UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q








Quarterly
Report Pursuant to Section 13 or 15(d)


of
the Securities Exchange Act of 1934


For
the quarterly period ended:


June
30, 2008





Commission
File Number: 000-13823





FNB
United Corp.


(Exact
name of Registrant as specified in its Charter)





North
      Carolina
            56-1456589(State
      of Incorporation)
            (I.R.S.
      Employer Identification No.)150
      South Fayetteville StreetAsheboro,
      North Carolina
            27203(Address
      of principal executive offices)
            (Zip
      Code)





(336)
626-8300


(Registrant's
telephone number, including area code)







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





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





Large
      accelerated filer o
            
            Accelerated
      filer xNon-accelerated
      filer  o (Do not check if a smaller
      reporting company)
            
            Smaller
      reporting company  o





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





At
August 7, 2008, 11,425,052 shares of the registrant's common stock, $2.50 par
value, were outstanding.





1


PART
      I.  FINANCIAL INFORMATIONItem
      1.  Financial Statements
 FNB
United Corp. and SubsidiaryCONSOLIDATED BALANCE SHEETS
(unaudited)
   June
      30,
              
              
              December
      31,2008
              
              
              2007(unaudited)(in
      thousands, except share and per share data)ASSETSCash
      and due from banks
              
              $
              36,728
              
              
              $
              37,739Interest-bearing
      bank balances
              
              
              198
              
              
              
              836Federal
      funds sold
              
              
              500
              
              
              
              542Investment
      securities:Available
      for sale, at estimated fair value (amortizedcost
      of $187,484,000 and $160,903,000)
              
              
              186,213
              
              
              
              161,809Held
      to maturity (estimated fair value of$24,969,000
      and $35,251,000)
              
              
              25,360
              
              
              
              35,650Loans
      held for sale
              
              
              19,875
              
              
              
              17,586Loans
      held for investment
              
              
              1,574,942
              
              
              
              1,446,116Less
      allowance for loan losses
              
              
              (18,845
              )
              
              
              (17,381
              )Net
      loans held for investment
              
              
              1,556,097
              
              
              
              1,428,735Premises
      and equipment, net
              
              
              49,926
              
              
              
              46,614Goodwill
              
              
              108,395
              
              
              
              110,195Core
      deposit premiums
              
              
              6,161
              
              
              
              6,564Other
      assets
              
              
              65,567
              
              
              
              60,236Total
      Assets
              
              $
              2,055,020
              
              
              $
              1,906,506LIABILITIES
      AND SHAREHOLDERS' EQUITYDeposits:Noninterest-bearing
      demand deposits
              
              $
              164,671
              
              
              $
              158,564Interest-bearing
      deposits:Demand,
      savings and money market deposits
              
              
              514,885
              
              
              
              464,731Time
      deposits of $100,000 or more
              
              
              375,854
              
              
              
              375,419Other
      time deposits
              
              
              430,724
              
              
              
              442,328Total
      deposits
              
              
              1,486,134
              
              
              
              1,441,042Retail
      repurchase agreements
              
              
              32,297
              
              
              
              29,133Federal
      Home Loan Bank advances
              
              
              202,418
              
              
              
              131,790Federal
      funds purchased
              
              
              28,000
              
              
              
              13,500Subordinated
      debt
              
              
              15,000
              
              
              
              -Junior
      subordinated debentures
              
              
              56,702
              
              
              
              56,702Other
      liabilities
              
              
              19,587
              
              
              
              18,083Total
      Liabilities
              
              
              1,840,138
              
              
              
              1,690,250Shareholders'
      equity:Preferred
      stock - $10.00 par value;authorized
      200,000 shares, none issued
              
              
              -
              
              
              
              -Common
      stock - $2.50 par value;authorized
      50,000,000 shares, issuedshares
      - 11,425,052 and 11,426,902
              
              
              28,563
              
              
              
              28,567Surplus
              
              
              114,478
              
              
              
              114,119Retained
      earnings
              
              
              73,449
              
              
              
              74,199Accumulated
      other comprehensive loss
              
              
              (1,608
              )
              
              
              (629
              )Total
      Shareholders' Equity
              
              
              214,882
              
              
              
              216,256Total
      Liabilities andShareholders'
      Equity
              
              $
              2,055,020
              
              
              $
              1,906,506See
      accompanying notes to consolidated financial statements.


2


FNB
      United Corp. and SubsidiaryCONSOLIDATED
      STATEMENTS OF INCOME (unaudited)Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007(in
      thousands, except share and per share data)Interest
      IncomeInterest
      and fees on loans
              
              $
              25,858
              
              
              $
              28,569
              
              
              $
              53,394
              
              
              $
              56,438Interest
      and dividends on investment securities:Taxable
      income
              
              
              1,959
              
              
              
              2,231
              
              
              
              4,094
              
              
              
              3,887Non-taxable
      income
              
              
              503
              
              
              
              491
              
              
              
              1,030
              
              
              
              1,045Other
      interest income
              
              
              5
              
              
              
              423
              
              
              
              17
              
              
              
              1,241Total
      interest income
              
              
              28,325
              
              
              
              31,714
              
              
              
              58,535
              
              
              
              62,611Interest
      ExpenseDeposits
              
              
              10,622
              
              
              
              13,245
              
              
              
              22,428
              
              
              
              26,043Retail
      repurchase agreements
              
              
              163
              
              
              
              319
              
              
              
              412
              
              
              
              624Federal
      Home Loan Bank advances
              
              
              1,829
              
              
              
              674
              
              
              
              3,521
              
              
              
              1,355Federal
      funds purchased
              
              
              174
              
              
              
              27
              
              
              
              298
              
              
              
              27Other
      borrowed funds
              
              
              588
              
              
              
