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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2006

Commission file number 0-13823



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FNB UNITED CORP.

(Exact name of registrant as specified in its charter)



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|                         |  |                                     
|------------------------ |  | ------------------------------------
|North Carolina           |  | 56-1456589                          
|(State of incorporation) |  | (I.R.S. Employer Identification No.)

101 Sunset Avenue, Asheboro, North Carolina 27203

(Address of principal executive offices)

(336) 626-8300

(Registrants telephone number, including area code)



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

Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.



|Large | accelerated filer ̈Accelerated
filer  x    Non-accelerated filer ̈
|----- | ----------------------------------------------------------------

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

The registrant had 11,161,683 shares of $2.50 par value common stock outstanding at August 1, 2006.



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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FNB United Corp. and Subsidiaries

CONSOLIDATED BALANCE SHEETS (unaudited)



|                                                                                                                  |      |                                                |           |      |                   |   |         |   |  |   |           |  
|----------------------------------------------------------------------------------------------------------------- | ---- | ---------------------------------------------- | --------- | ---- | ----------------- | - | ------- | - |  | - | --------- | -
|                                                                                                                  |      | June 30,                                       |           |      | December 31, 2005 |  
|                                                                                                                  | 2006 |                                                |           | 2005 |                   |  
|                                                                                                                  |      | (in thousands, except share andper share data) |          
|ASSETS                                                                                                            |      |                                                |           |      |                   |   |         |   |  |   |           |  
|Cash and due from banks                                                                                           |      | $                                              | 27,544    |      |                   | $ | 19,433  |   |  | $ | 22,389    |  
|Interest-bearing bank balances                                                                                    |      |                                                | 30,873    |      |                   |   | 862     |   |  |   | 2,310     |  
|Federal funds sold                                                                                                |      |                                                | 18,643    |      |                   |   | 880     |   |  |   | 20,180    |  
|Investment securities:                                                                                            |      |                                                |           |      |                   |   |         |   |  |   |           |  
|Available for sale, at estimated fair value (amortized cost of $195,796, $74,870 and $110,693)                    |      |                                                | 193,681   |      |                   |   | 76,559  |   |  |   | 110,918   |  
|Held to maturity (estimated fair value of $40,515, $47,796 and $47,508)                                           |      |                                                | 42,480    |      |                   |   | 48,385  |   |  |   | 48,888    |  
|Loans:                                                                                                            |      |                                                |           |      |                   |   |         |   |  |   |           |  
|Loans held for sale                                                                                               |      |                                                | 21,879    |      |                   |   | 27,814  |   |  |   | 17,615    |  
|Loans held for investment                                                                                         |      |                                                | 1,267,323 |      |                   |   | 675,073 |   |  |   | 795,051   |  
|Less allowance for loan losses                                                                                    |      |                                                | (15,814   | )    |                   |   | (7,732  | ) |  |   | (9,945    | )
|                                                                                                                  |      |                                                |           |      |                   |   |         |   |  |   |           |  
|Net loans                                                                                                         |      |                                                | 1,273,388 |      |                   |   | 695,155 |   |  |   | 802,721   |  
|                                                                                                                  |      |                                                |           |      |                   |   |         |   |  |   |           |  
|Premises and equipment, net                                                                                       |      |                                                | 43,502    |      |                   |   | 18,795  |   |  |   | 24,670    |  
|Goodwill                                                                                                          |      |                                                | 112,926   |      |                   |   | 16,359  |   |  |   | 31,381    |  
|Core deposit premiums                                                                                             |      |                                                | 7,788     |      |                   |   | 77      |   |  |   | 1,326     |  
|Other assets                                                                                                      |      |                                                | 65,668    |      |                   |   | 28,097  |   |  |   | 37,302    |  
|                                                                                                                  |      |                                                |           |      |                   |   |         |   |  |   |           |  
|Total Assets                                                                                                      |      | $                                              | 1,816,493 |      |                   | $ | 904,602 |   |  | $ | 1,102,085 |  
|                                                                                                                  |      |                                                |           |      |                   |   |         |   |  |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                              |      |                                                |           |      |                   |   |         |   |  |   |           |  
|Deposits:                                                                                                         |      |                                                |           |      |                   |   |         |   |  |   |           |  
|Noninterest-bearing demand deposits                                                                               |      | $                                              | 155,071   |      |                   | $ | 84,055  |   |  | $ | 100,465   |  
|Interest-bearing deposits:                                                                                        |      |                                                |           |      |                   |   |         |   |  |   |           |  
|Demand, savings and money market deposits                                                                         |      |                                                | 467,954   |      |                   |   | 218,795 |   |  |   | 252,855   |  
|Time deposits of $100,000 or more                                                                                 |      |                                                | 352,890   |      |                   |   | 169,959 |   |  |   | 229,910   |  
|Other time deposits                                                                                               |      |                                                | 428,083   |      |                   |   | 216,850 |   |  |   | 258,379   |  
|                                                                                                                  |      |                                                |           |      |                   |   |         |   |  |   |           |  
|Total deposits                                                                                                    |      |                                                | 1,403,998 |      |                   |   | 689,659 |   |  |   | 841,609   |  
|Retail repurchase agreements                                                                                      |      |                                                | 21,113    |      |                   |   | 17,101  |   |  |   | 21,338    |  
|Federal Home Loan Bank advances                                                                                   |      |                                                | 87,703    |      |                   |   | 68,010  |   |  |   | 86,225    |  
|Other borrowed funds                                                                                              |      |                                                | 78,992    |      |                   |   | 36,502  |   |  |   | 39,004    |  
|Other liabilities                                                                                                 |      |                                                | 20,213    |      |                   |   | 8,361   |   |  |   | 11,594    |  
|                                                                                                                  |      |                                                |           |      |                   |   |         |   |  |   |           |  
|Total Liabilities                                                                                                 |      |                                                | 1,612,019 |      |                   |   | 819,633 |   |  |   | 999,770   |  
|                                                                                                                  |      |                                                |           |      |                   |   |         |   |  |   |           |  
|Shareholders equity:                                                                                             |      |                                                |           |      |                   |   |         |   |  |   |           |  
|Preferred stock - $10.00 par value; authorized 200,000 shares, none issued                                        |      |                                                |          |      |                   |   |        |   |  |   |          |  
|Common stock - $2.50 par value; authorized 10,000,000 shares, issued shares - 11,127,864, 5,617,653 and 6,370,486 |      |                                                | 27,820    |      |                   |   | 14,044  |   |  |   | 15,926    |  
|Surplus                                                                                                           |      |                                                | 111,143   |      |                   |   | 10,590  |   |  |   | 23,542    |  
|Retained earnings                                                                                                 |      |                                                | 66,793    |      |                   |   | 59,279  |   |  |   | 62,711    |  
|Accumulated other comprehensive income (loss)                                                                     |      |                                                | (1,282    | )    |                   |   | 1,056   |   |  |   | 136       |  
|                                                                                                                  |      |                                                |           |      |                   |   |         |   |  |   |           |  
|Total Shareholders Equity                                                                                        |      |                                                | 204,474   |      |                   |   | 84,969  |   |  |   | 102,315   |  
|                                                                                                                  |      |                                                |           |      |                   |   |         |   |  |   |           |  
|Total Liabilities and Shareholders Equity                                                                        |      | $                                              | 1,816,493 |      |                   | $ | 904,602 |   |  | $ | 1,102,085 |  
|                                                                                                                  |      |                                                |           |      |                   |   |         |   |  |   |           |  

See accompanying notes to consolidated financial statements.



2



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FNB United Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME (unaudited)



|                                                    |  |                                                 |           |                           |   |           |  |      |           |  |   |           |  
|--------------------------------------------------- |  | ----------------------------------------------- | --------- | ------------------------- | - | --------- |  | ---- | --------- |  | - | --------- | -
|                                                    |  | Three Months EndedJune 30,                      |           | Six Months Ended June 30, |  
|                                                    |  | 2006                                            |           | 2005                      |   | 2006      |  | 2005 |          
|                                                    |  | (in thousands, except share and per share data) |          
|Interest Income                                     |  |                                                 |           |                           |   |           |  |      |           |  |   |           |  
|Interest and fees on loans                          |  | $                                               | 22,831    |                           | $ | 11,322    |  | $    | 38,037    |  | $ | 21,876    |  
|Interest and dividends on investment securities:    |  |                                                 |           |                           |   |           |  |      |           |  |   |           |  
|Taxable income                                      |  |                                                 | 1,968     |                           |   | 860       |  |      | 3,264     |  |   | 1,666     |  
|Non-taxable income                                  |  |                                                 | 548       |                           |   | 415       |  |      | 1,008     |  |   | 837       |  
|Other interest income                               |  |                                                 | 459       |                           |   | 85        |  |      | 623       |  |   | 117       |  
|                                                    |  |                                                 |           |                           |   |           |  |      |           |  |   |           |  
|Total interest income                               |  |                                                 | 25,806    |                           |   | 12,682    |  |      | 42,932    |  |   | 24,496    |  
|                                                    |  |                                                 |           |                           |   |           |  |      |           |  |   |           |  
|Interest Expense                                    |  |                                                 |           |                           |   |           |  |      |           |  |   |           |  
|Deposits                                            |  |                                                 | 9,247     |                           |   | 3,383     |  |      | 14,750    |  |   | 6,413     |  
|Retail repurchase agreements                        |  |                                                 | 197       |                           |   | 108       |  |      | 361       |  |   | 187       |  
|Federal Home Loan Bank advances                     |  |                                                 | 938       |                           |   | 651       |  |      | 1,797     |  |   | 1,295     |  
|Federal funds purchased                             |  |                                                 |          |                           |   |          |  |      | 8         |  |   | 5         |  
|Other borrowed funds                                |  |                                                 | 1,047     |                           |   | 355       |  |      | 1,558     |  |   | 592       |  
|                                                    |  |                                                 |           |                           |   |           |  |      |           |  |   |           |  
|Total interest expense                              |  |                                                 | 11,429    |                           |   | 4,497     |  |      | 18,474    |  |   | 8,492     |  
|                                                    |  |                                                 |           |                           |   |           |  |      |           |  |   |           |  
|Net Interest Income                                 |  |                                                 | 14,377    |                           |   | 8,185     |  |      | 24,458    |  |   | 16,004    |  
|Provision for loan losses                           |  |                                                 | 405       |                           |   | 864       |  |      | 482       |  |   | 1,234     |  
|                                                    |  |                                                 |           |                           |   |           |  |      |           |  |   |           |  
|Net Interest Income After Provision for Loan Losses |  |                                                 | 13,972    |                           |   | 7,321     |  |      | 23,976    |  |   | 14,770    |  
|                                                    |  |                                                 |           |                           |   |           |  |      |           |  |   |           |  
|Noninterest Income                                  |  |                                                 |           |                           |   |           |  |      |           |  |   |           |  
|Service charges on deposit accounts                 |  |                                                 | 2,099     |                           |   | 1,552     |  |      | 3,516     |  |   | 2,834     |  
|Mortgage loan sales                                 |  |                                                 | 1,133     |                           |   | 1,382     |  |      | 2,096     |  |   | 2,259     |  
|Trust and investment services                       |  |                                                 | 362       |                           |   | 293       |  |      | 655       |  |   | 673       |  
|Cardholder and merchant services income             |  |                                                 | 420       |                           |   | 335       |  |      | 789       |  |   | 621       |  
|Other service charges, commissions and fees         |  |                                                 | 247       |                           |   | 215       |  |      | 497       |  |   | 456       |  
|Bank owned life insurance                           |  |                                                 | 219       |                           |   | 146       |  |      | 378       |  |   | 290       |  
|Factoring operations                                |  |                                                 | 76        |                           |   |          |  |      | 76        |  |   |          |  
|Other income (charge)                               |  |                                                 | 48        |                           |   | 37        |  |      | 107       |  |   | (11       | )
|                                                    |  |                                                 |           |                           |   |           |  |      |           |  |   |           |  
|Total noninterest income                            |  |                                                 | 4,604     |                           |   | 3,960     |  |      | 8,114     |  |   | 7,122     |  
|                                                    |  |                                                 |           |                           |   |           |  |      |           |  |   |           |  
|Noninterest Expense                                 |  |                                                 |           |                           |   |           |  |      |           |  |   |           |  
|Personnel expense                                   |  |                                                 | 6,766     |                           |   | 4,845     |  |      | 12,037    |  |   | 9,242     |  
|Net occupancy expense                               |  |                                                 | 931       |                           |   | 460       |  |      | 1,532     |  |   | 867       |  
|Furniture and equipment expense                     |  |                                                 | 1,134     |                           |   | 531       |  |      | 1,779     |  |   | 1,046     |  
|Data processing services                            |  |                                                 | 427       |                           |   | 358       |  |      | 1,020     |  |   | 670       |  
|Other expense                                       |  |                                                 | 3,003     |                           |   | 1,743     |  |      | 5,308     |  |   | 3,334     |  
|                                                    |  |                                                 |           |                           |   |           |  |      |           |  |   |           |  
|Total noninterest expense                           |  |                                                 | 12,261    |                           |   | 7,937     |  |      | 21,676    |  |   | 15,159    |  
|                                                    |  |                                                 |           |                           |   |           |  |      |           |  |   |           |  
|Income Before Income Taxes                          |  |                                                 | 6,315     |                           |   | 3,344     |  |      | 10,414    |  |   | 6,733     |  
|Income taxes                                        |  |                                                 | 2,282     |                           |   | 1,072     |  |      | 3,704     |  |   | 2,155     |  
|                                                    |  |                                                 |           |                           |   |           |  |      |           |  |   |           |  
|Net Income                                          |  | $                                               | 4,033     |                           | $ | 2,272     |  | $    | 6,710     |  | $ | 4,578     |  
|                                                    |  |                                                 |           |                           |   |           |  |      |           |  |   |           |  
|Net income per common share:                        |  |                                                 |           |                           |   |           |  |      |           |  |   |           |  
|Basic                                               |  | $                                               | .42       |                           | $ | .41       |  | $    | .84       |  | $ | .82       |  
|Diluted                                             |  |                                                 | .41       |                           |   | .40       |  |      | .83       |  |   | .80       |  
|                                                    |  |                                                 |           |                           |   |           |  |      |           |  |   |           |  
|Weighted average number of shares outstanding:      |  |                                                 |           |                           |   |           |  |      |           |  |   |           |  
|Basic                                               |  |                                                 | 9,670,409 |                           |   | 5,608,223 |  |      | 8,034,332 |  |   | 5,607,481 |  
|Diluted                                             |  |                                                 | 9,795,772 |                           |   | 5,748,400 |  |      | 8,129,695 |  |   | 5,752,022 |  
|                                                    |  |                                                 |           |                           |   |           |  |      |           |  |   |           |  

See accompanying notes to consolidated financial statements.



