits
                                                                                          
                                                                                          
                                                                                          39,260
                                                                                          
                                                                                          
                                                                                          
                                                                                          25
                                                                                          
                                                                                          
                                                                                          
                                                                                          0.26
                                                                                          
                                                                                          
                                                                                          
                                                                                          41,316
                                                                                          
                                                                                          
                                                                                          
                                                                                          61
                                                                                          
                                                                                          
                                                                                          
                                                                                          0.59Money
      market deposits
                                                                                          
                                                                                          
                                                                                          282,682
                                                                                          
                                                                                          
                                                                                          
                                                                                          1,146
                                                                                          
                                                                                          
                                                                                          
                                                                                          1.64
                                                                                          
                                                                                          
                                                                                          
                                                                                          260,898
                                                                                          
                                                                                          
                                                                                          
                                                                                          1,803
                                                                                          
                                                                                          
                                                                                          
                                                                                          2.78Time
      deposits
                                                                                          
                                                                                          
                                                                                          903,095
                                                                                          
                                                                                          
                                                                                          
                                                                                          7,276
                                                                                          
                                                                                          
                                                                                          
                                                                                          3.27
                                                                                          
                                                                                          
                                                                                          
                                                                                          830,464
                                                                                          
                                                                                          
                                                                                          
                                                                                          9,409
                                                                                          
                                                                                          
                                                                                          
                                                                                          4.56Retail
      repurchase agreements
                                                                                          
                                                                                          
                                                                                          20,296
                                                                                          
                                                                                          
                                                                                          
                                                                                          33
                                                                                          
                                                                                          
                                                                                          
                                                                                          0.66
                                                                                          
                                                                                          
                                                                                          
                                                                                          30,183
                                                                                          
                                                                                          
                                                                                          
                                                                                          249
                                                                                          
                                                                                          
                                                                                          
                                                                                          3.32Federal
      Home Loan Bank advances
                                                                                          
                                                                                          
                                                                                          224,372
                                                                                          
                                                                                          
                                                                                          
                                                                                          1,598
                                                                                          
                                                                                          
                                                                                          
                                                                                          2.89
                                                                                          
                                                                                          
                                                                                          
                                                                                          169,398
                                                                                          
                                                                                          
                                                                                          
                                                                                          1,692
                                                                                          
                                                                                          
                                                                                          
                                                                                          4.02Federal
      funds purchased
                                                                                          
                                                                                          
                                                                                          13,857
                                                                                          
                                                                                          
                                                                                          
                                                                                          17
                                                                                          
                                                                                          
                                                                                          
                                                                                          0.50
                                                                                          
                                                                                          
                                                                                          
                                                                                          15,040
                                                                                          
                                                                                          
                                                                                          
                                                                                          124
                                                                                          
                                                                                          
                                                                                          
                                                                                          3.32Other
      borrowed funds
                                                                                          
                                                                                          
                                                                                          111,702
                                                                                          
                                                                                          
                                                                                          
                                                                                          692
                                                                                          
                                                                                          
                                                                                          
                                                                                          2.51
                                                                                          
                                                                                          
                                                                                          
                                                                                          56,702
                                                                                          
                                                                                          
                                                                                          
                                                                                          909
                                                                                          
                                                                                          
                                                                                          
                                                                                          6.45Total interest-bearing liabilities
                                                                                          
                                                                                          
                                                                                          1,774,945
                                                                                          
                                                                                          
                                                                                          
                                                                                          11,214
                                                                                          
                                                                                          
                                                                                          
                                                                                          2.56
                                                                                          
                                                                                          
                                                                                          
                                                                                          1,565,911
                                                                                          
                                                                                          
                                                                                          
                                                                                          14,780
                                                                                          
                                                                                          
                                                                                          
                                                                                          3.80Noninterest-bearing
      liabilities and shareholders' equity:Noninterest-bearing
      demand deposits
                                                                                          
                                                                                          
                                                                                          144,479
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          157,436Other
      liabilities
                                                                                          
                                                                                          
                                                                                          15,452
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          19,202Shareholders'
      equity
                                                                                          
                                                                                          
                                                                                          175,262
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          217,716Total liabilities and equity
                                                                                          
                                                                                          $
                                                                                          2,110,138
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          $
                                                                                          1,960,265Net interest income and net yield
      on earning assets (4)
                                                                                          
                                                                                          
                                                                                          $
                                                                                          14,498
                                                                                          
                                                                                          
                                                                                          
                                                                                          3.03
                                                                                          %
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          $
                                                                                          15,766
                                                                                          
                                                                                          
                                                                                          
                                                                                          3.68
                                                                                          %Interest rate spread(5)
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          2.81
                                                                                          %
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          3.34
                                                                                          %
  (1)
      The fully tax equivalent basis is computed using a federal tax rate of
      35%.(2)
      The average loan balances include nonaccruing loans.(3)
      The average balances for all years include market adjustments to fair
      value for securities and loans available/held for sale.(4)
      Net yield on earning assets is computed by dividing net interest income by
      average earning assets.(5)
      Earning asset yield minus interest bearing liabilities
    rate.
  Provision
for Loan Losses
 
 This
provision is the charge against earnings to provide an allowance for probable
losses inherent in the loan portfolio.  The amount of each year’s
charge is affected by several considerations including management’s evaluation
of various risk factors in determining the adequacy of the allowance (see “Asset
Quality”), actual loan loss experience and loan portfolio growth.
 