              1,390
              
              
              
              1,497
              
              
              
              2,678Total
      interest expense
              
              
              13,376
              
              
              
              15,655
              
              
              
              28,156
              
              
              
              30,727Net
      Interest Income
              
              
              14,949
              
              
              
              16,059
              
              
              
              30,379
              
              
              
              31,884Provision
      for loan losses
              
              
              1,383
              
              
              
              476
              
              
              
              2,897
              
              
              
              1,000Net
      Interest Income After Provision for Loan Losses
              
              
              13,566
              
              
              
              15,583
              
              
              
              27,482
              
              
              
              30,884Noninterest
      IncomeService
      charges on deposit accounts
              
              
              2,137
              
              
              
              2,279
              
              
              
              4,221
              
              
              
              4,329Gains
      on sale of mortgage loans
              
              
              804
              
              
              
              1,368
              
              
              
              2,227
              
              
              
              2,506Trust
      and investment services
              
              
              468
              
              
              
              461
              
              
              
              931
              
              
              
              832Cardholder
      and merchant services income
              
              
              638
              
              
              
              537
              
              
              
              1,119
              
              
              
              1,044Other
      service charges, commissions and fees
              
              
              335
              
              
              
              319
              
              
              
              448
              
              
              
              656Bank
      owned life insurance
              
              
              235
              
              
              
              215
              
              
              
              486
              
              
              
              451Other
      income
              
              
              126
              
              
              
              247
              
              
              
              339
              
              
              
              581Total
      noninterest income
              
              
              4,743
              
              
              
              5,426
              
              
              
              9,771
              
              
              
              10,399Noninterest
      ExpensePersonnel
      expense
              
              
              8,908
              
              
              
              8,199
              
              
              
              17,607
              
              
              
              16,618Net
      occupancy expense
              
              
              1,350
              
              
              
              1,390
              
              
              
              2,649
              
              
              
              2,569Furniture
      and equipment expense
              
              
              1,121
              
              
              
              1,247
              
              
              
              2,257
              
              
              
              2,360Data
      processing services
              
              
              726
              
              
              
              470
              
              
              
              1,183
              
              
              
              1,002Goodwill
      impairment
              
              
              1,800
              
              
              
              -
              
              
              
              1,800
              
              
              
              -Other
      expense
              
              
              3,413
              
              
              
              4,063
              
              
              
              7,361
              
              
              
              7,432Total
      noninterest expense
              
              
              17,318
              
              
              
              15,369
              
              
              
              32,857
              
              
              
              29,981Income
      Before Income Taxes
              
              
              991
              
              
              
              5,640
              
              
              
              4,396
              
              
              
              11,302Income
      taxes
              
              
              851
              
              
              
              1,949
              
              
              
              1,933
              
              
              
              3,859Net
      Income
              
              $
              140
              
              
              $
              3,691
              
              
              $
              2,463
              
              
              $
              7,443Net
      income per common share:Basic
              
              $
              0.01
              
              
              $
              0.33
              
              
              $
              0.22
              
              
              $
              0.66Diluted
              
              $
              0.01
              
              
              $
              0.33
              
              
              $
              0.22
              
              
              $
              0.66Weighted
      average number of common shares outstanding:Basic
              
              
              11,414,330
              
              
              
              11,318,908
              
              
              
              11,409,630
              
              
              
              11,291,270Diluted
              
              
              11,416,269
              
              
              
              11,343,367
              
              
              
              11,411,569
              
              
              
              11,319,427See
      accompanying notes to consolidated financial statements.


3


FNB
      United Corp. and SubsidiaryCONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE
  INCOMESix
      Months Ended June 30, 2008 and 2007
(unaudited)
  AccumulatedOtherCommon
      Stock
              
              
              
              
              
              Retained
              
              
              ComprehensiveShares
              
              
              Amount
              
              
              Surplus
              
              
              Earnings
              
              
              Income
      (Loss)
              
              
              Total(in
      thousands, except share and per share data)Balance,
      December 31, 2006
              
              
              11,293,992
              
              
              $
              28,235
              
              
              $
              112,213
              
              
              $
              68,662
              
              
              $
              (1,442
              )
              
              $
              207,668Comprehensive
      income:Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              7,443
              
              
              
              -
              
              
              
              7,443Other
      comprehensive income, net of taxes:Unrealized
      securities losses
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (501
              )
              
              
              (501
              )Total
      comprehensive income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6,942Cash
      dividends declared, $0.30 per share
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (3,404
              )
              
              
              -
              
              
              
              (3,404
              )Stock
      options:
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              -
              
              
              
              -Proceeds
      from options exercised
              
              
              76,314
              
              
              
              191
              
              
              
              489
              
              
              
              -
              
              
              
              -
              
              
              
              680Compensation
      expense recognized
              
              
              -
              
              
              
              -
              
              
              
              266
              
              
              
              -
              
              
              
              -
              
              
              
              266Net
      tax benefit related to option exercises
              
              
              -
              
              
              
              -
              
              
              
              150
              
              
              
              -
              
              
              
              -
              
              
              
              150Restricted
      stock:
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -
              
              
              
              -Shares
      issued, subject to restriction
              
              
              2,000
              
              
              
              5
              
              
              
              (5
              )
              
              
              -
              
              
              
              -
              
              
              
              -Compensation
      expense recognized
              
              
              -
              
              
              
              -
              
              
              
              162
              
              
              
              -
              
              
              
              -
              
              
              
              162Other
      compensatory stock issued
              
              
              432
              
              
              
              1
              
              
              
              7
              
              
              
              -
              
              
              
              -
              
              
              