3



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FNB United Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME

Six Months Ended June 30, 2006 and June 30, 2005 (unaudited)



|                                                                |        |                                                 |   |        |         |        |   |                   |   |         |                                              |  |   |        |   |  |   |        |   |  |   |         |  
|--------------------------------------------------------------- | ------ | ----------------------------------------------- | - | ------ | ------- | ------ | - | ----------------- | - | ------- | -------------------------------------------- |  | - | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                                                |        | Common Stock                                    |   |        | Surplus |        |   | Retained Earnings |   |         | AccumulatedOther Comprehensive Income
(Loss) |  |   | Total  |  
|                                                                | Shares |                                                 |   | Amount |         |        |   |                   |  
|                                                                |        | (in thousands, except share and per share data) |  
|Balance, December 31, 2004                                      |        | 5,605,102                                       |   |        | $       | 14,013 |   |                   | $ | 10,643  |                                              |  | $ | 56,383 |   |  | $ | 1,108  |   |  | $ | 82,147  |  
|Comprehensive income:                                           |        |                                                 |   |        |         |        |   |                   |   |         |                                              |  |   |        |   |  |   |        |   |  |   |         |  
|Net income                                                      |        |                                                |   |        |         |       |   |                   |   |        |                                              |  |   | 4,578  |   |  |   |       |   |  |   | 4,578   |  
|Other comprehensive income:                                     |        |                                                 |   |        |         |        |   |                   |   |         |                                              |  |   |        |   |  |   |        |   |  |   |         |  
|Unrealized securities losses, net of income tax benefit of $33  |        |                                                |   |        |         |       |   |                   |   |        |                                              |  |   |       |   |  |   | (52    | ) |  |   | (52     | )
|                                                                |        |                                                 |   |        |         |        |   |                   |   |         |                                              |  |   |        |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                      |        |                                                |   |        |         |       |   |                   |   |        |                                              |  |   |       |   |  |   |       |   |  |   | 4,526   |  
|                                                                |        |                                                 |   |        |         |        |   |                   |   |         |                                              |  |   |        |   |  |   |        |   |  |   |         |  
|Cash dividends declared, $.30 per share                         |        |                                                |   |        |         |       |   |                   |   |        |                                              |  |   | (1,682 | ) |  |   |       |   |  |   | (1,682  | )
|Stock option plan:                                              |        |                                                 |   |        |         |        |   |                   |   |         |                                              |  |   |        |   |  |   |        |   |  |   |         |  
|Proceeds from options exercised                                 |        | 35,351                                          |   |        |         | 88     |   |                   |   | 347     |                                              |  |   |       |   |  |   |       |   |  |   | 435     |  
|Common stock repurchased                                        |        | (22,800                                         | ) |        |         | (57    | ) |                   |   | (400    | )                                            |  |   |       |   |  |   |       |   |  |   | (457    | )
|                                                                |        |                                                 |   |        |         |        |   |                   |   |         |                                              |  |   |        |   |  |   |        |   |  |   |         |  
|Balance, June 30, 2005                                          |        | 5,617,653                                       |   |        | $       | 14,044 |   |                   | $ | 10,590  |                                              |  | $ | 59,279 |   |  | $ | 1,056  |   |  | $ | 84,969  |  
|                                                                |        |                                                 |   |        |         |        |   |                   |   |         |                                              |  |   |        |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2005                                      |        | 6,370,486                                       |   |        | $       | 15,926 |   |                   | $ | 23,542  |                                              |  | $ | 62,711 |   |  | $ | 136    |   |  | $ | 102,315 |  
|Comprehensive income:                                           |        |                                                 |   |        |         |        |   |                   |   |         |                                              |  |   |        |   |  |   |        |   |  |   |         |  
|Net income                                                      |        |                                                |   |        |         |       |   |                   |   |        |                                              |  |   | 6,710  |   |  |   |       |   |  |   | 6,710   |  
|Other comprehensive income:                                     |        |                                                 |   |        |         |        |   |                   |   |         |                                              |  |   |        |   |  |   |        |   |  |   |         |  
|Unrealized securities losses, net of income tax benefit of $922 |        |                                                |   |        |         |       |   |                   |   |        |                                              |  |   |       |   |  |   | (1,418 | ) |  |   | (1,418  | )
|                                                                |        |                                                 |   |        |         |        |   |                   |   |         |                                              |  |   |        |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                      |        |                                                |   |        |         |       |   |                   |   |        |                                              |  |   |       |   |  |   |       |   |  |   | 5,292   |  
|                                                                |        |                                                 |   |        |         |        |   |                   |   |         |                                              |  |   |        |   |  |   |        |   |  |   |         |  
|Cash dividends declared, $.30 per share                         |        |                                                |   |        |         |       |   |                   |   |        |                                              |  |   | (2,628 | ) |  |   |       |   |  |   | (2,628  | )
|Merger acquisition of subsidiary company:                       |        |                                                 |   |        |         |        |   |                   |   |         |                                              |  |   |        |   |  |   |        |   |  |   |         |  
|Common stock issued                                             |        | 4,654,504                                       |   |        |         | 11,636 |   |                   |   | 83,176  |                                              |  |   |       |   |  |   |       |   |  |   | 94,812  |  
|Fair value of stock options assumed                             |        |                                                |   |        |         |       |   |                   |   | 3,311   |                                              |  |   |       |   |  |   |       |   |  |   | 3,311   |  
|Stock option plan:                                              |        |                                                 |   |        |         |        |   |                   |   |         |                                              |  |   |        |   |  |   |        |   |  |   |         |  
|Proceeds from options exercised                                 |        | 102,874                                         |   |        |         | 258    |   |                   |   | 647     |                                              |  |   |       |   |  |   |       |   |  |   | 905     |  
|Compensation expense recognized                                 |        |                                                |   |        |         |       |   |                   |   | 246     |                                              |  |   |       |   |  |   |       |   |  |   | 246     |  
|Net tax effect related to stock option exercises                |        |                                                |   |        |         |       |   |                   |   | 221     |                                              |  |   |       |   |  |   |       |   |  |   | 221     |  
|                                                                |        |                                                 |   |        |         |        |   |                   |   |         |                                              |  |   |        |   |  |   |        |   |  |   |         |  
|Balance, June 30, 2006                                          |        | 11,127,864                                      |   |        | $       | 27,820 |   |                   | $ | 111,143 |                                              |  | $ | 66,793 |   |  | $ | (1,282 | ) |  | $ | 204,474 |  
|                                                                |        |                                                 |   |        |         |        |   |                   |   |         |                                              |  |   |        |   |  |   |        |   |  |   |         |  

See accompanying notes to consolidated financial statements.



4



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FNB Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)



|                                                                                            |  |                          |         |   |      |   |         |  
|------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                            |  | Six Months EndedJune 30, |        
|                                                                                            |  | 2006                     |         |   | 2005 |  
|                                                                                            |  | (in thousands)           |        
|Operating Activities:                                                                       |  |                          |         |   |      |   |         |  
|Net income                                                                                  |  | $                        | 6,710   |   |      | $ | 4,578   |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                          |         |   |      |   |         |  
|Depreciation and amortization of premises and equipment                                     |  |                          | 1,239   |   |      |   | 820     |  
|Provision for loan losses                                                                   |  |                          | 482     |   |      |   | 1,234   |  
|Deferred income taxes (benefit)                                                             |  |                          | 159     |   |      |   | (311    | )
|Deferred loan fees and costs, net                                                           |  |                          | (73     | ) |      |   | (44     | )
|Premium amortization and discount accretion of investment securities, net                   |  |                          | (36     | ) |      |   | 193     |  
|Amortization of intangibles                                                                 |  |                          | 194     |   |      |   | 25      |  
|Stock option compensation expense                                                           |  |                          | 246     |   |      |   |        |  
|Income from bank owned life insurance                                                       |  |                          | (378    | ) |      |   | (290    | )
|Net increase in loans held for sale                                                         |  |                          | (3,523  | ) |      |   | (16,166 | )
|Decrease (increase) in other assets                                                         |  |                          | 1,676   |   |      |   | (261    | )
|Increase (decrease) in other liabilities                                                    |  |                          | (1,150  | ) |      |   | 728     |  
|                                                                                            |  |                          |         |   |      |   |         |  
|Net Cash Provided by (Used in) Operating Activities                                         |  |                          | 5,546   |   |      |   | (9,494  | )
|                                                                                            |  |                          |         |   |      |   |         |  
|Investing Activities:                                                                       |  |                          |         |   |      |   |         |  
|Available-for-sale securities:                                                              |  |                          |         |   |      |   |         |  
|Proceeds from maturities and calls                                                          |  |                          | 6,236   |   |      |   | 3,553   |  
|Purchases                                                                                   |  |                          | (6,825  | ) |      |   | (6,481  | )
|Held-to-maturity securities:                                                                |  |                          |         |   |      |   |         |  
|Proceeds from maturities and calls                                                          |  |                          | 7,529   |   |      |   | 4,146   |  
|Purchases                                                                                   |  |                          | (1,226  | ) |      |   | (1,297  | )
|Net decrease (increase) in loans held for investment                                        |  |                          | 7,337   |   |      |   | (23,658 | )
|Purchases of premises and equipment                                                         |  |                          | (2,400  | ) |      |   | (2,506  | )
|Net cash received in merger acquisition of subsidiary company                               |  |                          | 10,256  |   |      |   |        |  
|Purchases of SBIC investments                                                               |  |                          | (750    | ) |      |   | (150    | )
|Other, net                                                                                  |  |                          | 66      |   |      |   | 96      |  
|                                                                                            |  |                          |         |   |      |   |         |  
|Net Cash Provided by (Used in) Investing Activities                                         |  |                          | 20,223  |   |      |   | (26,297 | )
|                                                                                            |  |                          |         |   |      |   |         |  
|Financing Activities:                                                                       |  |                          |         |   |      |   |         |  
|Net increase (decrease) in deposits                                                         |  |                          | (813    | ) |      |   | 30,115  |  
|Increase (decrese) in retail repurchase agreements                                          |  |                          | (3,783  | ) |      |   | 3,283   |  
|Decrease in Federal Home Loan Bank advances                                                 |  |                          | (17,005 | ) |      |   | (1,000  | )
|Decrease in federal funds purchased                                                         |  |                          |        |   |      |   | (8,175  | )
|Increase in other borrowed funds                                                            |  |                          | 28,926  |   |      |   | 13,936  |  
|Proceeds from exercise of stock options                                                     |  |                          | 905     |   |      |   | 435     |  
|Tax benefit from exercise of stock options                                                  |  |                          | 221     |   |      |   |        |  
|Common stock repurchased                                                                    |  |                          |        |   |      |   | (457    | )
|Cash dividends paid                                                                         |  |                          | (2,039  | ) |      |   | (1,680  | )
|                                                                                            |  |                          |         |   |      |   |         |  
|Net Cash Provided by Financing Activities                                                   |  |                          | 6,412   |   |      |   | 36,457  |  
|                                                                                            |  |                          |         |   |      |   |         |  
|Net Increase in Cash and Cash Equivalents                                                   |  |                          | 32,181  |   |      |   | 666     |  
|Cash and cash equivalents at beginning of period                                            |  |                          | 44,879  |   |      |   | 20,509  |  
|                                                                                            |  |                          |         |   |      |   |         |  
|Cash and Cash Equivalents at End of Period                                                  |  | $                        | 77,060  |   |      | $ | 21,175  |  
|                                                                                            |  |                          |         |   |      |   |         |  
|Supplemental disclosure of cash flow information:                                           |  |                          |         |   |      |   |         |  
|Cash paid during the period for:                                                            |  |                          |         |   |      |   |         |  
|Interest                                                                                    |  | $                        | 18,051  |   |      | $ | 8,013   |  
|Income taxes                                                                                |  |                          | 3,057   |   |      |   | 3,037   |  
|Noncash transactions:                                                                       |  |                          |         |   |      |   |         |  
|Foreclosed loans transferred to other real estate                                           |  |                          | 379     |   |      |   | 787     |  
|Unrealized securities gains (losses), net of income taxes                                   |  |                          | (1,418  | ) |      |   | (52     | )
|Merger acquisition of subsidiary company:                                                   |  |                          |         |   |      |   |         |  
|Fair value of assets acquired                                                               |  |                          | 728,656 |   |      |   |        |  
|Fair value of common stock issued and stock options assumed                                 |  |                          | 98,123  |   |      |   |        |  
|Cash paid                                                                                   |  |                          | 27,717  |   |      |   |        |  
|                                                                                            |  |                          |         |   |      |   |         |  
|Liabilities assumed                                                                         |  |                          | 602,816 |   |      |   |        |  

See accompanying notes to consolidated financial statements.



5



---

FNB United Corp. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. | Basis of Presentation
|-- | ---------------------

FNB United Corp.
(FNB United), formerly known as FNB Corp., is a bank holding company whose wholly owned subsidiaries are First National Bank and Trust Company (First National Bank) and Dover Mortgage Company (Dover). First
National Bank has two wholly owned subsidiaries, First National Investor Services, Inc. and Premier Investment Services, Inc. A second bank subsidiary, First Gaston Bank of North Carolina, acquired through merger with Integrity Financial Corporation
effective April 28, 2006 as discussed in Note 2 below, was merged into First National Bank on August 1, 2006 and, for the purposes of these consolidated financial statements is considered to be a part of First National Bank since
April 28, 2006. Through its subsidiaries, 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. First National Bank has offices in Alamance, Alexander, Ashe, Catawba, Chatham, Gaston, Guilford, Iredell, Montgomery, Moore, Orange, Randolph, Richmond, Rowan, Scotland, Watauga and Wilkes counties in North Carolina. Dover Mortgage
Company operates mortgage production offices in North Carolina at Charlotte, Carolina Beach, Goldsboro, Greensboro, Greenville, Lake Norman, Leland, Raleigh, Waxhaw and Wilmington.

The accompanying consolidated financial statements, prepared without audit, include the accounts of FNB United and its subsidiaries (collectively the
Corporation). 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
and six month periods ended June 30, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2006.

The organization and business of FNB United, accounting policies followed by the Corporation and other relevant information are contained in the notes to the consolidated financial statements filed as part of the
Corporations 2005 annual report on Form 10-K. This quarterly report should be read in conjunction with such annual report.



|2. | Cash and Cash Equivalents
|-- | -------------------------

For purposes of
reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.



6



---

|3. | Merger Information
|-- | ------------------

United Financial, Inc.

On November 4, 2005, the Corporation completed a merger for the acquisition of United Financial, Inc. (United), holding
company for Alamance Bank, headquartered in Graham, North Carolina. At the date of merger, Alamance Bank operated three offices and, based on estimated fair values, had $163,858,000 in total assets, $96,624,000 in loans and $112,961,000 in deposits.
On February 1, 2006, Alamance Bank was merged into First National Bank.

Pursuant to the terms of the merger, each share of United
common stock was converted, at the election of the shareholder, into either: (1) $14.25 in cash, (2) 0.6828 shares of FNB United common stock, or (3) $4.99 in cash and 0.4438 shares of FNB United common stock, the overall conversion
of stock being limited to 65% of United shares. The aggregate purchase price was $22,708,000, consisting of $8,201,000 of cash payments and 728,625 shares of FNB United common stock valued at $14,507,000.

The merger transaction has been accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and
liabilities of United were recorded based on estimated fair values as of November 4, 2005, with the estimate of goodwill being subject to possible adjustment during the one-year period from that date. The consolidated financial statements
include the results of operations of United since November 4, 2005.

Integrity Financial Corporation

On April 28, 2006, the Corporation completed a merger for the acquisition of Integrity Financial Corporation (Integrity), headquartered
in Hickory, North Carolina and the holding company for First Gaston Bank of North Carolina. At the date of the merger, First Gaston Bank operated seventeen offices and, based on estimated fair values, had $728,656,000 in total assets, $475,281,000
in loans and $563,311,000 in deposits. On August 1, 2006, First Gaston Bank was merged into First National Bank.

Pursuant to the terms
of the merger, each share of Integrity common stock was converted into 0.8743 shares of FNB United common stock and $5.20 in cash. The aggregate purchase price was $127,184,000, consisting of $27,717,000 in cash payments to Integrity shareholders,
4,654,504 shares of FNB United common stock valued at $94,812,000, outstanding Integrity stock options valued at $3,311,000 and transaction costs of $1,344,000.

The merger transaction has been accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Integrity were recorded based on estimated fair values as
of April 28, 2006, with the estimate of goodwill being subject to possible adjustment during the one-year period from that date. The consolidated financial statements include the results of operations of Integrity since April 28, 2006.



7



---

The estimated fair values of the Integrity assets acquired and liabilities assumed at the date of merger
based on the information currently available is as follows (in thousands):



|                                          |  |               |          |  
|----------------------------------------- |  | ------------- | -------- | -
|                                          |  | April 28,2006 |         
|Cash and cash equivalents                 |  | $             | 37,973   |  
|Investment securities, available for sale |  |               | 84,373   |  
|Loans, net                                |  |               | 475,281  |  
|Premises and equipment, net               |  |               | 17,786   |  
|Goodwill                                  |  |               | 81,537   |  
|Core deposit intangible                   |  |               | 6,656    |  
|Other assets                              |  |               | 25,050   |  
|Deposits                                  |  |               | (563,311 | )
|Borrowings                                |  |               | (32,237  | )
|Other liabilities                         |  |               | (7,268   | )
|                                          |  |               |          |  
|Net assets acquired                       |  |               | 125,840  |  
|Transaction costs                         |  |               | 1,344    |  
|                                          |  |               |          |  
|Total purchase price                      |  | $             | 127,184  |  
|                                          |  |               |          |  

The core deposit intangible will be amortized on the straight-line basis over a ten-year life. The
amortization method and valuation of the core deposit intangible are based upon a historical study of the deposits acquired. Goodwill will not be amortized but will be tested for impairment in accordance with SFAS No. 142. None of the goodwill
is expected to be deductible for income tax purposes. Premiums and discounts that resulted from recording the Integrity assets and liabilities at their respective fair values are being amortized using methods that approximate an effective yield over
the life of the assets and liabilities. The net amortization increased net income before income taxes by $428,000 for the three and six months ended June 30, 2006.