 During
the three-month period ended March 31, 2009, the provision for loan losses was
$14.1 million, compared to $1.5 million in the same period of
2008.  The level of the provision was driven by
 
  19
  deteriorating
loan quality.  Net charge-offs for the three months ended March 31,
2009 totaled $10.2 million, or 2.58% of annualized average loans, compared to
$680,000, or .18% of annualized average loans for the same period in 2008.
Approximately 64% of the 2009 first quarter charge-offs were comprised of land
development loans.
 
 Noninterest
Income
 
 For the
three months ended March 31, 2009, noninterest income was $5.9 million, an
increase of $0.9 million, or 17%, compared to the same period in
2008.  The primary reason for this increase was the result of mortgage
loan sales increasing $0.8 million.
 
 Noninterest
Expense
 
 Noninterest
expense for the first quarter was approximately $15.8 million in 2009 and $15.5
million in 2008. During the second half of 2008, the Company undertook a
noninterest expense improvement project that included consolidation of
operational functions, strong vendor management and tighter staffing
models.  The results of this project have yielded lower expenses for
the first quarter of 2009 including reductions in salaries and benefits of $0.7
million and travel and entertainment expenses of $0.1 million. Losses related to
other real estate owned were also $0.2 million lower than the prior year. These
reductions were offset by increases in audit fees of $0.3 million, FDIC
insurance costs of $0.3 million, write-off of investment in a failed banker’s
bank of $0.3 million, marketing initiatives of $0.2 million and occupancy
expense of $0.2 million.
 
 Provision
for Income Taxes
 
 The
Company experienced an income tax benefit totaling $4.1 million for the first
quarter of 2009 compared to a tax expense of $1.1 million for the same period in
2008.  The decrease in the provision for 2009, compared to the prior
year, results primarily from the decrease in taxable income.  Our
provision for income taxes, as a percentage of (loss)/income before income
taxes, was 41.7% for the three months ended March 31, 2009, compared to 31.8%
for the first three months ended March 31, 2008.
 
 Financial
Condition
 
 Since
December 31, 2008, the Company’s assets have increased $109.6 million, to $2.2
billion at March 31, 2009.  The principal factors causing this overall
increase during the first three months of 2009 were a $94.9 million increase in
net investment securities, combined with a $12.8 million increase in loans held
for sale.  Loans held for investment totaled $1.6 billion both at
March 31, 2009 and at December 31, 2008. Investment securities of $328.1 million
at March 31, 2009 were 41% higher than the $233.2 million balance at December
31, 2008.
 
 Deposits
totaled $1.6 billion at March 31, 2009, compared to $1.5 billion at December 31,
2008.  At the end of the first quarter 2009, noninterest-bearing
deposits were $143.1 million, or 9%, of total deposits, down 5% since the end of
2008.  Borrowings at the Federal Home Loan Bank (“FHLB”) totaled
$172.9 million at March 31, 2009, compared to $238.9 million at December 31,
2008.  The decrease in the FHLB borrowings was partially offset by an
increase in federal funds purchased of $38 million. The Company accessed the
Federal Reserve’s Term Auction Liquidity Facility for the first time in January,
2009. Unlike FHLB funding, Federal Reserve funding allows construction and
development loans as collateral.
 
 Shareholders’
equity is strong, with all of our regulatory capital ratios at levels that
classify the Company as “well capitalized” under bank regulatory capital
guidelines.  Shareholders’ equity was $192.8 million at the end of the
first quarter 2009, up 30% from $147.9 million at December 31, 2008. The
increase reflects the issuance of Series A senior preferred stock and related
warrant to the U.S. Department of the
  20
  Treasury
pursuant to the terms of the Capital Purchase Program. The Company declared
common dividends of $.025 per share during the first quarter ended March 31,
2009.
 
 Investment
Securities
 
 The
Company evaluates all securities on a quarterly basis, and more frequently when
economic conditions warrant additional evaluations, to determine if an
other-than-temporary impairment (“OTTI”) exists pursuant to
guidelines established in FSP 115-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments.  In
evaluating the possible impairment of securities, consideration is given to the
length of time and the extent to which the fair value has been less than book
value, the financial conditions and near-term prospects of the issuer, and the
ability and intent of the Company to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair
value.  In analyzing an issuer’s financial condition, the Company may
consider whether the securities are issued by the federal government or its
agencies or government sponsored agencies, whether downgrades by bond rating
agencies have occurred, and the results of reviews of the issuer’s financial
condition.  If management determines that an investment experienced an
OTTI, the loss is recognized in the income statement as a realized
loss.  Any recoveries related to the value of these securities are
recorded as an unrealized gain (as other comprehensive income/(loss) in
stockholders’ equity) and not recognized in income until the security is
ultimately sold.
 
 The
Company owns one collateralized debt obligation (“CDO”) issue with a book value
as of March 31, 2009 of $4.9 million. With very limited marketability of the
security, a down-graded credit rating and rates well above the stated rate of
this security, the current trading activity is $4.3 million below par for this
security. Though the market value of the CDO has been impacted by market
illiquidity, the Company’s position is superior to other tranches within the CDO
and it is expected that all contractual payments will be made until maturity or
call. After extensive review, and with the expectation that the Company will
receive all contractual cash flows, management determined that no OTTI charge
was necessary. Management will continue to monitor this security for future
OTTI.
 