              8Balance,
      June 30, 2007
              
              
              11,372,738
              
              
              $
              28,432
              
              
              $
              113,282
              
              
              $
              72,701
              
              
              $
              (1,943
              )
              
              $
              212,472Balance,
      December 31, 2007
              
              
              11,426,902
              
              
              $
              28,567
              
              
              $
              114,119
              
              
              $
              74,199
              
              
              $
              (629
              )
              
              $
              216,256Cumulative
      effect of a change in accountingprinciple
      - Adoption of EITF 06-4
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (357
              )
              
              
              -
              
              
              
              (357
              )Comprehensive
      income:Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,463
              
              
              
              -
              
              
              
              2,463Other
      comprehensive income, net of taxes:Unrealized
      securities losses
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,318
              )
              
              
              (1,318
              )Interest
      rate swap
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              311
              
              
              
              311Application
      of SFAS No. 158
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              28
              
              
              
              28Total
      comprehensive income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,484Cash
      dividends declared, $0.25 per share
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,856
              )
              
              
              -
              
              
              
              (2,856
              )Stock
      options:Proceeds
      from options exercised
              
              
              150
              
              
              
              1
              
              
              
              1
              
              
              
              -
              
              
              
              -
              
              
              
              2Compensation
      expense recognized
              
              
              -
              
              
              
              -
              
              
              
              219
              
              
              
              -
              
              
              
              -
              
              
              
              219Restricted
      stock:Shares
      issued/terminated,subject
      to restriction
              
              
              (2,000
              )
              
              
              (5
              )
              
              
              5
              
              
              
              -
              
              
              
              -
              
              
              
              -Compensation
      expense recognized
              
              
              -
              
              
              
              -
              
              
              
              134
              
              
              
              -
              
              
              
              -
              
              
              
              134Balance,
      June 30, 2008
              
              
              11,425,052
              
              
              $
              28,563
              
              
              $
              114,478
              
              
              $
              73,449
              
              
              $
              (1,608
              )
              
              $
              214,882See
      accompanying notes to consolidated financial statements.


4


FNB
      United Corp. and SubsidiaryCONSOLIDATED
      STATEMENTS OF CASH FLOWS (unaudited)Six
      months ended,June
      30,2008
              
              
              2007(dollars
      in thousands)Operating
      ActivitiesNet
      income
              
              $
              2,463
              
              
              $
              7,443Adjustments
      to reconcile net income to cash providedby
      operating activities:Depreciation
      and amortization  of premises and equipment
              
              
              1,714
              
              
              
              1,800Provision
      for loan losses
              
              
              2,897
              
              
              
              1,000Deferred
      income taxes
              
              
              319
              
              
              
              341Deferred
      loan fees and costs, net
              
              
              599
              
              
              
              (794
              )Premium
      amortization and discount accretion of investment securities,
      net
              
              
              (170
              )
              
              
              19Amortization
      of core deposit premiums
              
              
              403
              
              
              
              410Stock
      compensation expense
              
              
              353
              
              
              
              436Income
      from bank owned life insurance
              
              
              (486
              )
              
              
              (451
              )Mortgage
      loans held for sale:Origination
      of mortgage loans held for sale
              
              
              (151,196
              )
              
              
              (213,209
              )Proceeds
      from sale of mortgage loans held for sale
              
              
              150,667
              
              
              
              209,454Gain
      on mortgage loan sales
              
              
              (2,227
              )
              
              
              (2,506
              )Mortgage
      servicing rights capitalized
              
              
              (731
              )
              
              
              (534
              )Mortgage
      servicing rights amortization and impairment
              
              
              379
              
              
              
              174Goodwill
      impairment
              
              
              1,800
              
              
              
              -Changes
      in assets and liabilities:(Increase)
      decrease in interest receivable
              
              
              1,341
              
              
              
              (817
              )(Increase)
      decrease in other assets
              
              
              (1,219
              )
              
              
              4,459Increase
      in accrued interest and other liabilities
              
              
              2,773
              
              
              
              545Net
      cash provided by operating activities
              
              
              9,679
              
              
              
              7,770Investing
      ActivitiesAvailable-for-sale
      securities:Proceeds
      from maturities and calls
              
              
              43,934
              
              
              
              27,089Purchases
              
              
              (70,299
              )
              
              
              (96,556
              )Held-to-maturity
      securities:Proceeds
      from maturities and calls
              
              
              10,250
              
              
              
              4,378Net
      increase in loans held for investment
              
              
              (134,992
              )
              
              
              (52,259
              )Purchases
      of  premises and equipment
              
              
              (5,079
              )
              
              
              (2,145
              )Net
      cash used in investing activities
              
              
              (156,186
              )
              
              
              (119,493
              )Financing
      ActivitiesNet
      increase in deposits
              
              
              45,092
              
              
              
              24,350Increase
      in retail repurchase agreements
              
              
              3,164
              
              
              
              5,020Increase
      (decrease) in Federal Home Loan Bank advances
              
              
              70,486
              
              
              
              (1,195
              )Increase
      in federal funds purchased
              
              
              14,500
              
              
              
              8,950Increase
      in other borrowings
              
              
              15,000
              
              
              
              5,940Proceeds
      from exercise of stock options
              
              
              2
              
              
              
              680Tax
      benefit from exercise of stock options
              
              
              -
              
              
              
              150Cash
      dividends paid
              
              
              (3,428
              )
              
              
              (3,622
              )Net
      cash provided by financing activities
              
              
              144,816
              
              
              
              40,273Net
      Decrease in Cash and Cash Equivalents
              
              
              (1,691
              )
              
              
              (71,450
              )Cash
      and Cash Equivalents at Beginning of Period
              
              
              39,117
              
              
              
              108,340Cash
      and Cash Equivalents at End of Period
              
              $
              37,426
              
              
              $
              36,890Supplemental
      disclosure of cash flow information:Cash
      paid during the period for:Interest
              
              $
              28,487
              
              
              $
              30,243Income
      taxes, net of refunds
              
              
              1,159
              
              
              
              329Noncash
      transactions:Foreclosed
      loans transferred to other real estate
              
              
              5,047
              
              
              
              1,092Unrealized
      securities gains (losses), net of income taxes (benefit)
              
              
              (1,318
              )
              
              
              (501
              )Application
      of SFAS No. 158 to employee benefit plan costs, net of income
      taxes
              
              
              28
              
              
              
              -Interest
      rate swap
              
              
              311
              
              
              
              -Adoption
      of EITF Issue 06-4
              
              
              (357
              )
              
              
              -See
      accompanying notes to consolidated financial statements.