The following unaudited pro forma financial information presents the combined results of operations of FNB United and Integrity as if the merger had occurred as of the beginning of the period for each period
presented, after giving effect to certain adjustments, including amortization of the core deposit intangible and related income tax effects. The pro forma financial information does not necessarily reflect the results of operations that would have
occurred had FNB United and Integrity constituted a single entity during such periods.



|                             |  |                                       |        |                          |   |        |  |      |        |  |   |       
|---------------------------- |  | ------------------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                             |  | Three Months EndedJune 30,            |        | Six Months EndedJune 30,
|                             |  | 2006                                  |        | 2005                     |   | 2006   |  | 2005
|                             |  | (in thousands, except per share data)
|Net interest income          |  | $                                     | 16,591 |                          | $ | 14,588 |  | $    | 33,167 |  | $ | 28,772
|Noninterest income           |  |                                       | 4,919  |                          |   | 5,253  |  |      | 9,679  |  |   | 9,433 
|Net income                   |  |                                       | 4,999  |                          |   | 4,059  |  |      | 8,268  |  |   | 8,344 
|                             |  |                                       |        |                         
|Net income per common share: |  |                                       |        |                          |   |        |  |      |        |  |   |       
|Basic                        |  |                                       | .45    |                          |   | .40    |  |      | .75    |  |   | .82   
|Diluted                      |  |                                       | .45    |                          |   | .39    |  |      | .74    |  |   | .80   



8



---

|4. | Earnings Per Share (EPS)
|-- | ------------------------

Basic net income per
share, or basic EPS, is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if the Corporations dilutive stock options were
exercised. The numerator of the basic EPS computation is the same as the numerator of the diluted EPS computation for all periods presented. A reconciliation of the denominators of the basic and diluted EPS computations is as follows:



|                                                                             |  |                            |  |                           |  |           |  |          
|---------------------------------------------------------------------------- |  | -------------------------- |  | ------------------------- |  | --------- |  | ---------
|                                                                             |  | Three Months EndedJune 30, |  | Six Months Ended June 30,
|                                                                             |  | 2006                       |  | 2005                      |  | 2006      |  | 2005     
|Basic EPS denominator - Weighted average number of common shares outstanding |  | 9,670,409                  |  | 5,608,223                 |  | 8,034,332 |  | 5,607,481
|Dilutive share effect arising from assumed exercise of stock options         |  | 125,363                    |  | 140,177                   |  | 95,363    |  | 144,541  
|                                                                             |  |                            |  |                           |  |           |  |          
|Diluted EPS denominator                                                      |  | 9,795,772                  |  | 5,748,400                 |  | 8,129,695 |  | 5,752,022
|                                                                             |  |                            |  |                           |  |           |  |          

For the three months ended June 30, 2006 and 2005 there were 304,760 and 315,807 stock
options, respectively, that were antidilutive since the exercise price exceeded the average market price, and for the six months ended June 30, 2006 and 2005, there were 229,159 and 238,961 stock options, respectively, that were antidilutive.
These common stock equivalents were omitted from the calculations of diluted EPS for their respective periods.



|5. | Stock-Based Compensation
|-- | ------------------------

Effective January 1,
2006, the Corporation adopted Statement of Financial Accounting Standards No. 123R (revised 2004), Share-Based Payment, (SFAS 123R) which was issued by the FASB in December 2004. SFAS No. 123R revises FASB Statement
No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, (APB No. 25) and its related interpretations. SFAS No. 123R
requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the
vesting period). SFAS No. 123R also requires measurement of the cost of employee services received in exchange for an award based on the grant-date fair value of the award. SFAS No. 123R also amends SFAS No. 95, Statement of
Cash Flows, to require that excess tax benefits be reported as financing cash inflows, rather than as a reduction of taxes paid, which is included within operating cash flows.

The Corporation adopted SFAS No. 123R using the modified prospective application as permitted under SFAS No. 123R. Accordingly, prior period
amounts have not been restated. Under this application, compensation expense is required to be recorded for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date
of adoption.



9



---

Prior to the adoption of SFAS No. 123R, the Corporation used the intrinsic value method as
prescribed by APB No. 25 and thus recognized no compensation expense for options granted with exercise prices equal to the fair market value of the common stock on the date of grant.

As of June 30, 2006, the Corporation has six share-based compensation plans in effect. The compensation cost charged against income for those plans
for the three and six months ended June 30, 2006 was $127,000 and $246,000, respectively, and the related deferred tax benefit was $7,000 and $14,000, respectively.

The Corporation adopted stock compensation plans in 1993 and 2003 that allow for the granting of incentive and nonqualified stock options to key employees and directors. The 2003 stock compensation plan also allows
for the granting of restricted stock. Under terms of both the 1993 and 2003 plans, options are granted at prices equal to the fair market value of the common stock on the date of grant. Options become exercisable after one year in equal, cumulative
installments over a five-year period. No option shall expire later than ten years from the date of grant. No further grants can be made under the 1993 stock compensation plan after March 10, 2003. Based on the stock options outstanding at
June 30, 2006, a maximum of 387,745 shares of common stock has been reserved for issuance under the 1993 stock compensation plan. A maximum of 420,000 shares of common stock has been reserved for issuance under the 2003 stock compensation plan.
At June 30, 2006, there were 102,400 shares available under the 2003 plan for the granting of additional options or stock awards.

The
Corporation assumed a stock compensation plan in its merger acquisition of Carolina Fincorp in 2000. One grant of qualified and nonqualified stock options was made under the plan in 1999 to key employees and directors at a price equal to fair market
value on the date of grant. No additional grants will be made under the plan. Based on the stock options outstanding at June 30, 2006, a maximum of 41,008 shares of common stock has been reserved for issuance under the stock compensation plan.

The Corporation assumed three stock compensation plans in its merger acquisition of Integrity Financial Corporation on April 28, 2006.
Qualified and nonqualified stock options are outstanding under these plans for grants issued from 1996 to 2004 to key employees and directors at a price equal to fair market value on the date of grant. No additional grants will be made under the
plans. Based on the stock options outstanding at June 30, 2006, a maximum of 239,800 shares of common stock has been reserved for issuance under these stock compensation plans.

The fair market value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The risk-free interest rate is
based on a U.S. Treasury instrument with a life that is similar to the expected life of the option grant. Expected volatility is based on the historical volatility of the Corporations common stock over approximately the previous 6 years. The
expected life of the options has historically been considered to be approximately 6 years. The expected dividend yield is based upon the current yield in effect at the date of grant. Forfeitures are estimated at a 3.00% rate, adjusted to 1.75% for
5-year vesting.



10



---

An option was granted for a total of 5,000 shares during the six months ended June 30, 2006 with a
fair value per share of $5.09. There were no options granted during the six months ended June 30, 2005. The fair value was estimated on the date of grant in 2006 using the Black-Scholes option-pricing model with the following assumptions:



|                        |  |         |  
|----------------------- |  | ------- | -
|Risk-free interest rate |  | 4.40    | %
|Dividend yield          |  | 3.25    |  
|Volatility              |  | 31.00   |  
|Expected life           |  | 6 years |  

The following is a summary of stock option activity for the six months ended June 30, 2006:



|                                     |  |          |   |  |                              |       |                                        |   |      
|------------------------------------ |  | -------- | - |  | ---------------------------- | ----- | -------------------------------------- | - | -----
|                                     |  | Shares   |   |  | WeightedAverageExercisePrice |       | AggregateIntrinsicValue (in thousands)
|Outstanding at December 31, 2005     |  | 768,963  |   |  | $                            | 16.54 |                                        |   |      
|Granted                              |  | 5,000    |   |  |                              | 18.63 |                                        |   |      
|Assumed in merger acquisition        |  | 325,384  |   |  |                              | 9.44  |                                        |   |      
|Exercised                            |  | (102,874 | ) |  |                              | 8.79  |                                        |   |      
|Forfeited                            |  | (10,320  | ) |  |                              | 15.18 |                                        |   |      
|                                     |  |          |   |  |                              |       |                                        |   |      
|Outstanding at June 30, 2006         |  | 986,153  |   |  |                              | 15.02 |                                        | $ | 3,136
|                                     |  |          |   |  |                              |       |                                        |   |      
|Options exercisable at June 30, 2006 |  | 667,411  |   |  |                              | 13.11 |                                        |   | 3,397
|                                     |  |          |   |  |                              |       |                                        |   |      

At June 30, 2006, information concerning stock options outstanding and exercisable is as
follows:



|                         |  |                     |  |                                                 |  |                              |       |                   |         |                              |   |      
|------------------------ |  | ------------------- |  | ----------------------------------------------- |  | ---------------------------- | ----- | ----------------- | ------- | ---------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                            
|Range of Exercise Prices |  | Shares              |  | WeightedAverageRemainingContractualLife (Years) |  | WeightedAverageExercisePrice |       | NumberExercisable |         | WeightedAverageExercisePrice
|$ 5.29 -   9.97          |  | 181,226             |  | 2.45                                            |  | $                            | 8.71  |                   | 181,226 |                              | $ | 8.71 
|10.00 - 14.20            |  | 338,327             |  | 4.21                                            |  |                              | 12.45 |                   | 304,985 |                              |   | 12.30
|15.00 - 19.82            |  | 313,700             |  | 7.34                                            |  |                              | 18.02 |                   | 118,100 |                              |   | 17.10
|20.00 - 27.00            |  | 152,900             |  | 7.37                                            |  |                              | 22.03 |                   | 63,100  |                              |   | 22.14
|                         |  |                     |  |                                                 |  |                              |       |                   |         |                              |   |      
|                         |  | 986,153             |  | 5.37                                            |  |                              | 15.02 |                   | 667,411 |                              |   | 13.11
|                         |  |                     |  |                                                 |  |                              |       |                   |         |                              |   |      

For the six months ended June 30, 2006 and 2005, the intrinsic value of options exercised was
$827,000 and $257,000, respectively, and the grant-date fair value of options vested was $3,000 and $3,000, respectively.



11



---

The cash proceeds from option exercises for the six months ended June 30, 2006 amounted to $905,000
and the related tax benefit recorded in shareholders equity for the tax deduction realized from these option exercises amounted to $221,000.

As of June 30, 2006, there was $1,360,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all of the Corporations stock benefit plans. That cost is expected to be
recognized over a weighted-average period of 2.9 years.

The Corporation funds the option shares from authorized but unissued
shares. The Corporation does not typically purchase shares to fulfill the obligations of the stock benefit plans. Corporation policy does allow option holders under certain plans to exercise options with seasoned shares.

The adoption of SFAS No. 123R and its fair value compensation cost recognition provisions are different from the non-recognition provisions under
SFAS No. 123 and the intrinsic value method for compensation cost allowed APB No. 25. The effect (increase/(decrease)) of the adoption of SFAS No. 123R for the three and six months ended June 30, 2006 is as follows:



|                                           |  |                                      |      |   |                |   |      |  
|------------------------------------------ |  | ------------------------------------ | ---- | - | -------------- | - | ---- | -
|                                           |  | June 30, 2006                        |     
|                                           |  | ThreeMonthsEnded                     |      |   | SixMonthsEnded |  
|                                           |  | (in thousands, exceptper share data) |     
|Income before income taxes                 |  | $                                    | (127 | ) |                | $ | (246 | )
|Net income                                 |  |                                      | (120 | ) |                |   | (232 | )
|                                           |  |                                     
|Cash flow from operating activities        |  |                                      | (191 | ) |                |   | (221 | )
|Cash flow provided by financing activities |  |                                      | 191  |   |                |   | 221  |  
|                                           |  |                                     
|Net income per share:                      |  |                                      |      |   |                |   |      |  
|Basic                                      |  |                                      | (.01 | ) |                |   | (.03 | )
|Diluted                                    |  |                                      | (.01 | ) |                |   | (.03 | )

The following illustrates the effect on net available to common stockholders if the Corporation
had applied the fair value recognition provisions of SFAS No. 123 to the results for the three and six months ended June 30, 2005 (in thousands, except per share data):



12



---

|                                                                                                                   |  |                                      |       |   |                |   |       |  
|------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------ | ----- | - | -------------- | - | ----- | -
|                                                                                                                   |  | June 30, 2005                        |      
|                                                                                                                   |  | ThreeMonthsEnded                     |       |   | SixMonthsEnded |  
|                                                                                                                   |  | (in thousands, exceptper share data) |      
|Net income, as reported                                                                                            |  | $                                    | 2,272 |   |                | $ | 4,578 |  
|Add: Stock-based employee compensation expense included in reported net income, net of related income tax effects  |  |                                      |      |   |                |   |      |  
|Less: Stock-based compensation determined under fair value based method of all awards, net of related income taxes |  |                                      | (97   | ) |                |   | (195  | )
|                                                                                                                   |  |                                      |       |   |                |   |       |  
|Net income, pro forma                                                                                              |  | $                                    | 2,175 |   |                | $ | 4,383 |  
|                                                                                                                   |  |                                      |       |   |                |   |       |  
|Net income per share:                                                                                              |  |                                      |       |   |                |   |       |  
|Basic:                                                                                                             |  |                                      |       |   |                |   |       |  
|As reported                                                                                                        |  | $                                    | .41   |   |                | $ | .82   |  
|Pro forma                                                                                                          |  |                                      | .39   |   |                |   | .78   |  
|                                                                                                                   |  |                                     
|Diluted:                                                                                                           |  |                                      |       |   |                |   |       |  
|As reported                                                                                                        |  |                                      | .40   |   |                |   | .80   |  
|Pro forma                                                                                                          |  |                                      | .38   |   |                |   | .76   |  



|6. | Loans
|-- | -----

Loans as presented are reduced by net
deferred loan fees of $1,072,000, $946,000 and $939,000 at June 30, 2006, June 30, 2005 and December 31, 2005, respectively.



|7. | Allowance for Loan Losses
|-- | -------------------------

Changes in the
allowance for loan losses were as follows:



|                               |  |                            |        |                          |   |       |  |      |        |  |   |      
|------------------------------ |  | -------------------------- | ------ | ------------------------ | - | ----- |  | ---- | ------ |  | - | -----
|                               |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|                               |  | 2006                       |        | 2005                     |   | 2006  |  | 2005
|                               |  | (in thousands)            
|Balance at beginning of period |  | $                          | 9,960  |                          | $ | 7,556 |  | $    | 9,945  |  | $ | 7,293
|Charge-offs                    |  |                            | 1,309  |                          |   | 948   |  |      | 1,858  |  |   | 1,144
|Recoveries                     |  |                            | 720    |                          |   | 260   |  |      | 1,207  |  |   | 349  
|                               |  |                            |        |                          |   |       |  |      |        |  |   |      
|Net loan charge-offs           |  |                            | 589    |                          |   | 688   |  |      | 651    |  |   | 795  
|Provision for loan losses      |  |                            | 405    |                          |   | 864   |  |      | 482    |  |   | 1,234
|Purchase accounting adjustment |  |                            | 6,038  |                          |   |      |  |      | 6,038  |  |   |     
|                               |  |                            |        |                          |   |       |  |      |        |  |   |      
|Balance at end of period       |  | $                          | 15,814 |                          | $ | 7,732 |  | $    | 15,814 |  | $ | 7,732
|                               |  |                            |        |                          |   |       |  |      |        |  |   |      



13



---

|8. | Supplementary Income Statement Information
|-- | ------------------------------------------

Significant components of other expense were as follows:



|                                  |  |                            |     |                          |   |      |  |      |     |  |   |    
|--------------------------------- |  | -------------------------- | --- | ------------------------ | - | ---- |  | ---- | --- |  | - | ---
|                                  |  | Three Months EndedJune 30, |     | Six Months EndedJune 30,
|                                  |  | 2006                       |     | 2005                     |   | 2006 |  | 2005
|                                  |  | (in thousands)            
|Stationery, printing and supplies |  | $                          | 316 |                          | $ | 235  |  | $    | 595 |  | $ | 415
|Advertising and marketing         |  |                            | 379 |                          |   | 273  |  |      | 559 |  |   | 474
|Professional fees                 |  |                            | 315 |                          |   | 137  |  |      | 521 |  |   | 255



|9. | Postretirement Employee Benefit Plans
|-- | -------------------------------------

Information
concerning the net periodic cost of the Corporations postretirement benefit plans is as follows:



|                                         |  |                                  |      |   |                                     |   |                                         |  |   |   
|---------------------------------------- |  | -------------------------------- | ---- | - | ----------------------------------- | - | --------------------------------------- |  | - | --
|                                         |  | Three Months Ended June 30, 2006
|                                         |  | PensionPlan                      |      |   | SupplementalExecutiveRetirementPlan |   | OtherPostretirementDefinedBenefit
Plans
|                                         |  | (in thousands)                  
|Service cost                             |  | $                                | 201  |   |                                     | $ | 25                                      |  | $ | 22
|Interest cost                            |  |                                  | 163  |   |                                     |   | 23                                      |  |   | 22
|Expected return on plan assets           |  |                                  | (224 | ) |                                     |   |                                        |  |   |  
|Amortization of prior service cost       |  |                                  | 7    |   |                                     |   | 12                                      |  |   |  
|Amortization of transition obligation    |  |                                  |     |   |                                     |   |                                        |  |   | 5 
|Recognized net actuarial loss            |  |                                  | 48   |   |                                     |   | 8                                       |  |   | 3 
|                                         |  |                                  |      |   |                                     |   |                                         |  |   |   
|Net periodic postretirement benefit cost |  | $                                | 195  |   |                                     | $ | 68                                      |  | $ | 52
|                                         |  |                                  |      |   |                                     |   |                                         |  |   |   