 The
Company also owns one corporate bond and one municipal bond with respective book
values of $1.0 million and $0.4 million. Both bonds have reduced credit ratings
and the corporate bond has little resale market. Current trading values are $0.5
million for the corporate bond and $0.4 million for the municipal bond. After
extensive review, the Company expects all cash flows to be received as scheduled
and has the intent and ability to hold both securities for a period of time that
is sufficient to recover value. No OTTI charge is considered necessary at this
time. Management will continue to monitor the securities for future
OTTI.
 
 At March
31, 2009, the remainder of the Company’s securities available-for-sale with an
unrealized loss position were, in management’s belief, primarily due to
differences in market interest rates as compared to those of the underlying
securities.  Management does not believe any of these securities are
other-than-temporarily impaired.  At March 31, 2009, the Company has
both the intent and ability to hold these impaired securities for a period of
time necessary to recover the unrealized losses; however, the Company may from
time to time dispose of an impaired security in response to asset/liability
management decisions, future market movements, business plan changes, or if the
net proceeds could be reinvested at a rate of return that is expected to recover
the loss within a reasonable period of time.
 
 Asset
Quality
 
 Management
considers the asset quality of the Bank to be of primary
importance.  A formal loan review function, independent of loan
origination, is used to identify and monitor problem loans.  As part
of the loan review function, a third-party assessment group has been employed to
review the underwriting documentation and risk grading
analysis.  Beginning in 2009, the formal loan review function will
be
  21
  brought
in-house in order to provide more timely response.  This function will
be managed by credit administration.
 
 Nonperforming
assets
 
 Nonperforming
assets are comprised of nonaccrual loans, accruing loans past due 90 days or
more, and other real estate owned (“OREO”).  Loans are placed in
nonaccrual status when, in management’s opinion, the collection of all or a
portion of interest becomes doubtful.  Loans are returned to accrual
status when the factors indicating doubtful collectability cease to exist and
the loan has performed in accordance with its terms for a demonstrated period of
time.  OREO represents real estate acquired through foreclosure or
deed in lieu of foreclosure and is generally carried at fair value, less
estimated costs to sell.
 
 Nonperforming
loans at March 31, 2009 were $118.8 million, or 7.5% of loans held for
investment, compared to $96.0 million, or 6.1% of loans held for investment at
December 31, 2008.  OREO was $9.1 million at March 31, 2009, compared
to $6.8 million at December 31, 2008.
 
 Allowance for Loan
Losses
 
 In
determining the allowance for loan losses and any resulting provision to be
charged against earnings, particular emphasis is placed on the results of the
loan review process.  Consideration is also given to a review of
individual loans, historical loan loss experience, the value and adequacy of
collateral and economic conditions in the Bank’s market area.  For
loans determined to be impaired, the allowance is based on discounted cash flows
using the loan’s initial effective interest rate or the fair value of the
collateral for certain collateral dependent loans. This evaluation is inherently
subjective as it requires material estimates, including the amounts and timing
of future cash flows expected to be received on impaired loans that may be
susceptible to significant change.  In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank’s allowance for loan losses.  Such agencies may require the
Bank to recognize changes to the allowance based on their judgments about
information available to them at the time of their
examinations.  Loans are charged off when, in the opinion of
management, they are deemed to be uncollectible.  Recognized losses
are charged against the allowance, and subsequent recoveries are added to the
allowance.
 
 The
adequacy of the allowance for loan losses is measured on a quarterly basis
against an allocation model that assigns reserves to various components of the
loan portfolio in order to provide for probable inherent
losses.  Homogeneous pools of loans are segregated, and
classifications of individual loans within certain of these pools are identified
using risk grades derived from regulatory risk guidelines and additional
internal parameters.  Utilizing the trailing four-year historical loss
experience of the Bank (prior to the merger with Integrity) combined with recent
loss experience with the acquired Integrity loan portfolio and the
assessment of portfolio quality and diversification trends and economic factors,
a range of appropriate reserves is calculated for each classification and pool
of loans.  Allocated to each pool is a reserve amount within the
calculated range, as supported by the historical loss
ratios.  Additional reserves are estimated and assigned to the most
adversely classified loans based upon an individual analysis of present-value
repayment and/or liquidation projections of each loan.  A portion of
the total reserve may be unallocated to any specific segment of the loan
portfolio, but will not exceed the upper limit of the total calculated reserve
range when aggregated with allocated portions.  The determination
within the allowance model of allocated and unallocated components is not
necessarily indicative of future losses or allocations.  The entire
balance of the allowance for loan losses is available to absorb losses in any
segment of the loan portfolio.
 
 The
allowance for loan losses, as a percentage of loans held for investment,
amounted to 2.44% at March 31, 2009, 2.19% at December 31, 2008 and 1.18% at
March 31, 2008.  Adequate provisions and allowances for loan losses
are based upon numerous factors including growth of the loan
portfolio,
  22
  delinquencies,
net charge offs, nonperforming loans, and collateral values.  Changes
in the allowance for loan losses are presented in Note 4 to the Consolidated
Financial Statements.
 
 Management
believes the allowance for loan losses of $38.6 million at March 31, 2009 is
adequate to cover probable losses inherent in the loan portfolio; however,
assessing the adequacy of the allowance is a process that requires continuous
evaluation and considerable judgment.  Management’s judgments are
based on numerous assumptions about current events which it believes to be
reasonable, but which may or may not be valid.  Thus, there can be no
assurance that loan losses in future periods will not exceed the current
allowance or that future increases in the allowance will not be
required.  No assurance can be given that management’s ongoing
evaluation of the loan portfolio in light of changing economic conditions and
other relevant circumstances will not require significant future additions to
the allowance, thus adversely affecting the operating results of the
Company.
 