5


FNB
United Corp. and Subsidiary


Notes
to Consolidated Financial Statements


(Unaudited)





1.
            Basis
      of Presentation





FNB
United Corp. (“FNB United”) is the bank holding company for CommunityOne Bank,
National Association (“CommunityOne”), formerly known as First National Bank and
Trust Company prior to June 4, 2007. CommunityOne has three wholly owned
subsidiaries, Dover Mortgage Company (“Dover”), First National Investor
Services, Inc. and Premier Investment Services, Inc.  Through
CommunityOne and Dover, 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.
CommunityOne 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, based
in Charlotte, NC, joined FNB United in 2003 and has a retail origination network
in key growth markets across the state, in addition to wholesale operations.
Effective August 1, 2007, Dover became a subsidiary of CommunityOne. Premier
Investment Services, Inc. is an inactive company.





The
accompanying consolidated financial statements, prepared without audit, include
the accounts of FNB United and its subsidiary (collectively, the “Company”). All
significant intercompany balances and transactions have been
eliminated.





The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
periods.  Actual results could differ from those
estimates.  Operating results for the three-month and six-month
periods ended June 30, 2008 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2008.





Certain
reclassifications have been made to the prior period consolidated financial
statements to place them on a comparable basis with the current period
consolidated financial statements. These reclassifications have no effect on net
income or shareholders’ equity as previously reported.





The
organization and business of FNB United, accounting policies followed by the
Company and other relevant information are contained in the notes to the
consolidated financial statements filed as part of the Company 's 2007 Annual
Report on Form 10-K.  This quarterly report should be read in
conjunction with that annual report.





2.
            Cash
      and Cash Equivalents





For
purposes of reporting cash flows, cash and cash equivalents include the balance
sheet captions: cash and due from banks, interest-bearing bank balances and
federal funds sold.  Generally, federal funds are purchased and sold
for one-day periods.





3.
            Earnings
      per Share





Basic net
income per share, or basic earnings per share (“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 Company’s potential common stock and contingently issuable shares, which
consist of dilutive stock options and restricted stock, were
exercised.  The numerator of the basic EPS computation is the same as
the numerator of the diluted EPS computation for


6


all periods presented.  A reconciliation of
      the denominators of the basic and diluted EPS computations is as
      follows:


Three
      Months Ended June 30,
              
              
              Six
      Months Ended June 30,2008
              
              
              2007
              
              
              2008
              
              
              2007Basic
      EPS denominator - weighted average number of common shares
      outstanding
              
              
              11,414,330
              
              
              
              11,318,908
              
              
              
              11,409,630
              
              
              
              11,291,270Dilutive
      share effect arising from potential common share issuances
              
              
              1,939
              
              
              
              24,459
              
              
              
              1,939
              
              
              
              28,157Diluted
      EPS denominator
              
              
              11,416,269
              
              
              
              11,343,367
              
              
              
              11,411,569
              
              
              
              11,319,427




For the
three months ended June 30, 2008 and 2007 there were 647,004 and 363,221 shares,
respectively, related to stock options and restricted stock that were
antidilutive since the exercise price exceeded the average market price for the
period and were omitted from the calculation of diluted earnings per share for
their respective periods. For the six months ended June 30, 2008 and 2007, there
were 656,520 and 368,272 shares, respectively, related to stock options and
restricted stock that were antidilutive.  These common stock
equivalents were omitted from the calculations of diluted EPS for their
respective periods.





4.
            Allowance
      for Loan Losses





Changes
      in the allowance for loan losses were as
  follows:





Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007(dollars
      in thousands)Balance,
      at beginning of period
              
              $
              18,215
              
              
              $
              15,757
              
              
              $
              17,381
              
              
              $
              15,943Provision
      for loan losses
              
              
              1,383
              
              
              
              476
              
              
              
              2,897
              
              
              
              1,000Net
      chargeoffsChargeoffs
              
              
              (1,106
              )
              
              
              (1,031
              )
              
              
              (2,152
              )
              
              
              (2,229
              )Recoveries
              
              
              353
              
              
              
              503
              
              
              
              719
              
              
              
              991Net
      chargeoffs
              
              
              (753
              )
              
              
              (528
              )
              
              
              (1,433
              )
              
              
              (1,238
              )Balance,
      end of period
              
              $
              18,845
              
              
              $
              15,705
              
              
              $
              18,845
              
              
              $
              15,705Annualized
      net charge-offs duringthe
      period to average loans
              
              
              0.19
              %
              
              
              0.16
              %
              
              
              0.19
              %
              
              
              0.18
              %Annualized
      net charge-offs duringthe
      period to allowance for loan losses
              
              
              15.98
              %
              
              
              13.45
              %
              
              
              15.21
              %
              
              
              15.77
              %Allowance
      for loan loss to loans heldfor
      investment
              