14



---

|                                         |  |                                  |      |   |                                     |   |                                         |  |   |    
|---------------------------------------- |  | -------------------------------- | ---- | - | ----------------------------------- | - | --------------------------------------- |  | - | ---
|                                         |  | Three Months Ended June 30, 2005
|                                         |  | PensionPlan                      |      |   | SupplementalExecutiveRetirementPlan |   | OtherPostretirementDefinedBenefit
Plans
|                                         |  | (in thousands)                  
|Service cost                             |  | $                                | 159  |   |                                     | $ | 17                                      |  | $ | 17 
|Interest cost                            |  |                                  | 156  |   |                                     |   | 19                                      |  |   | 21 
|Expected return on plan assets           |  |                                  | (207 | ) |                                     |   |                                        |  |   |   
|Amortization of prior service cost       |  |                                  | 7    |   |                                     |   | 12                                      |  |   | 2  
|Amortization of transition obligation    |  |                                  |     |   |                                     |   |                                        |  |   | 5  
|Recognized net actuarial loss            |  |                                  | 38   |   |                                     |   | 5                                       |  |   | 3  
|                                         |  |                                  |      |   |                                     |   |                                         |  |   |    
|Net periodic postretirement benefit cost |  | $                                | 153  |   |                                     | $ | 53                                      |  | $ | 48 
|                                         |  |                                  |      |   |                                     |   |                                         |  |   |    
|                                         | 
|                                         |  | Six Months Ended June 30, 2006  
|                                         |  | PensionPlan                      |      |   | SupplementalExecutiveRetirementPlan |   | OtherPostretirementDefinedBenefit
Plans
|                                         |  | (in thousands)                  
|Service cost                             |  | $                                | 402  |   |                                     | $ | 50                                      |  | $ | 44 
|Interest cost                            |  |                                  | 326  |   |                                     |   | 46                                      |  |   | 44 
|Expected return on plan assets           |  |                                  | (448 | ) |                                     |   |                                        |  |   |   
|Amortization of prior service cost       |  |                                  | 14   |   |                                     |   | 24                                      |  |   |   
|Amortization of transition obligation    |  |                                  |     |   |                                     |   |                                        |  |   | 10 
|Recognized net actuarial loss            |  |                                  | 96   |   |                                     |   | 16                                      |  |   | 6  
|                                         |  |                                  |      |   |                                     |   |                                         |  |   |    
|Net periodic postretirement benefit cost |  | $                                | 390  |   |                                     | $ | 136                                     |  | $ | 104
|                                         |  |                                  |      |   |                                     |   |                                         |  |   |    
|                                         | 
|                                         |  | Six Months Ended June 30, 2005  
|                                         |  | PensionPlan                      |      |   | SupplementalExecutiveRetirementPlan |   | OtherPostretirementDefinedBenefit
Plans
|                                         |  | (in thousands)                  
|Service cost                             |  | $                                | 318  |   |                                     | $ | 34                                      |  | $ | 34 
|Interest cost                            |  |                                  | 312  |   |                                     |   | 38                                      |  |   | 42 
|Expected return on plan assets           |  |                                  | (414 | ) |                                     |   |                                        |  |   |   
|Amortization of prior service cost       |  |                                  | 14   |   |                                     |   | 24                                      |  |   | 4  
|Amortization of transition obligation    |  |                                  |     |   |                                     |   |                                        |  |   | 10 
|Recognized net actuarial loss            |  |                                  | 76   |   |                                     |   | 10                                      |  |   | 6  
|                                         |  |                                  |      |   |                                     |   |                                         |  |   |    
|Net periodic postretirement benefit cost |  | $                                | 306  |   |                                     | $ | 106                                     |  | $ | 96 
|                                         |  |                                  |      |   |                                     |   |                                         |  |   |    



15



---

Due to the significant contributions of $530,000 and $2,175,000 made in 2005 and 2004, respectively, the
Corporation does not expect to contribute any funds to its pension plan in 2006. 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.



|10. | Derivatives and Financial Instruments
|--- | -------------------------------------

Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), as amended by SFAS Nos. 137, 138 and 149, establishes accounting and reporting standards for
derivative and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet, and measure those instruments at fair value. Changes in the fair value of those derivatives are reported in
current earnings or other comprehensive income depending on the purpose for which the derivative is held and whether the derivative qualifies for hedge accounting.

In connection with its asset/liability management objectives, the Corporation in 2004 entered into an interest rate swap on a $7,000,000 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 Corporation makes and the fixed rate interest payments received is currently reported in earnings.

For the three months ended June 30, 2006 and 2005, the interest rate swap resulted in a net increase of $30,000 and a net reduction of $5,000, respectively, in the interest expense that would otherwise have been reported for the FHLB
advance, and for the six months ended June 30, 2006 and 2005, the interest rate swap resulted in a net increase of $51,000 and a net reduction of $18,000, respectively, in interest expense. The fair value of the swap at June 30, 2006 was
recorded on the consolidated balance sheet as a liability in the amount of $371,000, offset by a valuation adjustment in the same amount to the FHLB advance.

The Corporation has also identified the following derivative instruments which were recorded on the consolidated balance sheet at June 30, 2006: commitments to originate fixed rate residential mortgage loans and
forward sales commitments.

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 sold, the Corporation is subject to variability
in market prices related to these commitments. The Corporation 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 $25,772,000 at June 30, 2006, and the related forward sales commitments totaled
$25,772,000. Loans held for sale by Dover Mortgage Company totaled $17,429,000 at June 30, 2006, and the related forward sales commitments totaled $17,429,000.



16



---

First National Bank had loans held for sale of $4,450,000 at June 30, 2006. Binding commitments of
First National Bank for the origination of mortgage loans intended to be held for sale at June 30, 2006 were not material.



|11. | Recently Adopted Accounting Pronouncements
|--- | ------------------------------------------

In
November 2003, the Emerging Issues Task Force (EITF) issued EITF Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-01). EITF 03-01 provided guidance
for evaluating whether an investment is other-than-temporarily impaired and requires certain disclosures with respect to these investments. In September 2004, the Financial Accounting Standards Board (FASB) issued a FASB Staff Position
(FSP EITF 03-1-b) to delay the requirement to record impairment losses under EITF 03-1. The guidance also included accounting considerations subsequent to the recognition of an other-than-temporary impairment and requirements for
disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, which addresses the determination as to when an investment is considered impaired.
This FSP nullifies certain requirements of EITF 03-01 and supersedes EITF Topic No. D-44, Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value. This FSP is to be applied to
reporting periods beginning after December 15. 2005. The Corporation adopted the provisions of FSP FAS 115-1 on January 1, 2006 with no effect on its consolidated financial statements.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R (SFAS No. 123R), Share-Based
Payment, which is a revision of FASB Statement No. 123 Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25 Accounting for Stock Issued to Employees. SFAS No. 123R requires companies
to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees over the period during which an employee is required to provide service in exchange for the award (presumptively
the vesting period). SFAS No. 123R sets accounting requirements for share-based compensation to employees, including employee-stock purchase plans (ESPPs). Awards to most nonemployee directors will be accounted for as
employee awards. This Statement was to be effective for public companies that do not file as small business issuers as of the beginning of interim or annual reporting periods beginning after June 15, 2005. In April 2005, the Securities and
Exchange Commission (SEC) issued Release No. 2005-57, which defers the effective date of SFAS No. 123R for many registrants. Registrants that do not file as small business users must adopt SFAS No. 123R as of the beginning
of their first annual period beginning after June 15, 2005. The Corporation adopted the provisions of SFAS No. 123R on January 1, 2006 as discussed in Note 5 above.

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107), which contains guidance on applying the requirements in SFAS
No. 123R. SAB 107 provides guidance on valuation techniques, development of assumptions used in valuing employee share options and related MD&A disclosures. SAB 107 is effective for the period in which SFAS No. 123R is adopted. In
conjunction with the adoption of SFAS No. 123R on January 1, 2006, the Corporation adopted the provisions of SAB 107 .



17



---

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (SFAS
No. 154), Accounting Changes and Error Corrections, which replaces APB Opinion No. 20 Accounting Changes and FASB Statement No. 3 Reporting Accounting Changes in Interim Financial Statements.
SFAS No. 154 changes the requirements for the accounting for and reporting of a change in an accounting principle. SFAS No. 154 requires retrospective application for voluntary changes in an accounting principle unless it is impracticable
to do so. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Corporation adopted the provisions of SFAS No. 154 on January 1, 2006 with no effect on its consolidated
financial statements.



|12. | Business Segment Information
|--- | ----------------------------

The Corporation is
considered to have two principal business segments: the full-service subsidiary bank, First National Bank, and the mortgage banking subsidiary, Dover Mortgage Company. Dover originates, underwrites and closes loans for sale into the secondary
market. Financial performance for each segment is detailed in the following tables. Included in the Other column are amounts for other corporate activities and eliminations of intersegment transactions.



|                                                    |  |                                  |           |                      |   |        |  |   |       |   |  |   |          
|--------------------------------------------------- |  | -------------------------------- | --------- | -------------------- | - | ------ |  | - | ----- | - |  | - | ---------
|                                                    |  | Three Months Ended June 30, 2006
|                                                    |  | FirstNationalBank                |           | DoverMortgageCompany |   | Other  |  |   | Total
|                                                    |  | (in thousands)                  
|Interest income                                     |  | $                                | 25,576    |                      | $ | 230    |  | $ |      |   |  | $ | 25,806   
|Interest expense                                    |  |                                  | 10,382    |                      |   | 205    |  |   | 842   |   |  |   | 11,429   
|                                                    |  |                                  |           |                      |   |        |  |   |       |   |  |   |          
|Net interest income                                 |  |                                  | 15,194    |                      |   | 25     |  |   | (842  | ) |  |   | 14,377   
|Provision for loan losses                           |  |                                  | 405       |                      |   |       |  |   |      |   |  |   | 405      
|                                                    |  |                                  |           |                      |   |        |  |   |       |   |  |   |          
|Net interest income after provision for loan losses |  |                                  | 14,789    |                      |   | 25     |  |   | (842  | ) |  |   | 13,972   
|Noninterest income                                  |  |                                  | 3,686     |                      |   | 862    |  |   | 56    |   |  |   | 4,604    
|Noninterest expense                                 |  |                                  | 11,355    |                      |   | 800    |  |   | 106   |   |  |   | 12,261   
|                                                    |  |                                  |           |                      |   |        |  |   |       |   |  |   |          
|Income (loss) before income taxes                   |  |                                  | 7,120     |                      |   | 87     |  |   | (892  | ) |  |   | 6,315    
|Income taxes (benefit)                              |  |                                  | 2,554     |                      |   | 40     |  |   | (312  | ) |  |   | 2,282    
|                                                    |  |                                  |           |                      |   |        |  |   |       |   |  |   |          
|Net income (loss)                                   |  | $                                | 4,566     |                      | $ | 47     |  | $ | (580  | ) |  | $ | 4,033    
|                                                    |  |                                  |           |                      |   |        |  |   |       |   |  |   |          
|Total assets                                        |  | $                                | 1,789,061 |                      | $ | 23,613 |  | $ | 3,819 |   |  | $ | 1,816,493
|Net loans                                           |  |                                  | 1,255,959 |                      |   | 17,429 |  |   |      |   |  |   | 1,273,388
|Goodwill                                            |  |                                  | 109,142   |                      |   | 3,784  |  |   |      |   |  |   | 112,926  



18



---

|                                                    |  |                                  |           |                       |   |        |  |   |        |   |  |   |          
|--------------------------------------------------- |  | -------------------------------- | --------- | --------------------- | - | ------ |  | - | ------ | - |  | - | ---------
|                                                    |  | Three Months Ended June 30, 2005
|                                                    |  | FirstNational Bank               |           | DoverMortgage Company |   | Other  |  |   | Total 
|                                                    |  | (in thousands)                  
|Interest income                                     |  | $                                | 12,392    |                       | $ | 290    |  | $ |       |   |  | $ | 12,682   
|Interest expense                                    |  |                                  | 4,143     |                       |   | 225    |  |   | 129    |   |  |   | 4,497    
|                                                    |  |                                  |           |                       |   |        |  |   |        |   |  |   |          
|Net interest income                                 |  |                                  | 8,249     |                       |   | 65     |  |   | (129   | ) |  |   | 8,185    
|Provision for loan losses                           |  |                                  | 864       |                       |   |       |  |   |       |   |  |   | 864      
|                                                    |  |                                  |           |                       |   |        |  |   |        |   |  |   |          
|Net interest income after provision for loan losses |  |                                  | 7,385     |                       |   | 65     |  |   | (129   | ) |  |   | 7,321    
|Noninterest income                                  |  |                                  | 2,885     |                       |   | 1,104  |  |   | (29    | ) |  |   | 3,960    
|Noninterest expense                                 |  |                                  | 6,778     |                       |   | 1,148  |  |   | 11     |   |  |   | 7,937    
|                                                    |  |                                  |           |                       |   |        |  |   |        |   |  |   |          
|Income (loss) before income taxes                   |  |                                  | 3,492     |                       |   | 21     |  |   | (169   | ) |  |   | 3,344    
|Income taxes (benefit)                              |  |                                  | 1,118     |                       |   | 11     |  |   | (57    | ) |  |   | 1,072    
|                                                    |  |                                  |           |                       |   |        |  |   |        |   |  |   |          
|Net income (loss)                                   |  | $                                | 2,374     |                       | $ | 10     |  | $ | (112   | ) |  | $ | 2,272    
|                                                    |  |                                  |           |                       |   |        |  |   |        |   |  |   |          
|Total assets                                        |  | $                                | 871,993   |                       | $ | 32,225 |  | $ | 384    |   |  | $ | 904,602  
|Net loans                                           |  |                                  | 677,332   |                       |   | 25,555 |  |   |       |   |  |   | 702,887  
|Goodwill                                            |  |                                  | 12,583    |                       |   | 3,776  |  |   |       |   |  |   | 16,359   
|                                                    | 
|                                                    |  | Six Months Ended June 30, 2006  
|                                                    |  | FirstNational Bank               |           | DoverMortgage Company |   | Other  |  |   | Total 
|                                                    |  | (in thousands)                  
|Interest income                                     |  | $                                | 42,511    |                       | $ | 421    |  | $ |       |   |  | $ | 42,932   
|Interest expense                                    |  |                                  | 16,952    |                       |   | 374    |  |   | 1,148  |   |  |   | 18,474   
|                                                    |  |                                  |           |                       |   |        |  |   |        |   |  |   |          
|Net interest income                                 |  |                                  | 25,559    |                       |   | 47     |  |   | (1,148 | ) |  |   | 24,458   
|Provision for loan losses                           |  |                                  | 482       |                       |   |       |  |   |       |   |  |   | 482      
|                                                    |  |                                  |           |                       |   |        |  |   |        |   |  |   |          
|Net interest income after provision for loan losses |  |                                  | 25,077    |                       |   | 47     |  |   | (1,148 | ) |  |   | 23,976   
|Noninterest income                                  |  |                                  | 6,307     |                       |   | 1,693  |  |   | 114    |   |  |   | 8,114    
|Noninterest expense                                 |  |                                  | 19,856    |                       |   | 1,646  |  |   | 174    |   |  |   | 21,676   
|                                                    |  |                                  |           |                       |   |        |  |   |        |   |  |   |          
|Income (loss) before income taxes                   |  |                                  | 11,528    |                       |   | 94     |  |   | (1,208 | ) |  |   | 10,414   
|Income taxes (benefit)                              |  |                                  | 4,077     |                       |   | 49     |  |   | (422   | ) |  |   | 3,704    
|                                                    |  |                                  |           |                       |   |        |  |   |        |   |  |   |          
|Net income (loss)                                   |  | $                                | 7,451     |                       | $ | 45     |  | $ | (786   | ) |  | $ | 6,710    
|                                                    |  |                                  |           |                       |   |        |  |   |        |   |  |   |          
|Total assets                                        |  | $                                | 1,789,061 |                       | $ | 23,613 |  | $ | 3,819  |   |  | $ | 1,816,493
|Net loans                                           |  |                                  | 1,255,959 |                       |   | 17,429 |  |   |       |   |  |   | 1,273,388
|Goodwill                                            |  |                                  | 109,142   |                       |   | 3,784  |  |   |       |   |  |   | 112,926  