 Liquidity
Management
 
 Liquidity
management refers to the ability to meet day-to-day cash flow requirements based
primarily on activity in loan and deposit accounts of the Company’s
customers.  Deposit withdrawals, loan funding and general corporate
activity create a need for liquidity for the Company.  Liquidity is
derived from sources such as deposit growth; maturity, calls, or sales of
investment securities; principal and interest payments on loans; access to
borrowed funds or lines of credit; and profits.
 
 Consistent
with the general approach to liquidity, loans and other assets of the Bank are
based primarily on a core of local deposits and the Bank’s capital
position.  To date, the steady increase in deposits, retail repurchase
agreements and capital, supplemented by Federal Home Loan Bank advances and a
modest amount of brokered deposits, has been adequate to fund loan demand in the
Bank’s market area, while maintaining the desired level of immediate liquidity
and a substantial investment securities portfolio available for both immediate
and secondary liquidity purposes.
 
 Commitments,
Contingencies and Off-Balance Sheet Risk
 
 In the
normal course of business, various commitments are outstanding that are not
reflected in the Consolidated Financial Statements.  Significant
commitments at March 31, 2009 are discussed below.
 
 Commitments
by the Bank to extend credit and undisbursed advances on customer lines of
credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract.  At March 31, 2009, total
commitments to extend credit and undisbursed advances on customer lines of
credit amounted to $337.3 million.  Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee.  Since many commitments expire without being fully drawn, the
total commitment amounts do not necessarily represent future cash
requirements.  The Company evaluates each customer’s creditworthiness
on a case-by-case basis.  The amount of collateral obtained, if deemed
necessary, upon extension of credit is based on the credit evaluation of the
borrower.
 
 The Bank
issues standby letters of credit whereby it guarantees the performance of a
customer to a third party if a specified triggering event or condition
occurs.  The guarantees generally expire within one year and may be
automatically renewed depending on the terms of the guarantee.  All
standby letters of credit provide for recourse against the customer on whose
behalf the letter of credit was issued, and this recourse may be further secured
by a pledge of assets.  The maximum potential amount of undiscounted
future payments related to standby letters of credit was $16.5 million at March
31, 2009, $16.1 million at December 31, 2008 and $22.5 million at March 31,
2008.
 
 Dover
Mortgage Company originates certain fixed rate residential mortgage loans with
the intention of selling these loans.  Between the time that Dover
enters into an interest rate lock or a commitment to originate a fixed rate
residential mortgage loan with a potential borrower and the time the closed loan
is
  23
  sold, the
Company is subject to variability in market prices related to these
commitments.  The Company believes that it is prudent to limit the
variability of expected proceeds from the future sales of these loans by
entering into forward sales commitments and commitments to deliver loans into a
mortgage-backed security.  The commitments to originate fixed rate
residential mortgage loans and the forward sales commitments are freestanding
derivative instruments.  They do not qualify for hedge accounting
treatment so their fair value adjustments are recorded through the income
statement in income from mortgage loan sales.  The commitments to
originate fixed rate residential mortgage loans totaled $72.4 million at March
31, 2009, and the related forward sales commitments totaled $72.4
million.  Loans held for sale by Dover totaled $36.9 million at March
31, 2009, and the related forward sales commitments totaled $36.9
million.
 
 The Bank
had loans held for sale of $11.6 million at March 31,
2009.  Commitments of the Bank for the origination of mortgage loans
intended to be held for sale at March 31, 2009 were $58.9 million.
 
 The
Company does not have any special purpose entities or other similar forms of
off-balance sheet financing.
 
 Asset/Liability
Management and Interest Rate Sensitivity
 
 One of
the primary objectives of asset/liability management is to maximize the net
interest margin while minimizing the earnings risk associated with changes in
interest rates.  One method used to manage interest rate sensitivity
is to measure, over various time periods, the interest rate sensitivity
positions, or gaps; however, this method addresses only the magnitude of timing
differences and does not address earnings or market value.  Therefore,
management uses an earnings simulation model to prepare, on a regular basis,
earnings projections based on a range of interest rate scenarios in order to
more accurately measure interest rate risk.
 
 The
Company’s balance sheet was asset-sensitive at March 31, 2009.  An
asset-sensitive position means that, for cumulative gap measurement periods of
one year or less, there are more assets than liabilities subject to immediate
repricing as market rates change.  Because immediately rate sensitive
assets exceed rate sensitive interest-bearing liabilities, the earnings position
could improve in a rising rate environment and could deteriorate in a declining
rate environment, depending on the correlation of rate changes in these two
categories.  Included in interest-bearing liabilities subject to rate
changes within 90 days is a portion of the interest-bearing demand, savings and
money market deposits.  These types of deposits historically have not
repriced coincidentally with or in the same proportion as general market
indicators.
 