              
              1.20
              %
              
              
              1.16
              %
              
              
              1.20
              %
              
              
              1.16
              %








7


5.
            Postretirement
      Employee Benefit Plans





The
accompanying table details the components of the net periodic cost of the
Company’s postretirement benefit plans as recognized in the Company’s
Consolidated Statements of Income:





Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,Pension
      Plan
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007(dollars
      in thousands)
              
              
              (dollars
      in thousands)Service
      cost
              
              $
              66
              
              
              $
              67
              
              
              $
              132
              
              
              $
              134Interest
      Cost
              
              
              165
              
              
              
              157
              
              
              
              330
              
              
              
              314Expected
      return on plan assets
              
              
              (235
              )
              
              
              (236
              )
              
              
              (470
              )
              
              
              (472
              )Amortization
      of prior service cost
              
              
              1
              
              
              
              1
              
              
              
              2
              
              
              
              2Amortization
      of net actuarial loss
              
              
              2
              
              
              
              6
              
              
              
              4
              
              
              
              12Net
      periodic pension cost (income)
              
              $
              (1
              )
              
              $
              (5
              )
              
              $
              (2
              )
              
              $
              (10
              )Supplemental
      Executive Retirement PlanService
      cost
              
              $
              34
              
              
              $
              35
              
              
              $
              68
              
              
              $
              70Interest
      Cost
              
              
              36
              
              
              
              33
              
              
              
              72
              
              
              
              66Expected
      return on plan assets
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Amortization
      of prior service cost
              
              
              17
              
              
              
              17
              
              
              
              34
              
              
              
              34Amortization
      of net actuarial loss
              
              
              2
              
              
              
              7
              
              
              
              4
              
              
              
              14Net
      periodic SERP cost
              
              $
              89
              
              
              $
              92
              
              
              $
              178
              
              
              $
              184Other
      Postretirement Defined Benefit PlansService
      cost
              
              $
              4
              
              
              $
              4
              
              
              $
              8
              
              
              $
              8Interest
      Cost
              
              
              18
              
              
              
              17
              
              
              
              36
              
              
              
              34Expected
      return on plan assets
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Amortization
      of prior service cost (credit)
              
              
              (1
              )
              
              
              (1
              )
              
              
              (2
              )
              
              
              (2
              )Amortization
      of transition obligation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Amortization
      of net actuarial loss (gain)
              
              
              -
              
              
              
              2
              
              
              
              -
              
              
              
              4Net
      periodic postretirement benefit cost
              
              $
              21
              
              
              $
              22
              
              
              $
              42
              
              
              $
              44





The
Company does not expect to contribute any funds to its pension plan in
2008.  The other postretirement benefit plans are unfunded plans; and
consequently, there are no plan assets or cash contribution requirements other
than for the direct payment of benefits.





6.
            Recent
      Accounting Pronouncements





In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, “Fair Value
Measurements” (“SFAS No. 157”). SFAS No. 157 enhances existing guidance
for measuring assets and liabilities using fair value. Prior to the issuance of
SFAS No. 157, guidance for applying fair value was incorporated in several
accounting pronouncements. SFAS No. 157 provides a single definition of fair
value, together with a framework for measuring it, and requires additional
disclosure about the use of fair value to measure assets and liabilities. SFAS
No. 157 also emphasizes that fair value is a market-based measurement, not an
entity-specific measurement, and sets out a fair value hierarchy with the
highest priority being quoted prices in active markets. Under SFAS No. 157, fair
value measurements are disclosed by level within that hierarchy. While SFAS No.
157 does not add any new fair value measurements, it does change current
practice. Changes to practice include: (1) a requirement for an entity to
include its own credit standing in the measurement of its liabilities;
(2) a modification of the transaction price presumption; (3) a
prohibition on the use of block discounts when valuing large blocks of
securities for broker-dealers and investment companies; and (4) a


8


requirement
to adjust the value of restricted stock for the effect of the restriction even
if the restriction lapses within one year. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. The Company adopted the
provisions of SFAS No. 157 effective January 1, 2008.  Refer to Note 8
to the consolidated financial statements for additional
disclosures.




In
September 2006, the Emerging Issues Task Force (EITF) issued EITF Issue 06-4,
“Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements” (“EITF Issue
06-4”).  EITF Issue 06-4 requires that for endorsement split-dollar
insurance arrangements that provide a benefit to an employee that extends to
postretirement periods, an employer should recognize a liability for future
benefits in accordance with FASB Statement No. 106 or Accounting Principles
Board (APB) Opinion No. 12 based on the substantive agreement of the
employee.  If the employee has effectively agreed to maintain a life
insurance policy during postretirement periods, the costs of the life insurance
policy during the postretirement periods should be accrued in accordance with
either FASB Statement No. 106 or APB Opinion No. 12. EITF Issue 06-4 is
effective for fiscal years beginning after December 15, 2007. The adoption
of the provisions of EITF Issue 06-4 effective January 1, 2008 resulted in a
$357,000 reduction of retained earnings through recognition of the cumulative
effect of a change in accounting principle.




In
February 2007, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (SFAS 159), which allows an entity the
irrevocable option to elect fair value for the initial and subsequent
measurement for certain financial assets and liabilities on a
contract-by-contract basis. Subsequent changes in fair value of these financial
assets and liabilities would be recognized in earnings when they occur. SFAS 159
further establishes certain additional disclosure requirements. SFAS 159 is
effective for the Company’s financial statements for the year beginning on
January 1, 2008, with earlier adoption permitted.  The adoption
of the provisions of SFAS 159 effective January 1, 2008 had no material effect
on financial position or results of operations.