19



---

|                                                    |  |                                |           |                      |   |        |       |  |   |       |   |  |   |          
|--------------------------------------------------- |  | ------------------------------ | --------- | -------------------- | - | ------ | ----- |  | - | ----- | - |  | - | ---------
|                                                    |  | Six Months Ended June 30, 2005
|                                                    |  | FirstNationalBank              |           | DoverMortgageCompany |   |        | Other |  |   | Total
|                                                    |  | (in thousands)                
|Interest income                                     |  | $                              | 24,044    |                      | $ | 452    |       |  | $ |      |   |  | $ | 24,496   
|Interest expense                                    |  |                                | 7,901     |                      |   | 343    |       |  |   | 248   |   |  |   | 8,492    
|                                                    |  |                                |           |                      |   |        |       |  |   |       |   |  |   |          
|Net interest income                                 |  |                                | 16,143    |                      |   | 109    |       |  |   | (248  | ) |  |   | 16,004   
|Provision for loan losses                           |  |                                | 1,234     |                      |   |       |       |  |   |      |   |  |   | 1,234    
|                                                    |  |                                |           |                      |   |        |       |  |   |       |   |  |   |          
|Net interest income after provision for loan losses |  |                                | 14,909    |                      |   | 109    |       |  |   | (248  | ) |  |   | 14,770   
|Noninterest income                                  |  |                                | 5,355     |                      |   | 1,833  |       |  |   | (66   | ) |  |   | 7,122    
|Noninterest expense                                 |  |                                | 13,084    |                      |   | 2,076  |       |  |   | (1    | ) |  |   | 15,159   
|                                                    |  |                                |           |                      |   |        |       |  |   |       |   |  |   |          
|Income (loss) before income taxes                   |  |                                | 7,180     |                      |   | (134   | )     |  |   | (313  | ) |  |   | 6,733    
|Income taxes (benefit)                              |  |                                | 2,308     |                      |   | (47    | )     |  |   | (106  | ) |  |   | 2,155    
|                                                    |  |                                |           |                      |   |        |       |  |   |       |   |  |   |          
|Net income (loss)                                   |  | $                              | 4,872     |                      | $ | (87    | )     |  | $ | (207  | ) |  | $ | 4,578    
|                                                    |  |                                |           |                      |   |        |       |  |   |       |   |  |   |          
|Total assets                                        |  | $                              | 871,993   |                      | $ | 32,225 |       |  | $ | 384   |   |  | $ | 904,602  
|Net loans                                           |  |                                | 677,332   |                      |   | 25,555 |       |  |   |      |   |  |   | 702,887  
|Goodwill                                            |  |                                | 12,583    |                      |   | 3,776  |       |  |   |      |   |  |   | 16,359   
|                                                    |  |                                |           |                     
|Total assets                                        |  | $                              | 1,789,061 |                      | $ | 23,613 |       |  | $ | 3,819 |   |  | $ | 1,816,493
|Net loans                                           |  |                                | 1,255,959 |                      |   | 17,429 |       |  |   |      |   |  |   | 1,273,388
|Goodwill                                            |  |                                | 109,142   |                      |   | 3,784  |       |  |   |      |   |  |   | 112,926  



|13. | Comprehensive Income
|--- | --------------------

For the three months ended
June 30, 2006 and 2005, total comprehensive income, consisting of net income and unrealized securities gains and losses, net of taxes, was $3,083,000 and $2,709,000, respectively.

For the six months ended June 30, 2006 and 2005, total comprehensive income, consisting of net income and unrealized securities gains and losses, net
of taxes, was $5,292,000 and $4,526,000, respectively.



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

The purpose of this discussion and analysis is to assist in the understanding and evaluation of the financial condition, changes in
financial condition and results of operations of FNB United Corp. (FNB United or the Parent Company), formerly known as FNB Corp. prior to April 28, 2006, and its wholly owned subsidiaries, First National Bank and Trust
Company (First National Bank) and Dover Mortgage Company (Dover), collectively referred to as the Corporation. This discussion should be read in conjunction with the financial information appearing elsewhere in
this report.

First Gaston Bank of North Carolina, acquired through merger with Integrity Financial Corporation as discussed below in the
Overview  Merger Acquisition of Integrity Financial Corporation, was merged into First National Bank on August 1, 2006 and, for purposes of this discussion and analysis, is considered a part of First National Bank in 2006.

Overview

Description of Operations

FNB United is a bank holding company with a full-service subsidiary bank, First National Bank, that 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. First National Bank has offices in Alamance, Alexander, Ashe, Catawba, Chatham, Gaston, Guilford,
Iredell, Montgomery, Moore, Orange, Randolph, Richmond, Rowan, Scotland, Watauga and Wilkes counties in North Carolina.

Additionally, FNB
United has a mortgage banking subsidiary, Dover Mortgage Company, that originates, underwrites and closes loans for sale into the secondary market. Dover operates mortgage production offices in North Carolina at Charlotte, Carolina Beach, Goldsboro,
Greensboro, Greenville, Lake Norman, Leland, Raleigh, Waxhaw and Wilmington.

For business segment information related to the financial
performance of First National Bank and Dover Mortgage Company, see Note 12 to the Consolidated Financial Statements.

Merger Acquisition of United
Financial, Inc. in 2005

On November 4, 2005, the Corporation completed a merger for the acquisition of United Financial, Inc.
(United), holding company for Alamance Bank, headquartered in Graham, North Carolina. At the date of merger, Alamance Bank operated three offices and, based on estimated fair values, had $163,858,000 in total assets, $96,624,000 in loans
and $112,961,000 in deposits. On February 1, 2006, Alamance Bank was merged into First National Bank. Pursuant to the terms of the merger, each share of United common stock was converted, at the election of the shareholder, into either:
(1) $14.25 in cash, (2) 0.6828 shares of FNB United common stock, or (3) $4.99 in cash and 0.4438 shares of FNB United common stock, the overall conversion of stock being limited to 65% of United shares. The aggregate purchase price
was $22,708,000, consisting of $8,201,000 of cash payments and 728,625 shares of FNB United common stock valued at $14,507,000. The merger transaction has been accounted for using the purchase method of accounting for business combinations, and
accordingly, the assets and liabilities of United were recorded based on estimated fair values as of November 4, 2005, with the estimate of goodwill being subject to possible adjustment during the one-year period from that date. The
consolidated financial statements include the results of operations of



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United since November 4, 2005. Because the operations of United consisted substantially of those for Alamance Bank,
the references to this acquisition in the remainder of this discussion and analysis will be to the Alamance Bank acquisition.

Merger Acquisition of
Integrity Financial Corporation in 2006

On April 28, 2006, the Corporation completed a merger for the acquisition of Integrity
Financial Corporation (Integrity), headquartered in Hickory, North Carolina and the holding company for First Gaston Bank of North Carolina. At the date of the merger, First Gaston Bank operated seventeen offices and, based on estimated
fair values, had $728,656,000 in total assets, $475,281,000 in loans and $563,311,000 in deposits. On August 1, 2006, First Gaston Bank was merged into First National Bank. Pursuant to the terms of the merger, each share of Integrity common
stock was converted into 0.8743 shares of FNB United common stock and $5.20 in cash. The aggregate purchase price was $125,840,000, consisting of $27,717,000 in cash payments, 4,654,504 shares of FNB United common stock valued at $94,812,000 and
outstanding Integrity stock options valued at $3,311,000. The merger transaction has been accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Integrity were recorded based
on estimated fair values as of April 28, 2006, with the estimate of goodwill being subject to possible adjustment during the one-year period from that date. The consolidated financial statements include the results of operations of Integrity
since April 28, 2006. Because the operations of Integrity consisted substantially of those for First Gaston Bank, the references to this acquisition in the remainder of this discussion and analysis will be to the First Gaston Bank acquisition.

Primary Financial Data for 2006

The
Corporation earned $4,033,000 in the second quarter of 2006, a 77.5% increase from earnings of $2,272,000 in the same period of 2005. Basic earnings per share increased from $.41 to $.42 and diluted earnings per share increased from $.40 to $.41 for
percentage increases of 2.4% and 2.5%, respectively. For the first six months of 2006, earnings amounted to $6,710,000, which represents a 46.6% increase from earnings of $4,578,000 in the same period of 2005. Basic earnings per share in comparing
six-month periods increased from $.82 to $.84 and diluted earnings per share increased from $.80 to $.83 for percentage increases of 2.4% and 3.8%, respectively. As noted above, First Gaston Bank and Alamance Bank were acquired through mergers
effective April 28, 2006 and November 4, 2005, respectively, impacting both net income and the calculation of earnings per share since the acquisition dates and also the comparability of operating results on a year-to-date basis between
2006 and 2005 (see Note 12 to the Consolidated Financial Statements for business segment information and also below in Significant Factors Affecting Earnings in 2006 and 2005). The First Gaston Bank acquisition added $728,656,000 or
approximately 66% to total assets at the time of acquisition, while the Alamance Bank acquisition earlier added $163,168,000 or approximately 17.5% to total assets at the time of acquisition. Largely reflecting these acquisitions, total assets were
$1,816,493,000 at June 30, 2006, up 100.8% from June 30, 2005 and 64.8% from December 31, 2005. Loans amounted to $1,289,202,000 at June 30, 2006, increasing 83.4% from June 30, 2005 and 58.6% from December 31, 2005.
Total deposits were up 103.6% from June 30, 2005 and 66.8% from December 31, 2005, amounting to $1,403,998,000 at June 30, 2006.

Significant Factors Affecting Earnings in 2006 and 2005

The acquisitions of First Gaston Bank and Alamance Bank have
affected the comparability of operating results, as the consolidated financial statements include the results of operations of First Gaston Bank and Alamance Bank since April 28, 2006 and November 4, 2005, respectively, and prior period
financial



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information has not been restated. Consequently, the results of operations for the first six months of 2006 include the
results of the former First Gaston Bank operations for only the last two months of that period and the results of the Alamance Bank operations for all of that period, while the results of the first six months of 2005 do not include either First
Gaston Bank or Alamance Bank. As noted above, the First Gaston Bank acquisition added approximately 66% to total assets at the time of acquisition and the Alamance acquisition added approximately 17.5%.

The comparability of operating results has also been impacted by the adoption in the second quarter of 2005 of new regulatory guidance on the accounting
for courtesy overdraft programs. The initial result from adoption of this guidance was a $324,000 increase in the provision for loan losses in the second quarter of 2005, the effect of which was partially offset by a $156,000 increase in income from
service charges on deposit accounts. In periods subsequent to the second quarter of 2005, the regulatory guidance on accounting for courtesy overdraft programs will have a continuing effect on the results of operations by increasing the level of
both the provision for loan losses and income from service charges on deposit accounts, although these effects should tend to be offsetting with only a minor impact on net income. The total increase in the provision for loan losses in 2005 due to
the new regulatory guidance was $712,000 and for the first six months and second quarter of 2006 was $204,000 and $159,000, respectively.

As discussed in Note 5 to the Consolidated Financial Statements, effective January 1, 2006, the Corporation adopted Statement of Financial Accounting Standards No. 123R (SFAS No. 123R), Share-Based
Payment, which requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees over the period during which an employee is required to provide service
in exchange for the award (presumptively the vesting period). As a result of this adoption, stock-based compensation in the amount of $127,000, related to stock options previously granted, was charged against income in the second quarter of 2006 and
$246,000 was charged in the first six months of 2006. The related deferred tax benefit was $7,000 and $14,000, respectively. Prior to the adoption of SFAS No. 123R, the Corporation used the intrinsic value method as prescribed by APB
No. 25 and thus recognized no compensation expense for options granted with exercise prices equal to the fair market value of the common stock on the date of grant.

Prime rate increases resulting from the tightening measures utilized by the Federal Reserve for monetary policy purposes since mid-2004 have tended to improve the yield on earning assets, although the cost of funds is
being impacted by the general increase in interest rates. Net interest income increased $8,454,000 or 52.8% in the first six months of 2006 compared to the same period in 2005, reflecting the effect of a 46.4% increase in the level of average
earning assets coupled with an increase in the net interest margin, stated on a taxable equivalent basis, from 4.10% in 2005 to 4.25% in 2006. In comparing second quarter periods, net interest income increased $6,192,000 or 75.7%, reflecting a 69.3%
increase in average earning assets and an increase in the net interest margin from 4.12% to 4.25%.

Noninterest income increased $644,000
or 16.3% in the second quarter of 2006 compared to same period in 2005 and increased $992,000 or 13.9% in comparing six-month periods, due primarily to the addition of First Gaston Bank as discussed above.

Noninterest expense was $4,324,000 or 54.5% higher in the second quarter of 2006 compared to the same period in 2005 and was $6,517,000 or 43.0% higher
in comparing six-month periods, due largely to the addition of First Gaston Bank as discussed above. The higher level of noninterest expense also reflected the addition of Alamance Bank as discussed above including the cost of integrating operations
and the related data and other systems conversions which resulted from the merger of Alamance Bank with and into First National Bank effective February 1, 2006.



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Critical Accounting Policies

The Corporations significant accounting policies are set forth in Note 1 to the Consolidated Financial Statements contained in the Form 10-K Annual Report for the fiscal year ended December 31, 2005. Of
these significant accounting policies, the Corporation considers its policy regarding the allowance for loan losses to be its most critical accounting policy, because it requires managements most subjective and complex judgments. In addition,
changes in economic conditions can have a significant impact on the allowance for loan losses and therefore the provision for loan losses and results of operations. The Corporation has developed appropriate policies and procedures for assessing the
adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Corporations assessments may be impacted in future periods by changes in economic
conditions, the results of regulatory examinations, and the discovery of information with respect to borrowers that is not known to management at the time of the issuance of the consolidated financial statements. For additional discussion concerning
the Corporations allowance for loan losses and related matters, see Asset Quality.

Earnings Review

The Corporations net income increased $1,761,000 or 77.5% in the first quarter of 2006 compared to the same period of 2005 and increased $2,132,000
or 46.6% in comparing six-month periods. In general, earnings were impacted most significantly in the second quarter of 2006 by increases of $6,192,000 or 75.7% in net interest income and $644,000 in noninterest income and by a $459,000 reduction in
the provision for loan losses, which gains were significantly offset by a $4,324,000 increase in noninterest expense. Earnings for the first six months of 2006 were similarly impacted by increases of $8,454,000 or 52.8% in net interest income and
$992,000 in noninterest income and by a $752,000 reduction in the provision for loan losses, which gains were significantly offset by a $6,517,000 increase in noninterest expense. Certain factors specifically affecting the elements of income and
expense and the comparability of operating results for the first six months and second quarter periods of 2006 and 2005 were discussed in the Overview  Significant Factors Affecting Earnings in 2006 and 2005.

On an annualized basis, return on average assets decreased from 1.03% in the first six months of 2005 to 1.00% in the first six months of 2006. Return on
average shareholders equity decreased from 10.85% to 9.49% in comparing the same periods. In comparing second quarter periods, return on average assets was unchanged at 1.01% and return on average shareholders equity decreased from
10.68% to 9.06%. Return on tangible assets and equity (calculated by deducting average goodwill and core deposit premiums from average assets and from average equity) for the first six months of 2006 amounted to 1.05% and 16.89%, respectively, and
for the 2006 second quarter amounted to 1.07% and 18.54%.

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.

Net interest income was $24,458,000 in the first six months of 2006 compared to $16,004,000 in the same period of 2005. This increase of $8,454,000 or
52.8% resulted primarily from a 46.4% increase in the level of average earning assets coupled with an improvement in the net yield on earning assets, or net interest margin, from 4.10% in the first six months of 2005 to 4.25% in the same period of
2006. In comparing



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second quarter periods, net interest income increased $6,192,000 or 75.7% reflecting a 69.3% increase in average earning
assets and an increase in the net interest margin from 4.12% to 4.25%. On a taxable equivalent basis, the increases in net interest income in the first six months and second quarter of 2006 were $8,614,000 and $6,329,000, respectively, reflecting
changes in the relative mix of taxable and non-taxable earning assets in each period.