 Capital
Adequacy and Resources
 
 Under
guidelines established by the Board of Governors of the Federal Reserve System,
capital adequacy is currently measured for regulatory purposes by certain
risk-based capital ratios, supplemented by a leverage capital
ratio.  The risk-based capital ratios are determined by expressing
allowable capital amounts, defined in terms of Tier 1 and Tier 2, as a
percentage of risk-weighted assets, which are computed by measuring the relative
credit risk of both the asset categories on the balance sheet and various
off-balance sheet exposures.  Tier 1 capital consists primarily of
common shareholders' equity and qualifying perpetual preferred stock and
qualifying trust preferred securities, net of goodwill and other disallowed
intangible assets. Tier 2 capital, which is limited to the total of Tier 1
capital, includes allowable amounts of subordinated debt, mandatory convertible
debt, preferred stock, trust preferred securities and the allowance for loan
losses. Total capital, for risk-based purposes, consists of the sum of Tier 1
and Tier 2 capital.  Under current requirements, the minimum total
capital ratio is 8.00% and the minimum Tier 1 capital ratio is
4.00%.  At March 31, 2009, FNB United and the Bank had total
risk-based capital ratios of 12.51% and 11.79%, respectively, and Tier 1 capital
ratios of 10.16% and 9.70%, respectively.
  24
  As shown
in the accompanying table, FNB United and its wholly owned banking subsidiary
have capital levels exceeding the minimum levels for “well capitalized” bank
holding companies and banks as of March 31, 2009.
 
 Regulatory
      GuidelinesWell
                        
                        AdequatelyCapitalized
                        
                        Capitalized
                        
                        
                        FNB
      United
                        
                        CommunityONETotal
      Capital
                        10.00%
                        
                        8.00%
                        
                        
                        12.51%
                        
                        11.79%Tier
      1 Capital
                        6.00
                        
                        4.00
                        
                        
                        10.16
                        
                        9.70Leverage
      Capital
                        5.00
                        
                        4.00
                        
                        
                        8.98
                        
                        8.56
 
 On
February 13, 2009, the Company entered into a Letter Agreement and Securities
Purchase Agreement (the “Purchase Agreement”) with the U.S. Treasury Department
(“Treasury”) under the TARP Capital Purchase Program (the “CPP”) discussed
below, pursuant to which the Company sold (i) 51,500 shares of Fixed Rate
Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”)
for $51,500,000 and (ii) a warrant (the “Warrant”) to purchase 2,207,143 shares
of the Company’s common stock for an exercise price of $3.50 per share, or $7.7
million in the aggregate, in cash.
 
 The
warrant is immediately exercisable and expires 10 years from the date of
issuance.  Proceeds from this sale of the preferred stock are expected
to be used for general corporate purposes, including supporting the continued,
anticipated growth of the Company.  The CPP preferred stock is
generally non-voting, other than having class voting rights on certain matters,
and pays cumulative dividends quarterly at a rate of 5% per annum for the first
five years and 9% thereafter.  The preferred shares are redeemable at
the option of the Company, subject to the approval of its primary federal
regulator.
 
 Pursuant
to the terms of the Purchase Agreement, the ability of the Company to declare or
pay dividends or distributions on its common stock is subject to restrictions,
including a restriction against increasing dividends from the last quarterly
cash dividend per share ($.10) declared on the common stock prior to October 14,
2008, as adjusted for subsequent stock dividends and other similar
actions.  In addition, as long as Series A Preferred Stock is
outstanding, dividend payments are prohibited until all accrued and unpaid
dividends are paid on such preferred stock, subject to certain limited
exceptions.
 
 The
proceeds from the offering of the Series A Preferred Stock and related Warrant
were allocated between the Series A Preferred Stock and Warrant based on their
relative fair values.  The Warrant was assigned a fair value of $1.76
per share, or $3.9 million in the aggregate.  As a result, $3.9
million was recorded as the discount on the preferred stock obtained and will be
accreted as a reduction in net income available for common shareholders over the
next five years at approximately $596,000 to $985,000 per year.  For
purposes of these calculations, the fair value of the shares subject to the
Warrant was estimated using the Black-Scholes option pricing model.
 
 Non-GAAP
Measures
 
 This
Quarterly Report on Form 10-Q contains financial information determined by
methods other than in accordance with generally accepted accounting principles
(“GAAP”).  FNB United’s management uses these non-GAAP measures in
their analysis of FNB United’s performance.  These non-GAAP measures
exclude average goodwill and core deposit premiums from the calculations of
return on average assets and return on average equity.  Management
believes presentations of financial measures excluding the impact of goodwill
and core deposit premiums provide useful supplemental information that is
essential to a proper understanding of the operating results of FNB United’s
core businesses. In addition, certain designated net interest income amounts are
presented on a taxable equivalent basis.  Management believes that the
presentation of net interest income on a taxable equivalent basis aids in the
comparability of net interest income arising from taxable and tax-exempt
sources.  These disclosures should not be
  25
  viewed as
a substitute for results determined in accordance with GAAP, nor are they
necessarily comparable to non-GAAP performance measures that may be presented by
other companies.
 
 Cautionary
Statement Regarding Forward-Looking Statements
  The
statements contained in this Quarterly Report on Form 10-Q of FNB United Corp.
(“FNB United”) that are not historical facts are forward-looking statements, as
such term is defined in the Private Securities Litigation Reform Act of
1995.  These statements can be identified by the use of
forward-looking terminology such as “believes,” “expects,” “plans,” “projects,”
“goals,” “estimates,” “may,” “should,” “could,” “would,” “intends,” “outlook” or
“anticipates,” or the negative of such terms, variations of these and similar
words, or by discussions of strategy that involve risks and
uncertainties.  In addition, from time to time FNB United or its
representatives have made or may make forward-looking statements, orally or in
writing.  Such forward-looking statements may be included in, but are
not limited to, various filings made by FNB United with the Securities and
Exchange Commission, or press releases or oral statements made by or with the
approval of an authorized officer of FNB United.  Forward-looking
statements are based on management’s current views and assumptions and involve
risks and uncertainties that could significantly affect expected
results.
 