SFAS No.
141 (R), Business
Combinations.  This statement requires the acquiring entity in
a business combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction; establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to investors and other users all
of the information they need to evaluate and understand the nature and financial
effect of the business combination.  In addition, this statement
expands the scope of acquisition accounting to all transactions and
circumstances under which control of a business is obtained.  This
statement applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008.  Earlier adoption is
prohibited.




Staff
Accounting Bulletin No. 109.  SAB 109 revises and rescinds portions of
the interpretative guidance included in Topic 5:DD of the codification of staff
accounting bulletins in order to make this interpretive guidance consistent with
current authoritative accounting literature (principally SFAS 156 and SFAS 159).
SAB 109 discusses the staff’s views on the accounting for written loan
commitments that are recorded at fair value through earnings under generally
accepted accounting principles.  The principal change to current staff
guidance is to include the expected net future cash flows relating to the
associated servicing of a loan in the fair value measurement of a derivative
loan commitment (such as a loan commitment relating to a mortgage loan that will
be held for sale).  SAB 109 is effective prospectively to derivative
loan commitments issued or modified in fiscal quarters beginning after December
15, 2007. The adoption of the provisions of SAB, 109 effective January 1, 2008,
resulted in the initial recognition of $500,000 in written loan commitments
recorded at fair value


9


through
earnings related to the expected net future cash flows involving the associated
servicing of loans in the fair value measurement of derivative loan
commitments.




In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities — an amendment of FASB Statement
No. 133” (“SFAS 161”). SFAS 161 expands quarterly disclosure requirements
in SFAS No. 133 “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS 133”), about an entity’s derivative instruments and hedging
activities. SFAS 161 is effective for fiscal years beginning after
November 15, 2008. The Company is currently assessing the impact of SFAS
161 on its consolidated financial position and results of
operations.





From time
to time the FASB issues exposure drafts for proposed statements of financial
accounting standards. Such exposure drafts are subject to comment from the
public, to revisions by the FASB and to final issuance by the FASB as statements
of financial accounting standards. Management considers the effect of the
proposed statements on the consolidated financial statements of the Company and
monitors the status of changes to and proposed effective dates of exposure
drafts.





7.      
     Comprehensive Income





Comprehensive
income is defined as the change in equity of an enterprise during a period from
transactions and other events and circumstances from nonowner sources and,
accordingly, includes both net income and amounts referred to as other
comprehensive income.  The items of other comprehensive income are
included in the consolidated statement of shareholders’ equity and comprehensive
income.  The accumulated balance of other comprehensive income is
included in the shareholders’ equity section of the consolidated balance
sheet.  The Company’s components of accumulated other comprehensive
income at June 30, 2008 include unrealized gains (losses) on investment
securities classified as available-for-sale, the effect of the application of
SFAS No. 158 to defined benefit pension and other postretirement plans for
employees, and the changes in the interest rate swap on one issue of the trust
preferred securities.




For the
three months ended June 30, 2008 and 2007, total comprehensive income
(loss), consisting of net income and the components of other comprehensive
income, net of tax benefit, was ($1.3 million) and $3.3 million, respectively.
The income tax benefit related to the components of other comprehensive income
amounted to $976,000 and $279,000, respectively.




For the
six months ended June 30, 2008 and 2007, total comprehensive income,
consisting of net income and the components of other comprehensive income, net
of tax benefit, was $1.5 million and $6.9 million, respectively. The income tax
benefit related to the components of other comprehensive income amounted to
$673,000 and $325,000, respectively.





8.
            Financial
      Instruments





On March
14, 2008, FNB United entered into a pay fixed, receive variable
interest rate swap with SunTrust Bank in the notional amount of
$20,000,000, exactly matching the terms of an existing trust preferred
security and maturing on the first date on which FNB United may call the
security.  As a result, FNB United has locked the rate of
interest payable on the trust preferred securities at 4.01% through December 15,
2010.  Holders of the trust preferred are not affected. The swap was
effective at June 30, 2008 and is expected to remain so as the cash flows are
exactly matched.





On May
27, 2008, FNB United entered into a revolving credit agreement with
SunTrust Bank in the original principal amount of $10,000,000. Proceeds of all
revolving loans will be used for general corporate purposes, including
supporting the capital needs of CommunityOne. The revolving credit facility
bears interest at three-month LIBOR plus 1.50% per annum and will terminate on
May 22, 2009. It is unsecured. The credit agreement includes customary financial
and corporate affirmative and negative covenants and customary provisions for
acceleration upon the occurrence of an event of


10








default
by FNB United. Prepayments may be made without premium or penalty. FNB
United has not drawn down any amounts under the revolving credit
facility.




On June
30, 2008, CommunityOne entered into a subordinated debt loan agreement with
SunTrust Bank. The agreement provides for a $15 million subordinated term loan
that is unsecured and intended to qualify as Tier 2 capital under applicable
rules and regulations of the Comptroller of the Currency. The loan will mature
on June 30, 2015 and will bear interest at three-month LIBOR plus 3.50%, with
interest only payable quarterly. There is no right of acceleration in the case
of a default in the payment of the principal of or interest on the subordinated
debt loan or the performance of any other obligation of CommunityOne under the
note evidencing the loan. Acceleration upon the occurrence of limited events of
default is permitted provided that any required prior approval of the
Comptroller of the Currency for such acceleration is obtained. CommunityOne has
been extended the full amount of the subordinated debt loan.





9.
            Fair
      values of assets and liabilities





The
Company utilizes fair value measurements to record fair value adjustments to
certain assets and liabilities and to determine fair value disclosures.
Securities available-for-sale are recorded at fair value on a recurring basis.
Additionally, from time to time, the Company may be required to record at fair
value other assets on a nonrecurring basis, such as loans held for sale, loans
held for investment and certain other assets. These nonrecurring fair value
adjustments typically involve application of lower of cost or market accounting
or write-downs of individual assets.