Table 1 on page 35 and Table 2 on page 36 set forth
for the periods indicated information with respect to the Corporations average balances of assets and liabilities, as well as the total dollar amounts of interest income (taxable equivalent basis) from earning assets and interest expense on
interest-bearing liabilities, resultant rates earned or paid, net interest income, net interest spread and net yield on earning assets. Net interest spread refers to the difference between the average yield on earning assets and the average rate
paid on interest-bearing liabilities. Net yield on earning assets, or net interest margin, refers to net interest income divided by average earning assets and is influenced by the level and relative mix of earning assets and interest-bearing
liabilities. Changes in net interest income on a taxable equivalent basis, as measured by volume and rate variances, are also analyzed in Tables 1 and 2. Volume refers to the average dollar level of earning assets and interest-bearing liabilities.

Changes in the net interest margin and net interest spread tend to correlate with movements in the prime rate of interest. There are
variations, however, in the degree and timing of rate changes, compared to prime, for the different types of earning assets and interest-bearing liabilities.

Following a generally low-rate environment for interest rates both earned and paid by the Corporation, the Federal Reserve took action to raise the level of interest rates by 25 basis points at the end of June 2004,
due to concern about increasing inflationary pressures, causing the prime rate to increase to 4.25% in July 2004. Four additional rate increases of 25 basis points each during the second six months of 2004, eight more such rate increases in 2005 and
four more in 2006 have raised the prime rate to the 8.25% level at June 30, 2006. The prime rate averaged 4.12% in 2003, rising to 4.33% in 2004 and 6.15% in 2005.

The prime rate averaged 7.64% in the first six months of 2006 compared to 5.60% in the first six months of 2005. The prime rate averaged 7.86% in the second quarter of 2006 compared to 5.88% in the second quarter of
2005. The net interest spread, in comparing six-month periods, increased by 7 basis points from 3.81% in 2005 to 3.88% in 2006, reflecting the effect of an increase in the average total yield on earning assets that more than offset the increase in
the average rate paid on interest-bearing liabilities, or cost of funds. The yield on earning assets increased by 117 basis points from 6.20% in 2005 to 7.37% in 2006, while the cost of funds increased by 110 basis points from 2.39% to 3.49%. In
comparing second quarter periods, the net interest spread increased by 6 basis points from 3.81% to 3.87%, as the yield on earning assets increased by 123 basis points while the cost of funds increased by 117 basis points.

Provision for Loan Losses

This provision is the
charge against earnings to provide an allowance or reserve for probable losses inherent in the loan portfolio. The amount of each period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. Earnings were positively impacted in the first six months and second quarter of 2006, compared to the same
periods of 2005, by reductions in the provision of $752,000 and $459,000, respectively. These reductions in the provision reflect in part the reduced level of growth in loans held for investment in 2006 compared to 2005, exclusive of the increase in
loans in 2006 related to the acquisition of First Gaston Bank on April 28, 2006. As discussed in the



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Overview  Significant Factors Affecting Earnings in 2006 and 2005, the provision for loan losses has
been affected by the adoption in the second quarter of 2005 of new regulatory guidance on the accounting for courtesy overdraft programs, resulting in an increase in the provision in the first six months and second quarter of 2006 of $204,000 and
$159,000, respectively. Further effects from adoption of the new regulatory guidance are discussed in the Overview.

The
allowance for loan losses, as a percentage of loans held for investment, amounted to 1.25% at June 30, 2006, 1.15% at June 30, 2005 and 1.25% at December 31, 2005. The allowance percentage has increased based on the results from
application of the allowance model that assigns reserves to various components of the loan portfolio in order to provide for probable inherent losses and also from the effect of the relative allowance level assigned to the loans of First Gaston Bank
and Alamance Bank, which were acquired on April 28, 2006 and November 4, 2005, respectively, as discussed in the Overview.

Noninterest Income

Noninterest income for the first six months and second quarter of 2006 increased $992,000 or 13.9% and
$644,00 or 16.3%, respectively, compared to the same periods in 2005, due primarily to the acquisition of First Gaston Bank on April 28, 2006 as discussed in the Overview  Significant Factors Affecting Earnings in 2006 and
2005. The increase in service charges on deposit accounts also reflected the adoption in the second quarter of 2005 of new regulatory guidance on the accounting for courtesy overdraft programs as also discussed in the Overview 
Significant Factors Affecting Earnings in 2006 and 2005.

Noninterest Expense

Noninterest expense was $6,517,000 or 43.00% higher in the first six months of 2006 compared to the same period of 2005 and for the second quarter was
$4,324,000 or 54.5% higher, due largely to the acquisition of First Gaston Bank on April 28, 2006 and also to the acquisition of Alamance Bank on November 4, 2005 and the costs associated with its merger with and into First National bank
effective February 1, 2006 as discussed in the Overview  Significant Factors Affecting Earnings in 2006 and 2005. Similarly, the opening of a new branch office in Greensboro, North Carolina in January 2006 increased
noninterest expense in the first six months of 2006 compared to the same period of 2005. Personnel expense was also impacted in 2006 by the adoption of SFAR No. 123R which requires the recognition of stock-based compensation as discussed in the
Overview  Significant Factors Affecting Earnings in 2006 and 2005.

Income Taxes

The effective income tax rate increased from 32.1% in the first six months of 2005 to 35.6% in the same period of 2006 due principally to the significant
increase in the ratio of taxable to non-taxable income. Additionally, the Corporations federal income tax rate increased from 34% in 2005 to 35% in 2006 due to higher levels of taxable income.

Liquidity

Liquidity for First National Bank refers
to its continuing ability to meet deposit withdrawals, fund loan and capital expenditure commitments, maintain reserve requirements, pay operating expenses and provide funds to the Parent Company for payment of dividends, debt service and other
operational requirements. Liquidity is immediately available from five major sources: (a) cash on hand and on deposit at other banks, (b) the outstanding balance of federal funds sold, (c) lines for the purchase of federal funds from
other banks, (d) the line of credit established at the Federal Home Loan Bank, less charges against that line for



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existing advances and letters of credit used to secure public funds on deposit, and (e) the investment securities
portfolio. All debt securities are of investment grade quality and, if the need arises, can be promptly liquidated on the open market or pledged as collateral for short-term borrowing.

Consistent with the general approach to liquidity, loans and other assets of First National Bank are based primarily on a core of local deposits and
First National 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 First National 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.

Liquidity for Dover Mortgage Company refers to its continuing ability to fund mortgage loan commitments, pay operating expenses and provide funds to the
Parent Company for payment of dividends, debt service and other operational requirements. Liquidity is principally available from a line of credit with another financial institution.

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 June 30, 2006 are discussed below.

Commitments by First National 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 June 30, 2006, total commitments to extend credit and undisbursed advances on customer lines of credit amounted to $322,170,000. 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 Corporation 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.

First
National 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 $8,263,000 at June 30, 2006 and $6,424,000 at June 30, 2005. Due to insignificance, the Corporation has recorded no liability at June 30, 2006 for the
current carrying amount of the obligation to perform as a guarantor.

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
sold, the Corporation is subject to variability in market prices related to these commitments. The Corporation 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



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commitments to originate fixed rate residential mortgage loans totaled $25,772,000 at June 30, 2006, and the related
forward sales commitments totaled $25,772,000. Loans held for sale by Dover Mortgage Company totaled $17,429,000 at June 30, 2006, and the related forward sales commitments totaled $17,429,000.

First National Bank had loans held for sale of $4,450,000 at June 30, 2006. Binding commitments of First National Bank for the origination of
mortgage loans intended to be held for sale at June 30, 2006 were not material.

The Corporation 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 Corporations balance sheet was asset-sensitive at June 30, 2006. 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

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, Tier 2 and Tier 3, 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 amounts of perpetual preferred stock and 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. Tier 3 capital, applicable only to
financial institutions subject to certain market risk capital guidelines, is capital allocated to support the market risk related to a financial institutions ongoing trading activities. At June 30, 2006, FNB United and First National Bank
were not subject to the market risk capital guidelines and, accordingly, had no Tier 3 capital allocation. Total capital, for risk-based purposes, consists of the sum of Tier 1, Tier 2 and Tier 3 capital. Under current requirements, the minimum
total capital ratio is 8.00% and the minimum Tier 1 capital ratio is 4.00%. At June 30, 2006, FNB United and First National Bank had total capital ratios of 10.36% and 10.01%, respectively, and Tier 1 capital ratios of 7.29% and 8.98%.



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The leverage capital ratio, which serves as a minimum capital standard, considers Tier 1 capital only and
is expressed as a percentage of average total assets for the most recent quarter, after reduction of those assets for goodwill and other disallowed intangible assets at the measurement date. As currently required, the minimum leverage capital ratio
is 4.00%. At June 30, 2006, FNB United and First National Bank had leverage capital ratios of 6.59% and 8.29%, respectively.

First
National Bank is also required to comply with prompt corrective action provisions established by the Federal Deposit Insurance Corporation Improvement Act. To be categorized as well-capitalized, a bank must have a minimum ratio for total capital of
10.00%, for Tier 1 capital of 6.00% and for leverage capital of 5.00%. As noted above, First National Bank met all of those ratio requirements at June 30, 2006 and, accordingly, is well-capitalized under the regulatory framework for prompt
corrective action.

Balance Sheet Review

The growth in total assets at June 30, 2006 compared to June 30, 2005 and December 31, 2005 largely reflected the acquisitions of First Gaston Bank and Alamance Bank on April 28, 2006 and November 4, 2005,
respectively, as discussed in the Overview. Significant estimated fair values initially recorded for First Gaston Bank included total assets of $728,656,000, investment securities of $84,373,000, loans of $481,319,000, deposits of
$563,311,000 and Federal Home Loan Bank advances of $18,554,000. Significant estimated fair values initially recorded for Alamance Bank included total assets of $163,668,000, investment securities of $34,712,000, loans of $96,624,000, deposits of
$112,961,000 and Federal Home Loan Bank advances of $21,866,000. Total assets at June 30, 2006 were $911,891,000 or 100.8% higher than at June 30, 2005, reflecting the effect of both the First Gaston Bank and Alamance Bank acquisitions,
and were $714,408,000 or 64.8% higher than at December 31, 2005, reflecting the First Gaston Bank acquisition. By similar comparison, deposits were ahead by $714,339,000 or 103.6% and $562,389,000 or 66.8%. Average assets increased 51.4% in the
first six months of 2006 compared to the same period of 2005, while average deposits increased 50.9%, the second quarter increases being 77.4% and 76.9%, respectively.

Investment Securities

Additions to the investment securities portfolio depend to a large extent on
the availability of investable funds that are not otherwise needed to satisfy loan demand. During the twelve-month period ended June 30, 2006, there was a net increase of $111,217,000 or 89.0% in the level of investment securities, due
primarily to the additions of $84,373,000 and $34,712,000, respectively, in investment securities from the First Gaston Bank acquisition on April 28, 2006 and the Alamance Bank acquisition on November 4, 2005, as discussed in the
Balance Sheet Review. There was a net increase in the level of investment securities of $76,355,000 or 47.80% during the first six months of 2006 due primarily to the First Gaston Bank acquisition. Investable funds not otherwise utilized
are temporarily invested as federal funds sold or as interest-bearing balances at other banks, the level of which is affected by such considerations as near-term loan demand and liquidity needs. The interest-bearing bank balances initially recorded
for the First Gaston Bank acquisition amounted to $31,135,000.

Loans

The Corporations primary source of revenue and largest component of earning assets is the loan portfolio. During the twelve-month period ended March 31, 2006, loans increased $586,315,000 or 83.4%, due
primarily to the additions of $481,319,000 and $96,624,000, respectively, in loans from the First Gaston Bank acquisition on April 28, 2006 and the Alamance Bank acquisition on November 4, 2005, as discussed in



29



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the Balance Sheet Review. The net loan increase during the first six months of 2006 was $476,536,000 or 58.6%
due primarily to the First Gaston Bank acquisition. Average loans were $290,711,000 or 42.6% higher in the first six months of 2006 than in the same period of 2005 and were $445,596,000 or 64.7% higher in the second quarter comparison. The ratio of
average loans to average deposits, in comparing six-month periods, decreased from 100.1% in 2005 to 94.6% in 2006. The ratio of loans to deposits at June 30, 2006 was 91.8%.

Loan growth during the twelve-month period ended June 30, 2006, including the loans added by the First Gaston Bank and Alamance Bank acquisitions,
was significant in all types of loans, with the largest percentage increase being related to the portfolio of construction loans. During the first six months of 2006, loan growth, including the loans added by the First Gaston Bank acquisition, was
also significant in all types of loans, with the largest percentage increase being related to the portfolio of commercial and agricultural loans.

Asset
Quality

Management considers the asset quality of First National 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 is employed to review the underwriting documentation and risk grading analysis.

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 First National 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 First National Banks allowance for loan losses. Such agencies may require First National 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.

At June 30, 2006, the Corporation had impaired loans which totaled $86,000 and were also on nonaccrual status. The related allowance for loan losses
on these loans amounted to $15,000. At June 30, 2005 and December 31, 2005, the Corporation had no loans that were considered to be impaired.

At June 30, 2006, nonperforming loans were $17,983,000 in total, nonaccrual loans and accruing loans past due 90 days or more amounting to $15,646,000 and $2,337,000, respectively. At June 30, 2005,
nonperforming loans were $5,602,000 in total, nonaccrual loans and accruing loans past due 90 days or more amounting to $4,927,000 and $675,000, respectively. At December 31, 2005, nonperforming loans were $6,046,000 in total, nonaccrual loans
and accruing loans past due 90 days or more amounting to $5,398,000 and $648,000, respectively.

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



30



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certain of these pools are identified using risk grades derived from regulatory risk guidelines and additional internal
parameters. Utilizing the trailing two-year historical loss experience of First National Bank 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.

Earnings were positively impacted in the first six months and
second quarter of 2006, compared to the same periods of 2005, by reductions in the provision of $752,000 and $459,000, respectively. These reductions in the provision reflect in part the reduced level of growth in loans held for investment in 2006
compared to 2005, exclusive of the increase in loans in 2006 related to the acquisition of First Gaston Bank on April 28, 2006. As discussed in the Overview  Significant Factors Affecting Earnings in 2006 and 2005, the
provision for loan losses has been affected by the adoption in the second quarter of 2005 of new regulatory guidance on the accounting for courtesy overdraft programs, resulting in an increase in the provision in the first six months and second
quarter of 2006 of $204,000 and $159,000, respectively. Further effects from adoption of the new regulatory guidance are discussed in the Overview.

The allowance for loan losses, as a percentage of loans held for investment, amounted to 1.25% at June 30, 2006, 1.15% at June 30, 2005 and 1.25% at December 31, 2005. The allowance percentage has
increased based on the results from application of the allowance model that assigns reserves to various components of the loan portfolio in order to provide for probable inherent losses and also from the effect of the relative allowance level
assigned to the loans of First Gaston Bank and Alamance Bank, which were acquired on April 28, 2006 and November 4, 2005, respectively, as discussed in the Overview.

Management believes the allowance for loan losses of $15,814,000 at June 30, 2006 is adequate to cover probable losses in the loan portfolio;
however, assessing the adequacy of the allowance is a process that requires 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 Corporation.

The following table presents an analysis of the changes
in the allowance for loan losses. As noted above and in the Overview, new regulatory guidance adopted in the second quarter of 2005 on the accounting for courtesy overdraft programs has tended to increase the provision for loan losses.
This same regulatory guidance has also increased the level of both loan charge-offs and loan recoveries as noted in the comparison below of the three and six months ended June 30, 2006 to the same periods of 2005, although the effect of these
increases is largely offsetting.



31



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|                               |  |                            |        |                          |   |       |  |      |        |  |   |      
|------------------------------ |  | -------------------------- | ------ | ------------------------ | - | ----- |  | ---- | ------ |  | - | -----
|                               |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|                               |  | 2006                       |        | 2005                     |   | 2006  |  | 2005
|                               |  | (in thousands)            
|Balance at beginning of period |  | $                          | 9,960  |                          | $ | 7,556 |  | $    | 9,945  |  | $ | 7,293
|Charge-offs                    |  |                            | 1,309  |                          |   | 948   |  |      | 1,858  |  |   | 1,144
|Recoveries                     |  |                            | 720    |                          |   | 260   |  |      | 1,207  |  |   | 349  
|                               |  |                            |        |                          |   |       |  |      |        |  |   |      
|Net loan charge-offs           |  |                            | 589    |                          |   | 688   |  |      | 651    |  |   | 795  
|Provision for loan losses      |  |                            | 405    |                          |   | 864   |  |      | 482    |  |   | 1,234
|Purchase accounting adjustment |  |                            | 6,038  |                          |   |      |  |      | 6,038  |  |   |     
|                               |  |                            |        |                          |   |       |  |      |        |  |   |      
|Balance at end of period       |  | $                          | 15,814 |                          | $ | 7,732 |  | $    | 15,814 |  | $ | 7,732
|                               |  |                            |        |                          |   |       |  |      |        |  |   |      

Deposits

The level and mix of deposits is affected by various factors, including general economic conditions, the particular circumstances of local markets and the specific deposit strategies employed. In general, broad
interest rate declines tend to encourage customers to consider alternative investments such as mutual funds and tax-deferred annuity products, while interest rate increases tend to have the opposite effect.