 FNB
United wishes to caution the reader that factors, such as those listed below, in
some cases have affected and could affect FNB United’s actual results, causing
actual results to differ materially from those in any forward-looking
statement.  These factors include, without limitation:  (i)
competitive pressure in the banking industry or in FNB United’s markets may
increase significantly; (ii) inflation, interest rate, market and monetary
fluctuations; (iii) general economic conditions, either nationally or
regionally, may be unfavorable or less favorable than expected, resulting in,
among other things, credit quality deterioration or a reduced demand for credit
or other services;  (iv) adverse changes in the securities markets;
(v) changes may occur in banking and other applicable legislation and
regulation;  (vi) changes in general business conditions; and (vii)
changes in real estate markets. FNB United cautions that this list of factors is
not exclusive.  Readers should also consider information on risks and
uncertainties contained in the Company’s most recent Annual Report on Form 10-K,
including the discussions of competition, supervision and regulation, and effect
of governmental policies set forth therein.
 
 All
forward-looking statements speak only as of the date on which such statements
are made, and FNB United undertakes no obligation to update any statement,
whether written or oral, to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events.
 
 Item
3.            Quantitative
and Qualitative Disclosures About Market Risk
 
 Market
risk is the possible chance of loss from unfavorable changes in market prices
and rates.  These changes may result in a reduction of current and
future period net interest income, which is the favorable spread earned from the
excess of interest income on interest-earning assets, over interest expense on
interest-bearing liabilities.
 
 The
Company’s market risk arises primarily from interest rate risk inherent in its
lending and deposit-taking activities.  The structure of the Company’s
loan and deposit portfolios is such that a significant decline in interest rates
may adversely impact net market values and net interest income.  The
Company does not maintain a trading account nor is FNB United subject to
currency exchange risk or commodity price risk.  Interest rate risk is
monitored as part of the Company’s asset/liability management function, which is
discussed in “Asset/Liability Management and Interest Rate Sensitivity”
above.  Interest rate risk is monitored as part of the Company’s
asset/liability management function, which is discussed above in Item 2
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” under the heading “Asset/Liability Management and Interest Rate
Sensitivity.”
  26
  
 Management
considers interest rate risk the Bank’s most significant market risk, which
could potentially have the greatest impact on operating earnings. The Company is
asset sensitive, which means that falling interest rates could result in a
reduced amount of net interest income. The monitoring of interest rate risk is
part of the Company’s overall asset/liability management process. The primary
oversight of asset/liability management rests with the Company’s Asset and
Liability Committee. The Committee meets on a regular basis to review
asset/liability activities and to monitor compliance with established
policies.
 
 Management
does not believe there has been any significant change in the overall analysis
of financial instruments considered market risk sensitive, as measured by the
factors of contractual maturities, average interest rates and estimated fair
values, since the analysis prepared and presented in conjunction with the Form
10-K Annual Report for the fiscal year ended December 31, 2008.
 
 Item
      4.
                Controls
      and Procedures
 
 As of
March 31, 2009, the end of the period covered by this report, FNB United carried
out an evaluation under the supervision and with the participation of the
Company’s management, including FNB United’s Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of FNB
United’s disclosure controls and procedures.  In designing and
evaluating the Company’s disclosure controls and procedures, FNB United and its
management recognize that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and FNB United’s management necessarily was required
to apply its judgment in evaluating and implementing possible controls and
procedures.  Based upon the evaluation, and for the reason described
in the next paragraph, the Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were ineffective
to provide reasonable assurance that information required to be disclosed by FNB
United in the reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms.
 
 As of
December 31, 2008, FNB United concluded that it did not have adequate
segregation of duties and staffing within its accounting department, adversely
affecting its disclosure controls and procedures and internal control over
financial reporting. FNB United has since that date restructured various duties
and responsibilities within the accounting department to ensure appropriate
segregation of duties and is in the process of concluding an executive search
for an individual to assist the Company in its financial reporting. FNB United
reviews its disclosure controls and procedures, which may include its internal
controls over financial reporting, on an ongoing basis and may from time to time
make changes aimed at enhancing their effectiveness. No control enhancements
during the quarter ended March 31, 2009, other than those described above, have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
 
 PART
II.  OTHER INFORMATION
 
 Item
      1.
                Legal
      Proceedings
 
 None.
 
 Item
      1.A.
                Risk
      Factors
 
 No
      material changes.
 
 Item
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
   27
 Not
      Applicable.
 
 Item
      3.
                Defaults
      Upon Senior Securities
 
 Not
      Applicable.
 
 Item
      4.
                Submission
      of Matters to a Vote of Security
Holders
 
 On January 23, 2009, FNB United Corp.
conducted a special meeting of shareholders to approve an amendment to the
corporation’s articles of incorporation to provide that the corporation’s
authorized preferred stock may have voting rights. Shares represented at the
meeting either in person or by proxy totaled 6,718,123, or 58.8% of the shares
entitled to vote. 5,320,071 shares voted in favor of the amendment, 1,350,266
shares voted against, and 47,786 shares abstained.
 