Fair Value
Hierarchy





Under
SFAS 157, the Company groups assets and liabilities at fair value in three
levels, based on the markets in which the assets and liabilities are traded and
the reliability of the assumptions used to determine fair value. These levels
are:





Level
      1
            
            Valuation
      is based upon quoted prices for identical instruments traded in active
      markets.Level
      2
            
            Valuation
      is based upon quoted prices for similar instruments in active markets,
      quoted prices for identical or similar instruments in markets that are not
      active, and model-based valuation techniques for which all significant
      assumptions are observable in the market.Level
      3
            
            Valuation
      is generated from model-based techniques that use at least one significant
      assumption not observable in the market. These unobservable assumptions
      reflect estimates of assumptions that market participants would use in
      pricing the asset or liability. Valuation techniques include use of option
      pricing models, discounted cash flow models and similar
      techniques.





Following
is a description of valuation methodologies used for assets and liabilities
recorded at fair value.





Investment Securities
Available-for-Sale





Investment
securities available-for-sale are recorded at fair value on a recurring basis.
Fair value measurement is based upon quoted prices, if available. If quoted
prices are not available, fair values are measured using independent pricing
models or other model-based valuation techniques such as the present value of
future cash flows, adjusted for the security’s credit rating, prepayment
assumptions and other factors such as credit loss assumptions. Level 1
securities include those traded on an active exchange, such as the New York
Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers
in active over-the-counter markets and money market funds. Level 2 securities
include mortgage-backed securities issued by government sponsored entities,
municipal bonds and corporate debt securities. Securities classified as Level 3
include asset-backed securities in less liquid markets.


11





Loans Held for
Sale





Loans
held for sale are carried at the lower of cost or market value. The fair value
of loans held for sale is based on what secondary markets are currently offering
for portfolios with similar characteristics. As such, the Company classifies
loans subjected to nonrecurring fair value adjustments as Level 2.





Loans





The
Company does not record loans at fair value on a recurring basis. However, from
time to time, a loan is considered impaired and the related impairment is
charged against the allowance or a specific allowance is established. Loans for
which it is probable that payment of interest and principal will not be made in
accordance with the contractual terms of the loan agreement are considered
impaired. Once a loan is identified as individually impaired, management
measures impairment in accordance with SFAS 114, “Accounting by Creditors for
Impairment of a Loan,”(SFAS 114). The fair value of impaired loans is estimated using one of
several methods, including collateral value, market value of similar debt,
enterprise value, liquidation value and discounted cash flows. Those impaired
loans not requiring a specific allowance represent loans for which the fair
value of the expected repayments or collateral meet or exceed the recorded
investments in such loans. At June 30, 2008, substantially all of the total
impaired loans were evaluated based on the fair value of the collateral. In
accordance with SFAS 157, impaired loans where an allowance is established based
on the fair value of collateral require classification in the fair value
hierarchy. When the fair value of the collateral is based on an observable
market price or a current appraised value, the Company records the impaired loan
as nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the
appraised value and there is no observable market price, the Company records the
impaired loan as nonrecurring Level 3.





Derivative Assets and
Liabilities





Substantially
all derivative instruments held or issued by the Company for risk management or
customer-initiated activities are traded in over-the-counter markets where
quoted market prices are not readily available. For those derivatives, the
Company measures fair value using internally developed models that use primarily
market observable inputs, such as yield curves and option volatilities, and
include the value associated with counterparty credit risk. The Company
classifies derivatives instruments held or issued for risk management or
customer-initiated activities as Level 2.





Mortgage Servicing
Rights





Mortgage
servicing rights are subject to impairment testing. A valuation model, which
utilizes a discounted cash flow analysis using interest rates and prepayment
speed assumptions currently quoted for comparable instruments and a discount
rate, is used in the completion of impairment testing. If the valuation model
reflects a value less than the carrying value, loan servicing rights are
adjusted to fair value through a valuation allowance as determined by the model.
As such, the Company classifies mortgage servicing rights subjected to
nonrecurring fair value adjustments as Level 3.





Assets and Liabilities
Recorded at Fair Value on a Recurring Basis





The
following table presents the recorded amount of assets and liabilities measured
at fair value on a recurring basis.




(in
      thousands)June
      30, 2008
              
              Total
              
              
              Level
      1
              
              
              Level
      2
              
              
              Level
      3Investment
      securities available for sale
              
              $
              186,213
              
              
              $
              2,023
              
              
              $
              180,839
              
              
              $
              3,351Derivative
      assets
              
              
              987
              
              
              
              -
              
              
              
              987
              
              
              
              -Total
      assets at fair value
              
              $
              187,200
              
              
              $
              2,023
              
              
              $
              181,826
              
              
              $
              3,351


12





The
following is a reconciliation of the beginning and ending balances for assets
and liabilities measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during the period ended June 30,
2008.





(in
      thousands)June
      30, 2008
              
              Investment
      securities available for sale
              
              
              TotalBeginning
      balance, March 31, 2008
              
              $
              4,265
              
              
              $
              4,265Total
      gains/losses (realized'unrealized)Included
      in earnings (or changes in net assets)
              
              
              -
              
              
              
              -Included
      in other comprehensive income
              
              
              (905
              )
              
              
              (905
              )Purchases,
      issuances, and settlements
              
              
              -
              
              
              
              -Transfers
      in/out of Level 3
              
              
              (9
              )
              
              
              (9
              )Ending
      balance, June 30, 2008
              
              $
              3,351
              
              
              $
              3,351





Assets and Liabilities
Recorded at Fair Value on a Nonrecurring Basis





The
Company may be required, from time to time, to measure certain assets at fair
value on a nonrecurring basis in accordance with U.S. generally accepted
accounting principles. These include assets that are measured at the lower of
cost or market that were recognized at fair value below cost at the end of the
period. Assets measured at fair value on a nonrecurring basis are included in
the following table.