The level and mix of deposits has been specifically affected by the additions of $563,311,000 and $112,961,000, respectively, in deposits from the First
Gaston Bank acquisition on April 28, 2006 and the Alamance Bank acquisition on November 4, 2005, as discussed in the Balance Sheet Review. Total deposits increased $714,339,000 or 103.6% during the twelve-month period ended
June 30, 2006, reflecting the effect of both the First Gaston Bank and Alamance acquisitions, and $562,389,000 or 66.8% during the first six months of 2006, reflecting the First Gaston Bank acquisition. Significant increases by deposit category
for the twelve-month period ended June 30, 2006 were as follows: $71,016,000 for noninterest-bearing demand deposits, $93,276,000 for interest-bearing demand deposits, $150,131,000 for money market deposits and $394,164,000 for time deposits.
During the first six months of 2006, the significant increases by deposit category were as follows: $54,606,000 for noninterest-bearing demand deposits, $68,830,000 for interest-bearing demand deposits, $139,882,000 for money market deposits and
$292,684,000 for time deposits.

Business Development Matters

As discussed in the Overview and in Note 3 to the Consolidated Financial Statements, the Corporation completed a merger on November 4, 2005 for the acquisition of United Financial, Inc., holding
company for Alamance Bank, headquartered in Graham, North Carolina, in a transaction accounted for using the purchase method of accounting for business combinations. On February 1, 2006, Alamance Bank was merged with and into First National
Bank.

As discussed in the Overview and in Note 3 to the Consolidated Financial Statements, the Corporation completed a merger
on April 28, 2006 for the acquisition of Integrity Financial Corporation (Integrity), headquartered in Hickory, North Carolina and the holding company for First Gaston Bank, in a transaction accounted for using the purchase method
of accounting for business combinations. On August 1, 2006, First Gaston Bank was merged with and into First National Bank.



32



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In conjunction with the completion of the Integrity merger, FNB Uniteds wholly owned and newly
formed subsidiary, FNB United Statutory Trust II, issued $30,000,000 of trust preferred securities on April 27, 2006. The proceeds of the trust preferred securities, along with the proceeds of $928,000 received by the trust from the issuance of
its common securities to FNB United, were used to purchase $30,928,000 of FNB Uniteds junior subordinated debt securities. The proceeds of FNB Uniteds junior subordinated debt securities are primarily being used to fund the cash portion
of the merger consideration to the former Integrity shareholders. The trust preferred securities bear interest at a variable rate based on the three-month LIBOR rate plus 1.32% and mature on June 30, 2036, but may be redeemed at the option of
FNB United beginning on June 30, 2011.

In August 2003, First National Bank received regulatory approval for relocation of its
existing branch office in Randleman, North Carolina. The new office, which opened for business in August 2005, represents a move from an owned facility that is expected to be disposed of.

In January 2004, First National Bank received regulatory approval for establishment of its first branch office in Greensboro, North Carolina, resulting
in the opening of a loan production office in February 2004. A full-service banking office in a leased facility replaced the loan production office in May 2005.

In November 2004, First National Bank received regulatory approval for the establishment of a second branch office in Greensboro, North Carolina. The new office opened for business in January 2006.

In June 2005, First National Bank received regulatory approval for the establishment of a second branch office in Salisbury, North Carolina. Construction
of this full-service banking office, which will be a leased facility, is expected to be completed in the third quarter of 2006.

In 2005,
Dover Mortgage Company opened new mortgage production offices in North Carolina at Greensboro and Waxhaw.

Accounting Pronouncement Matters

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155 (SFAS No. 155), Accounting
for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140, which is effective for fiscal years beginning after September 15, 2006. SFAS No. 155 was issued to clarify the application of SFAS
No. 133 to beneficial interests in securitized financial assets and to improve the consistency of accounting for similar financial instruments, regardless of the form of the instruments. The Corporation is currently evaluating SFAS No.155 to
determine the potential impact, if any, on its consolidated financial statements.

In March 2006, the FASB issued Statement of Financial
Accounting Standards No. 156 (SFAS No. 156), Accounting for Servicing of Financial Assets  an amendment of FASB Statement No. 140, which is effective for fiscal years beginning after September 15,
2006. SFAS No. 156 was issued to simplify the accounting for servicing rights and to reduce the volatility that results from using different measurement attributes. The Corporation is currently evaluating SFAS No. 156 to determine the
potential impact, if any, on its consolidated financial statements.

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 Corporation and monitors the status of changes to and proposed effective dates of exposure drafts.



33



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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). The Corporations management uses
these non-GAAP measures in their analysis of the Corporation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 the Corporation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 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 for Purpose of the Safe Harbor Provisions of the Private Securities Litigation Reform
Act of 1995

The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements
(as such term is defined in the Private Securities Litigation Reform Act of 1995), which can be identified by the use of forward-looking terminology such as believes, expects, plans, projects,
goals, estimates, may, could, should, or anticipates or the negative thereof or other variations thereon of comparable terminology, or by discussions of strategy that involve
risks and uncertainties. In addition, from time to time, the Corporation 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 the Corporation with the Securities and Exchange Commission, or press releases or oral statements made by or with the approval of an authorized executive officer of the Corporation. Forward-looking statements are based on
managements current views and assumptions and involve risks and uncertainties that could significantly affect expected results. The Corporation wishes to caution the reader that factors, such as those listed below, in some cases have affected
and could affect the Corporations actual results, causing actual results to differ materially from those in any forward-looking statement. These factors include: (i) expected cost savings from the mergers described in the Overview may not
materialize within the expected time frame, (ii) revenues following the mergers may not meet expectations, (iii) costs or difficulties related to the integration of the businesses of FNB United and Integrity may be greater than
anticipated, (iv) competitive pressure in the banking industry or in the Corporations markets may increase significantly, (v) changes in the interest rate environment may reduce margins, (vi) general economic conditions, either
nationally or regionally, may be less favorable than expected, resulting in, among other things, credit quality deterioration, (vii) changes may occur in banking legislation and regulation, (viii) changes may occur in general business
conditions and (ix) changes may occur in the securities markets. Readers should also consider information on risks and uncertainties contained in the discussions of competition, supervision and regulation, and effect of governmental policies
contained in the Corporations most recent Annual Report on Form 10-K.



34



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Table 1

Average
Balances and Net Interest Income Analysis



|                                           |                 |                                                  |                         |  |                           |        |                             |                 |           |                         |   |                           |  |   |                  |  |      |   |  |   |        |   |  |   |       |  |   |       
|------------------------------------------ | --------------- | ------------------------------------------------ | ----------------------- |  | ------------------------- | ------ | --------------------------- | --------------- | --------- | ----------------------- | - | ------------------------- |  | - | ---------------- |  | ---- | - |  | - | ------ | - |  | - | ----- |  | - | ------
|SIX MONTHS ENDED JUNE 30                   |                 | 2006                                             |                         |  | 2005                      |        |                             |                
|                                           | Average Balance |                                                  | InterestIncome/ Expense |  | Average RatesEarned/ Paid |        |                             | Average Balance |           | InterestIncome/ Expense |   | Average RatesEarned/ Paid |  |   | 2006 Versus 2005
|                                           |                 |                                                  |                         |  |                           |        | Interest Variancedue to (1) |                 | NetChange
|                                           |                 |                                                  |                         |  |                           |        | Volume                      |                 |           | Rate                    |  
|                                           |                 | (Taxable Equivalent Basis, Dollars in Thousands)
|Earning Assets                             |                 |                                                  |                         |  |                           |        |                             |                 |           |                         |   |                           |  |   |                  |  |      |   |  |   |        |   |  |   |       |  |   |       
|Loans (2) (3)                              |                 | $                                                | 973,024                 |  | $                         | 38,132 |                             | 7.90            | %         |                         | $ | 682,313                   |  | $ | 21,935           |  | 6.47 | % |  | $ | 10,666 |   |  | $ | 5,531 |  | $ | 16,197
|Investment securities (2):                 |                 |                                                  |                         |  |                           |        |                             |                 |           |                         |   |                           |  |   |                  |  |      |   |  |   |        |   |  |   |       |  |   |       
|Taxable income                             |                 |                                                  | 139,491                 |  |                           | 3,389  |                             | 4.86            |           |                         |   | 78,598                    |  |   | 1,746            |  | 4.44 |   |  |   | 1,464  |   |  |   | 179   |  |   | 1,643 
|Non-taxable income                         |                 |                                                  | 52,483                  |  |                           | 1,556  |                             | 5.93            |           |                         |   | 45,001                    |  |   | 1,306            |  | 5.80 |   |  |   | 220    |   |  |   | 30    |  |   | 250   
|Other earning assets                       |                 |                                                  | 28,189                  |  |                           | 623    |                             | 4.45            |           |                         |   | 9,059                     |  |   | 117              |  | 2.61 |   |  |   | 379    |   |  |   | 127   |  |   | 506   
|                                           |                 |                                                  |                         |  |                           |        |                             |                 |           |                         |   |                           |  |   |                  |  |      |   |  |   |        |   |  |   |       |  |   |       
|Total earning assets                       |                 |                                                  | 1,193,187               |  |                           | 43,700 |                             | 7.37            |           |                         |   | 814,971                   |  |   | 25,104           |  | 6.20 |   |  |   | 12,729 |   |  |   | 5,867 |  |   | 18,596
|                                           |                 |                                                  |                         |  |                           |        |                             |                 |           |                         |   |                           |  |   |                  |  |      |   |  |   |        |   |  |   |       |  |   |       
|Cash and due from banks                    |                 |                                                  | 22,563                  |  |                           |        |                             |                 |           |                         |   | 17,707                    |  |   |                  |  |      |   |  |   |        |   |  |   |       |  |   |       
|Goodwill and core deposit premiums         |                 |                                                  | 62,003                  |  |                           |        |                             |                 |           |                         |   | 16,439                    |  |   |                  |  |      |   |  |   |        |   |  |   |       |  |   |       
|Other assets, net                          |                 |                                                  | 67,109                  |  |                           |        |                             |                 |           |                         |   | 38,885                    |  |   |                  |  |      |   |  |   |        |   |  |   |       |  |   |       
|                                           |                 |                                                  |                         |  |                           |        |                             |                 |           |                         |   |                           |  |   |                  |  |      |   |  |   |        |   |  |   |       |  |   |       
|Total Assets                               |                 | $                                                | 1,344,862               |  |                           |        |                             |                 |           |                         | $ | 888,002                   |  |   |                  |  |      |   |  |   |        |   |  |   |       |  |   |       
|                                           |                 |                                                  |                         |  |                           |        |                             |                 |           |                         |   |                           |  |   |                  |  |      |   |  |   |        |   |  |   |       |  |   |       
|Interest-Bearing Liabilities               |                 |                                                  |                         |  |                           |        |                             |                 |           |                         |   |                           |  |   |                  |  |      |   |  |   |        |   |  |   |       |  |   |       
|Interest-bearing deposits:                 |                 |                                                  |                         |  |                           |        |                             |                 |           |                         |   |                           |  |   |                  |  |      |   |  |   |        |   |  |   |       |  |   |       
|Demand deposits                            |                 | $                                                | 135,945                 |  |                           | 988    |                             | 1.47            |           |                         | $ | 93,660                    |  |   | 276              |  | 0.59 |   |  |   | 165    |   |  |   | 547   |  |   | 712   
|Savings deposits                           |                 |                                                  | 52,487                  |  |                           | 94     |                             | 0.36            |           |                         |   | 52,461                    |  |   | 82               |  | 0.32 |   |  |   |       |   |  |   | 12    |  |   | 12    
|Money market deposits                      |                 |                                                  | 127,128                 |  |                           | 2,010  |                             | 3.19            |           |                         |   | 73,349                    |  |   | 658              |  | 1.81 |   |  |   | 663    |   |  |   | 689   |  |   | 1,352 
|Certificates and other time deposits       |                 |                                                  | 593,493                 |  |                           | 11,658 |                             | 3.96            |           |                         |   | 381,847                   |  |   | 5,397            |  | 2.85 |   |  |   | 3,677  |   |  |   | 2,584 |  |   | 6,261 
|Retail repurchase agreements               |                 |                                                  | 18,068                  |  |                           | 361    |                             | 4.03            |           |                         |   | 16,413                    |  |   | 187              |  | 2.30 |   |  |   | 21     |   |  |   | 153   |  |   | 174   
|Federal Home Loan Bank advances            |                 |                                                  | 86,860                  |  |                           | 1,797  |                             | 4.17            |           |                         |   | 68,344                    |  |   | 1,295            |  | 3.82 |   |  |   | 375    |   |  |   | 127   |  |   | 502   
|Federal funds purchased                    |                 |                                                  | 268                     |  |                           | 8      |                             | 6.12            |           |                         |   | 487                       |  |   | 5                |  | 2.09 |   |  |   | (3     | ) |  |   | 6     |  |   | 3     
|Other borrowed funds                       |                 |                                                  | 53,119                  |  |                           | 1,558  |                             | 5.91            |           |                         |   | 29,082                    |  |   | 592              |  | 4.10 |   |  |   | 630    |   |  |   | 336   |  |   | 966   
|                                           |                 |                                                  |                         |  |                           |        |                             |                 |           |                         |   |                           |  |   |                  |  |      |   |  |   |        |   |  |   |       |  |   |       
|Total interest-bearing liabilities         |                 |                                                  | 1,067,368               |  |                           | 18,474 |                             | 3.49            |           |                         |   | 715,643                   |  |   | 8,492            |  | 2.39 |   |  |   | 5,528  |   |  |   | 4,454 |  |   | 9,982 
|                                           |                 |                                                  |                         |  |                           |        |                             |                 |           |                         |   |                           |  |   |                  |  |      |   |  |   |        |   |  |   |       |  |   |       
|Noninterest-bearing demand deposits        |                 |                                                  | 119,646                 |  |                           |        |                             |                 |           |                         |   | 80,365                    |  |   |                  |  |      |   |  |   |        |   |  |   |       |  |   |       
|Other liabilities                          |                 |                                                  | 16,391                  |  |                           |        |                             |                 |           |                         |   | 7,617                     |  |   |                  |  |      |   |  |   |        |   |  |   |       |  |   |       
|Shareholders equity                       |                 |                                                  | 141,457                 |  |                           |        |                             |                 |           |                         |   | 84,377                    |  |   |                  |  |      |   |  |   |        |   |  |   |       |  |   |       
|                                           |                 |                                                  |                         |  |                           |        |                             |                 |           |                         |   |                           |  |   |                  |  |      |   |  |   |        |   |  |   |       |  |   |       
|Total Liabilities and Shareholders Equity |                 | $                                                | 1,344,862               |  |                           |        |                             |                 |           |                         | $ | 888,002                   |  |   |                  |  |      |   |  |   |        |   |  |   |       |  |   |       
|                                           |                 |                                                  |                         |  |                           |        |                             |                 |           |                         |   |                           |  |   |                  |  |      |   |  |   |        |   |  |   |       |  |   |       
|Net Interest Income and Spread             |                 |                                                  |                         |  | $                         | 25,226 |                             | 3.88            | %         |                         |   |                           |  | $ | 16,612           |  | 3.81 | % |  | $ | 7,201  |   |  | $ | 1,413 |  | $ | 8,614 
|                                           |                 |                                                  |                         |  |                           |        |                             |                 |           |                         |   |                           |  |   |                  |  |      |   |  |   |        |   |  |   |       |  |   |       
|Net Yield on Earning Assets                |                 |                                                  |                         |  |                           |        |                             | 4.25            | %         |                         |   |                           |  |   |                  |  | 4.10 | % |  |   |        |   |  |   |       |  |   |       
|                                           |                 |                                                  |                         |  |                           |        |                             |                 |           |                         |   |                           |  |   |                  |  |      |   |  |   |        |   |  |   |       |  |   |       

---

|(1) | The mix variance, not separately stated, has been proportionally allocated to the rate and volume variances based on their absolute dollar amount.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Interest income and yields related to certain investment securities and loans exempt from both federal and state income tax or from state income tax alone are stated on a fully
taxable equivalent basis, assuming a federal tax rate of 35% in 2006 and 34% in 2005 and applicable state tax rate, reduced by the nondeductible portion of interest expense.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Nonaccrual loans are included in the average loan balance. Loan fees and the incremental direct costs associated with making loans are deferred and subsequently recognized over the
life of the loan as an adjustment of interest income.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