 Item
      5.
                Other
      Information
 
 None
 
 Item
      6.
                Exhibits
 
 Exhibits
      to this report are listed in the index to exhibits on pages 30-33 of this
      report.
  28
  
 SIGNATURE
 
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 
 FNB
      United Corp.(Registrant)Date:
      May 8, 2009
              By:
              /s/ Mark
      A. SeversonMark
      A. SeversonChief
      Financial Officer
 
  29
  INDEX
TO EXHIBITS
 
 Exhibit
      No.
                      Description of
      Exhibit3.10
                      Articles
      of Incorporation of the Registrant, incorporated herein by reference to
      Exhibit 3.1 to the Registrant’s Form S-14 Registration Statement (No.
      2-96498) filed March 16, 1985.3.11
                      Articles
      of Amendment to Articles of Incorporation of the Registrant, adopted May
      10, 1988, incorporated herein by reference to Exhibit 19.10 to the
      Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30,
      1988.3.12
                      Articles
      of Amendment to Articles of Incorporation of the Registrant, adopted May
      12, 1998, incorporated herein by reference to Exhibit 3.12 to the
      Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30,
      1998.3.13
                      Articles
      of Amendment to Articles of Incorporation of the Registrant, adopted May
      23, 2003, incorporated herein by reference to Exhibit 3.13 to the
      Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30,
      2003.3.14
                      Articles
      of Amendment to Articles of Incorporation of the Registrant, adopted March
      15, 2006, incorporated herein by reference to Exhibit 3.14 to the
      Registrant’s Form 10-Q Quarterly Report for the quarter ended March 31,
      2006.3.15
                      Articles
      of Merger, setting forth amendment to Articles of Incorporation of the
      Registrant, effective April 28, 2006, incorporated herein by reference to
      Exhibit 3.15 to the Registrant’s Form 10-Q Quarterly Report for the
      quarter ended March 31, 2006.3.16
                      Articles
      of Amendment to Articles of Incorporation, adopted January 23, 2009,
      incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form
      8-K Current Report filed January 23, 2009.3.17
                      Articles
      of Amendment to Articles of Incorporation, adopted February 11, 2009,
      incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form
      8-K Current Report filed February 13, 2009.3.20
                      Amended
      and Restated Bylaws of the Registrant, adopted February 11, 2009,
      incorporated herein by reference to Exhibit 3.2 to the Registrant’s Form
      8-K Current Report filed February 13, 2009.4.10
                      Specimen
      of Registrant’s Common Stock Certificate, incorporated herein by reference
      to Exhibit 4 to Amendment No. 1 to the Registrant’s Form S-14 Registration
      Statement (No. 2-96498) filed April 19, 1985.4.11
                      Specimen
      of Registrant’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A,
      Stock Certificate, incorporated herein by reference to Exhibit 4.1 to the
      Registrant’s Form 8-K Current Report filed February 13,
    2009.4.20
                      Indenture
      dated as of November 4, 2005, between FNB Corp. and U.S. Bank, National
      Association, as trustee, incorporated herein by reference to Exhibit 4.1
      to the Registrant’s Form 8-K Current Report filed November 8,
      2005.
 
  30
  
 4.21
                Amended
      and Restated Declaration of Trust of FNB United Statutory Trust I dated as
      of November 4, 2005, among FNB Corp., as sponsor, U.S. Bank, National
      Association, as institutional trustee, and Michael C. Miller and Jerry A.
      Little, as administrators, incorporated herein by reference to Exhibit 4.2
      to the Registrant’s Form 8-K Current Report dated November 4,
      2005.4.30
                Amended
      and Restated Declaration of Trust of FNB United Statutory Trust I dated as
      of November 4, 2005, among FNB Corp., as sponsor, U.S. Bank, National
      Association, as institutional trustee, and Michael C. Miller and Jerry A.
      Little, as administrators, incorporated herein by reference to Exhibit 4.2
      to the Registrant’s Form 8-K Current Report filed November 8,
      2005.4.31
                Amended
      and Restated Trust Agreement of FNB United Statutory Trust II dated as of
      April 27, 2006, among FNB Corp., as sponsor, Wilmington Trust Company, as
      institutional trustee, and Michael C. Miller and Jerry A. Little, as
      administrators, incorporated herein by reference to Exhibit 4.2 to the
      Registrant’s Form 8-K Current Report dated April 27, 2006 and filed April
      28, 2006.4.40
                Warrant
      to purchase up to 2,207,143 shares of Common Stock used to the United
      States Department of the Treasury, incorporated herein by reference to
      Exhibit 4.2 to the Registrant’s Form 8-K Current Report filed February 13,
      2009.10.10*
                Form
      of Split Dollar Insurance Agreement dated as of November 1, 1987 between
      First National Bank and Trust Company and certain of its key employees and
      directors, incorporated herein by reference to Exhibit 19.20 to the
      Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30,
      1988.10.11*
                Form
      of Amendment to Split Dollar Insurance Agreement dated as of November 1,
      1994 between First National Bank and Trust Company and certain of its key
      employees and directors, incorporated herein by reference to Exhibit 10.11
      to the Registrant’s Form 10-KSB Annual Report for the fiscal year ended
      December 31, 1994.10.20*
                Stock
      Compensation Plan as amended effective May 12, 1998, incorporated herein
      by reference to Exhibit 10.30 to the Registrant’s Form 10-Q Quarterly
      Report for the quarter ended June 30, 1998.10.21*
                Form
      of Incentive Stock Option Agreement between FNB Corp. and certain of its
      key employees, pursuant to the Registrant’s Stock Compensation Plan,
      incorporated herein by reference to Exhibit 10.31 to the Registrant’s Form
      10-KSB Annual Report for the fiscal year ended December 31,
      1994.10.22*
                Form
      of Nonqualified Stock Option Agreement between FNB Corp. and certain of
      its directors, pursuant to the Registrant’s Stock Compensation Plan,
      incorporated herein by reference to Exhibit 10.32 to the Registrant’s Form
      10-KSB Annual Report for the fiscal year ended December 31,
      1994.10.23*
                FNB
      United Corp. 2003 Stock Incentive Plan, as amended and restated as of
      December 31, 2008, incorporated herein by reference to Exhibit 10.23 to
      the Registrant’s Form 10-K Annual Report for the fiscal year ended
      December 31, 2008.10.24*
                Form
      of Incentive Stock Option Agreement between FNB Corp. and certain of its
      key employees, pursuant to the Registrant’s 2003 Stock Incentive Plan,
      incorporated herein by reference to Exhibit 10.24 to the Registrant’s Form
      10-Q Quarterly Report for the quarter ended  September 30,
      2003.
 