35



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Table 2

Average
Balances and Net Interest Income Analysis



|                                           |  |                                                  |           |                          |      |                            |                              |      |                 |  |                          |         |                            |   |        |                  |      |   |  |   |        |  |   |       |  |   |       
|------------------------------------------ |  | ------------------------------------------------ | --------- | ------------------------ | ---- | -------------------------- | ---------------------------- | ---- | --------------- |  | ------------------------ | ------- | -------------------------- | - | ------ | ---------------- | ---- | - |  | - | ------ |  | - | ----- |  | - | ------
|                                           |  | 2006                                             |           |                          | 2005 |                            |                              |     
|THREE MONTHS ENDED JUNE 30                 |  | Average Balance                                  |           | Interest Income/ Expense |      | Average Rates Earned/ Paid |                              |      | Average Balance |  | Interest Income/ Expense |         | Average Rates Earned/ Paid |   |        | 2006 Versus 2005
|                                           |  |                                                  |           |                          |      |                            |                              |      |                 |  |                          |         |                            |  
|                                           |  |                                                  |           |                          |      |                            | Interest Variance due to (1) |      | Net Change     
|                                           |  |                                                  |           |                          |      |                            | Volume                       |      | Rate            | 
|                                           |  | (Taxable Equivalent Basis, Dollars in Thousands)
|Earning Assets                             |  |                                                  |           |                          |      |                            |                              |      |                 |  |                          |         |                            |   |        |                  |      |   |  |   |        |  |   |       |  |   |       
|Loans (2) (3)                              |  | $                                                | 1,134,738 |                          | $    | 22,898                     |                              | 8.09 | %               |  | $                        | 689,142 |                            | $ | 11,351 |                  | 6.60 | % |  | $ | 8,558  |  | $ | 2,989 |  | $ | 11,547
|Investment securities (2):                 |  |                                                  |           |                          |      |                            |                              |      |                 |  |                          |         |                            |   |        |                  |      |   |  |   |        |  |   |       |  |   |       
|Taxable income                             |  |                                                  | 165,934   |                          |      | 2,042                      |                              | 4.92 |                 |  |                          | 79,912  |                            |   | 902    |                  | 4.51 |   |  |   | 1,051  |  |   | 89    |  |   | 1,140 
|Non-taxable income                         |  |                                                  | 55,762    |                          |      | 843                        |                              | 6.05 |                 |  |                          | 43,981  |                            |   | 644    |                  | 5.86 |   |  |   | 178    |  |   | 21    |  |   | 199   
|Other earning assets                       |  |                                                  | 41,265    |                          |      | 459                        |                              | 4.46 |                 |  |                          | 12,305  |                            |   | 84     |                  | 2.72 |   |  |   | 295    |  |   | 80    |  |   | 375   
|                                           |  |                                                  |           |                          |      |                            |                              |      |                 |  |                          |         |                            |   |        |                  |      |   |  |   |        |  |   |       |  |   |       
|Total earning assets                       |  |                                                  | 1,397,699 |                          |      | 26,242                     |                              | 7.53 |                 |  |                          | 825,340 |                            |   | 12,981 |                  | 6.30 |   |  |   | 10,082 |  |   | 3,179 |  |   | 13,261
|                                           |  |                                                  |           |                          |      |                            |                              |      |                 |  |                          |         |                            |   |        |                  |      |   |  |   |        |  |   |       |  |   |       
|Cash and due from banks                    |  |                                                  | 24,605    |                          |      |                            |                              |      |                 |  |                          | 17,709  |                            |   |        |                  |      |   |  |   |        |  |   |       |  |   |       
|Goodwill and core deposit premiums         |  |                                                  | 91,115    |                          |      |                            |                              |      |                 |  |                          | 16,440  |                            |   |        |                  |      |   |  |   |        |  |   |       |  |   |       
|Other assets, net                          |  |                                                  | 81,652    |                          |      |                            |                              |      |                 |  |                          | 39,554  |                            |   |        |                  |      |   |  |   |        |  |   |       |  |   |       
|                                           |  |                                                  |           |                          |      |                            |                              |      |                 |  |                          |         |                            |   |        |                  |      |   |  |   |        |  |   |       |  |   |       
|Total Assets                               |  | $                                                | 1,595,071 |                          |      |                            |                              |      |                 |  | $                        | 899,043 |                            |   |        |                  |      |   |  |   |        |  |   |       |  |   |       
|                                           |  |                                                  |           |                          |      |                            |                              |      |                 |  |                          |         |                            |   |        |                  |      |   |  |   |        |  |   |       |  |   |       
|Interest-Bearing Liabilities               |  |                                                  |           |                          |      |                            |                              |      |                 |  |                          |         |                            |   |        |                  |      |   |  |   |        |  |   |       |  |   |       
|Interest-bearing deposits:                 |  |                                                  |           |                          |      |                            |                              |      |                 |  |                          |         |                            |   |        |                  |      |   |  |   |        |  |   |       |  |   |       
|Demand deposits                            |  | $                                                | 159,435   |                          |      | 635                        |                              | 1.60 |                 |  | $                        | 94,438  |                            |   | 143    |                  | 0.61 |   |  |   | 147    |  |   | 345   |  |   | 492   
|Savings deposits                           |  |                                                  | 55,238    |                          |      | 54                         |                              | 0.39 |                 |  |                          | 52,565  |                            |   | 40     |                  | 0.31 |   |  |   | 2      |  |   | 12    |  |   | 14    
|Money market deposits                      |  |                                                  | 171,517   |                          |      | 1,548                      |                              | 3.62 |                 |  |                          | 74,301  |                            |   | 350    |                  | 1.89 |   |  |   | 705    |  |   | 493   |  |   | 1,198 
|Certificates and other time deposits       |  |                                                  | 693,041   |                          |      | 7,010                      |                              | 4.06 |                 |  |                          | 384,946 |                            |   | 2,850  |                  | 2.97 |   |  |   | 2,852  |  |   | 1,308 |  |   | 4,160 
|Retail repurchase agreements               |  |                                                  | 18,943    |                          |      | 197                        |                              | 4.18 |                 |  |                          | 17,309  |                            |   | 108    |                  | 2.50 |   |  |   | 11     |  |   | 78    |  |   | 89    
|Federal Home Loan Bank advances            |  |                                                  | 88,440    |                          |      | 938                        |                              | 4.25 |                 |  |                          | 68,025  |                            |   | 651    |                  | 3.84 |   |  |   | 212    |  |   | 75    |  |   | 287   
|Federal funds purchased                    |  |                                                  |          |                          |      |                           |                              |     |                 |  |                          |        |                            |   |       |                  |     |   |  |   |       |  |   |      |  |   |      
|Other borrowed funds                       |  |                                                  | 68,574    |                          |      | 1,047                      |                              | 6.12 |                 |  |                          | 31,785  |                            |   | 355    |                  | 4.47 |   |  |   | 525    |  |   | 167   |  |   | 692   
|                                           |  |                                                  |           |                          |      |                            |                              |      |                 |  |                          |         |                            |   |        |                  |      |   |  |   |        |  |   |       |  |   |       
|Total interest-bearing liabilities         |  |                                                  | 1,255,188 |                          |      | 11,429                     |                              | 3.66 |                 |  |                          | 723,369 |                            |   | 4,497  |                  | 2.49 |   |  |   | 4,454  |  |   | 2,478 |  |   | 6,932 
|                                           |  |                                                  |           |                          |      |                            |                              |      |                 |  |                          |         |                            |   |        |                  |      |   |  |   |        |  |   |       |  |   |       
|Noninterest-bearing demand deposits        |  |                                                  | 139,631   |                          |      |                            |                              |      |                 |  |                          | 82,592  |                            |   |        |                  |      |   |  |   |        |  |   |       |  |   |       
|Other liabilities                          |  |                                                  | 22,128    |                          |      |                            |                              |      |                 |  |                          | 7,994   |                            |   |        |                  |      |   |  |   |        |  |   |       |  |   |       
|Shareholders equity                       |  |                                                  | 178,124   |                          |      |                            |                              |      |                 |  |                          | 85,088  |                            |   |        |                  |      |   |  |   |        |  |   |       |  |   |       
|                                           |  |                                                  |           |                          |      |                            |                              |      |                 |  |                          |         |                            |   |        |                  |      |   |  |   |        |  |   |       |  |   |       
|Total Liabilities and Shareholders Equity |  | $                                                | 1,595,071 |                          |      |                            |                              |      |                 |  | $                        | 899,043 |                            |   |        |                  |      |   |  |   |        |  |   |       |  |   |       
|                                           |  |                                                  |           |                          |      |                            |                              |      |                 |  |                          |         |                            |   |        |                  |      |   |  |   |        |  |   |       |  |   |       
|Net Interest Income and Spread             |  |                                                  |           |                          | $    | 14,813                     |                              | 3.87 | %               |  |                          |         |                            | $ | 8,484  |                  | 3.81 | % |  | $ | 5,628  |  | $ | 701   |  | $ | 6,329 
|                                           |  |                                                  |           |                          |      |                            |                              |      |                 |  |                          |         |                            |   |        |                  |      |   |  |   |        |  |   |       |  |   |       
|Net Yield on Earning Assets                |  |                                                  |           |                          |      |                            |                              | 4.25 | %               |  |                          |         |                            |   |        |                  | 4.12 | % |  |   |        |  |   |       |  |   |       
|                                           |  |                                                  |           |                          |      |                            |                              |      |                 |  |                          |         |                            |   |        |                  |      |   |  |   |        |  |   |       |  |   |       

---

|(1) | The mix variance, not separately stated, has been proportionally allocated to the rate and volume variances based on their absolute dollar amount.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Interest income and yields related to certain investment securities and loans exempt from both federal and state income tax or from state income tax alone are stated on a fully
taxable equivalent basis, assuming a federal tax rate of 35% in 2006 and 34% in 2005 and applicable state tax rate, reduced by the nondeductible portion of interest expense.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Nonaccrual loans are included in the average loan balance. Loan fees and the incremental direct costs associated with making loans are deferred and subsequently recognized over the
life of the loan as an adjustment of interest income.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



36



---

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in
diminished current market values and/or reduced potential net interest income in future periods.

The Corporations market risk arises
primarily from interest rate risk inherent in its lending and deposit-taking activities. The structure of the Corporation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 Corporation does not maintain a trading account nor is the Corporation subject to currency exchange risk or commodity price risk. Interest rate risk is monitored as part of the Corporation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.

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, 2005.

Item 4. Controls and Procedures

As of June 30, 2006, the end of the period covered by this report, FNB United carried out an evaluation under the supervision and with the participation of the Corporation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 Corporation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, the Chief Executive Officer and Chief Financial Officer concluded that the Corporations disclosure
controls and procedures are effective 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. No significant change in the Corporations internal control over financial reporting occurred during the quarterly period ended June 30, 2006 that has
materially affected, or is reasonably likely to materially affect, FNB Uniteds internal control over 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.



37



---

PART II. OTHER INFORMATION

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



|                                      |  |                               |  |                           |   |                                                                           |   |                                                                        |        
|------------------------------------- |  | ----------------------------- |  | ------------------------- | - | ------------------------------------------------------------------------- | - | ---------------------------------------------------------------------- | -------
|Issuer Purchases of Equity
Securities
|Three Months Ended June 30, 2006      |  | TotalNumberof SharesPurchased |  | AveragePricePaid perShare |   | TotalNumber of SharesPurchasedas Part ofPubliclyAnnouncedPlans orPrograms |   | MaximumNumberof SharesThat MayYet BePurchasedUnder thePlans orPrograms
|April 1 to April 30                   |  |                              |  | $                         |  |                                                                           |  |                                                                        | 298,800
|May 1 to May 31                       |  |                              |  |                           |  |                                                                           |  |                                                                        | 298,800
|June 1 to June 30                     |  |                              |  |                           |  |                                                                           |  |                                                                        | 298,800
|                                      |  |                               |  |                           |   |                                                                           |   |                                                                        |        
|Total                                 |  |                              |  |                           |  |                                                                           |  |                                                                        | 298,800
|                                      |  |                               |  |                           |   |                                                                           |   |                                                                        |        

On July 21, 2005, the Corporation announced that the Board of Directors had authorized a
program for the repurchase of up to 300,000 shares of common stock during the period commencing August 1, 2005 and ending July 31, 2006. No shares were repurchased under this program subsequent to June 30, 2006.

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



|(a) | The annual meeting of the Corporation was held on Tuesday, May 9, 2006:
|--- | -----------------------------------------------------------------------



|(b) | No response is required.
|--- | ------------------------



|(c) | At the annual meeting, the shareholders voted upon the election of directors. The shareholders voted in favor of electing the following persons as directors of the Corporation:
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                       |  |           |  |                          
|---------------------- |  | --------- |  | -------------------------
|                       |  | Votes For |  | VotesWithheld/Abstentions
|For Term Ending 2008   |  |           |  |                          
|Jacob F. Alexander III |  | 4,557,491 |  | 24,334                   
|Lynn S. Lloyd          |  | 4,558,436 |  | 23,388                   
|                       |  |          
|For Term Ending 2009   |  |           |  |                          
|Larry E. Brooks        |  | 4,561,557 |  | 20,267                   
|W. L. Hancock          |  | 4,560,114 |  | 21,710                   
|Eugene B. McLaurin, II |  | 4,561,151 |  | 20,673                   
|R. Reynolds Neely, Jr. |  | 4,568,569 |  | 23,255                   
|Richard K. Pugh        |  | 4,553,453 |  | 28,372                   



38



---

Item 6. Exhibits

Exhibits to this report are listed in the index to exhibits on pages 41, 42, 43 and 44 of this report.



39



---

SIGNATURES

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



|                     |  |                  |  |                                             
|-------------------- |  | ---------------- |  | --------------------------------------------
|                     |  | FNB United Corp.
|                     |  | (Registrant)    
|                     |  |                 
|Date: August 8, 2006 |  | By:              |  | /s/ Jerry A. Little                         
|                     |  |                  |  | Jerry A. Little                             
|                     |  |                  |  | Treasurer and Secretary                     
|                     |  |                  |  | (Principal Financial and Accounting Officer)



40



---

INDEX TO EXHIBITS



|            |  |                                                                                                                                                                                                                                                            
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                     
|3.10        |  | 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.
|            | 
|3.20        |  | Amended and Restated Bylaws of the Registrant, adopted July 21, 2005, incorporated herein by reference to Exhibit 3.20 to the Registrants Form 10-Q Quarterly Report for the quarter ended
June 30, 2005.                                                 
|            | 
|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.                                               
|            | 
|4.20        |  | 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 dated November 4, 2005.                             



41



---

|            |  |                                                                                                                                                                                                                                                                                                                                                                                            
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                     
|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        |  | Junior Subordinated Indenture dated as of April 27, 2006, between FNB Corp. and Wilmington Trust Company, as trustee, incorporated herein by reference to Exhibit 4.1 to the Registrants
Form 8-K Current Report dated April 27, 2006 and filed April 28, 2006.                                                                                                                           
|            | 
|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.
|            | 
|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 Corp. 2003 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.1 to the Registrants Registration Statement on Form S-8 (File No. 333-105442).                                                                                                                                                                                                                        



42



---

|            |  |                                                                                                                                                                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                                                         
|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.
|            | 
|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.                                                                                                               
|            | 
|10.30*      |  | Employment Agreement dated as of January 1, 2006 among FNB Corp., First National Bank and Trust Company and Michael C. Miller, incorporated herein by reference to Exhibit 10 to the
Registrants Current Report on Form 8-K filed on January 6, 2006.                                         
|            | 
|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*      |  | Employment Agreement dated as of April 10, 2000 between First National Bank and Trust Company 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, 2000.                                
|            | 
|10.33*      |  | First Amendment to Employment Agreement dated as of June 30, 2006 between First National Bank and Trust Company and R. Larry Campbell, incorporated herein by reference to Exhibit 10 to the
Registrants Form 8-K Current Report dated June 30, 2006 and filed July 7, 2006.                  
|            | 
|10.34*      |  | 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.                                                                     
|            | 
|10.35*      |  | Form of Change of Control Agreement between FNB United Corp. and certain of its key employees and officers.                                                                                                                                                                                    
|            | 
|10.40       |  | Guarantee Agreement dated as of November 4, 2006, 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 8, 2005.                   



43



---

|            |  |                                                                                                                                                                                                                                                                                                                                
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                                                                                         
|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.
|            | 
|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.
|- | ---------------------------------------------------------



44