  31
  
 10.25*
                Form
      of Nonqualified Stock Option Agreement between FNB Corp. and certain of
      its directors, pursuant to the Registrant’s 2003 Stock Incentive Plan,
      incorporated herein by reference to Exhibit 10.25 to the Registrant’s Form
      10-K Annual Report for the fiscal year ended December 31,
      2003.10.26*
                Form
      of Restricted Stock Agreement between FNB United Corp. and certain of its
      key employees and non-employee directors, pursuant to the Registrant’s
      2003 Stock Incentive Plan, incorporated herein by reference to Exhibit
      10.26 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended
      June 30, 2006.10.30*
                Amended
      and Restated Employment Agreement dated as of December 31, 2008 among FNB
      United Corp., CommunityONE Bank, National Association and Michael C.
      Miller, incorporated herein by reference to Exhibit 10.30 to the
      Registrant’s Form 10-K Annual Report for the fiscal year ended December
      31, 2008.10.31*
                Carolina
      Fincorp, Inc. Stock Option Plan (assumed by the Registrant on April 10,
      2000), incorporated herein by reference to Exhibit 99.1 to the
      Registrant’s Registration Statement on Form S-8 (File No.
      333-54702).10.32*
                Amended
      and Restated Employment Agreement dated as of December 31, 2008 between
      CommunityONE Bank, National Association and R. Larry Campbell,
      incorporated herein by reference to Exhibit 10.32 to the Registrant’s Form
      10-K Annual Report for the fiscal year ended December 31,
      2008.10.33*
                Nonqualified
      Supplemental Retirement Plan with R. Larry Campbell, incorporated herein
      by reference to Exhibit 10(c) to the Annual Report on Form 10-KSB of
      Carolina Fincorp, Inc. for the fiscal year ended June 30,
      1997.10.34*
                Amendment
      to Executive Income Deferred Compensation Agreement dated as of December
      31, 2008 between CommunityONE Bank, National Association and R. Larry
      Campbell, incorporated herein by reference to Exhibit 10.34 to the
      Registrant’s Form 10-K Annual Report for the fiscal year ended December
      31, 2008.10.35*
                Amended
      and Restated Change of Control Agreement dated as of December 31, 2008
      among FNB United Corp., CommunityONE Bank, National Association, and R.
      Mark Hensley, incorporated herein by reference to Exhibit 10.35 to the
      Registrant’s Form 10-K Annual Report for the fiscal year ended December
      31, 2008.10.36*
                Amended
      and Restated Change of Control Agreement dated as of December 31, 2008
      among FNB United Corp., CommunityONE Bank, National Association, and Mark
      A. Severson, incorporated herein by reference to Exhibit 10.36 to the
      Registrant’s Form 10-K Annual Report for the fiscal year ended December
      31, 2008.10.37*
                Form
      of Change of Control Agreement among FNB United Corp., CommunityONE Bank,
      National Association and certain key officers and employees, incorporated
      herein by reference to Exhibit 10.37 to the Registrant’s Form 10-K Annual
      Report for the fiscal year ended December 31, 2008.
 
  32
  
 10.38*
                  Form
      of Letter Agreement between FNB United Corp. and senior executive officers
      incorporated herein by reference to the Registrant’s Form 8-K Current
      Report filed February 13, 2009.10.40
                  Guarantee
      Agreement dated as of November 4, 2005, by FNB Corp. for the benefit of
      the holders of trust preferred securities, incorporated herein by
      reference to Exhibit 10.1 to the Registrant’s Form 8-K Current Report
      dated November 4, 2005 and filed November 5, 2005.10.41
                  Guarantee
      Agreement dated as of April 27, 2006 between FNB Corp. and Wilmington
      Trust Company, as guarantee trustee, for the benefit of the holders of
      trust preferred securities, incorporated herein by reference to Exhibit
      10.1 to the Registrant’s Form 8-K Current Report dated April 27, 2006 and
      filed April 28, 2006.10.42
                  Subordinated
      Debt Loan Agreement dated as of June 30, 2008, between CommunityONE Bank,
      National Association and SunTrust Bank, incorporated herein by reference
      to Exhibit 10.43 to the Registrant’s Form 10-Q Quarterly Report for the
      quarter ended June 30, 2008.10.5
                  Letter
      Agreement between the Registrant and the United States Department of the
      Treasury, dated February 13, 2009, incorporated herein by reference to
      Exhibit 10.1 to the Registrant’s Form 8-K Current Report filed February
      13, 2009.31.10
                  Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.11
                  Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32
                  Certification
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.
 ________________
 
 *
Management contract, or compensatory plan or arrangement.


33