(in
      thousands)June
      30, 2008
              
              Total
              
              
              Level
      1
              
              
              Level
      2
              
              
              Level
      3Loans
              
              $
              1,213
              
              
              $
              -
              
              
              $
              -
              
              
              $
              1,213Mortgage
      servicing rights
              
              
              3,252
              
              
              
              -
              
              
              
              -
              
              
              
              3,252OREO
              
              
              5,645
              
              
              
              -
              
              
              
              5,645
              
              
              
              -Total
      assets at fair value
              
              $
              10,110
              
              
              $
              -
              
              
              $
              5,645
              
              
              $
              4,465


10.
            Goodwill




During the
second quarter of 2008, FNB United commenced an impairment evaluation of the
Dover Mortgage goodwill as a result of changes in the Dover business model,
which included the closing of certain offices that were not accretive to
earnings. As a result, the impairment evaluation determined the carrying value
exceeded fair value. The Company made the decision to take a goodwill impairment
charge for the entire remaining carrying value of $1.8 million (pre-tax and
after-tax), and this non-cash charge has been recorded as a component of
noninterest expense for the second quarter.




In
accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, the goodwill impairment analysis of Dover Mortgage as of June 30,
2008 necessitates an impairment analysis of the remaining entity-wide goodwill
of $108.4 million as of June 30, 2008. This analysis is underway and will be
completed by the end of the third quarter of 2008. Even though the fair value of
the enterprise reporting unit exceeded its carrying value as of the most recent
testing date, December 31, 2007, there can be no assurance that the pending
assessment of enterprise goodwill will indicate that its fair value exceeds its
carrying value.




13




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








The
following presents management’s discussion and analysis of the financial
condition, changes in financial condition and results of operations of FNB
United Corp. (“FNB United”) and its wholly owned subsidiary, CommunityOne Bank,
National Association (“CommunityOne”), formerly known as First National Bank and
Trust Company, prior to June 4, 2007. FNB United and its subsidiary are
collectively referred to as the “Company.” This discussion should be read in
conjunction with the financial statements and related notes included elsewhere
in this quarterly report. This discussion may contain forward-looking statements
that involve risks and uncertainties. Our actual results could differ
significantly from those anticipated in forward-looking statements as a result
of various factors. This discussion is intended to assist in understanding the
financial condition and results of operations of the Company.





Overview





Description
of Operations





FNB
United is a bank holding company with a full-service subsidiary bank,
CommunityOne, which offers a complete line of consumer, mortgage and business
banking services, including loan, deposit, cash management, investment
management and trust services, to individual and business
customers.  CommunityOne 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,
CommunityOne has a mortgage banking subsidiary, Dover Mortgage Company, which
originates, underwrites and closes loans for sale into the secondary
market.  Dover, based in Charlotte, NC, joined FNB United in 2003 and
has a retail origination network in key growth markets across the state, in
addition to wholesale operations in the surrounding states of South Carolina,
Tennessee, and Virginia. Effective August 1, 2007, Dover became a subsidiary of
CommunityOne.





Executive
Summary





The
Company earned $140,000 in the second quarter of 2008, a 96% decline from
earnings of $3.7 million in the same period of 2007. The decrease in net income
resulted from declining levels of net interest income and noninterest income and
higher levels of provision for loan losses. Additionally, during the second
quarter of 2008, FNB United commenced an impairment evaluation of the Dover
Mortgage goodwill as a result of changes in the Dover business model, which
included the closing of certain offices that were not accretive to
earnings.  As a result, the impairment evaluation determined the
carrying value exceeded fair value. The Company made the decision to take a
goodwill impairment charge for the entire remaining carrying value of $1.8
million (pre-tax and after-tax) ),or $0.16 per share, and this
non-cash charge has been recorded as a component of noninterest expense for the
second quarter. Noninterest expense was flat, excluding the effect of the
goodwill impairment charge. Quarterly basic and fully diluted earnings per
common share decreased from $0.33, to $0.01.





Total
assets were $2.06 billion at June 30, 2008, up 10% from June 30, 2007 and 8%
from December 31, 2007.  Gross loans held for investment of $1.57
billion at June 30, 2008 represented an increase of $222.4 million, or 16%, from
$1.35 billion at June 30, 2007 and an increase of $128.8 million, or 9%, from
$1.45 billion at December 31, 2007.  Total deposits of $1.49 billion
at June 30, 2008 represented an increase of $40.2 million, or 3%, from $1.45
billion at June 30, 2007 and an increase of $44.5 million, or 3%, from $1.44
billion at December 31, 2007.





14


Financial
highlights are presented in the accompanying table.





Table
1


Selected
Financial Data


As
      of / For the Quarter Ended
                
                
                As
      of / For the Quarter Ended6/30/2008
                
                
                6/30/2007
                
                
                6/30/2008
                
                
                6/30/2007Selected
      components income statement data
                
                (dollars
      in thousands, except per share data)Interest
      income
                
                $
                28,325
                
                
                $
                31,714
                
                
                $
                58,535
                
                
                $
                62,611Interest
      expense
                
                
                13,376
                
                
                
                15,655
                
                
                
                28,156
                
                
                
                30,727Net
      interest income
                
                
                14,949
                
                
                
                16,059
                
                
                
                30,379
                
                
                
                31,884Provision
      for loan losses
                
                
                1,383
                
                
                
                476
                
                
                
                2,897
                
                
                
                1,000Net
      interest income after provision for loan losses
                
                
                13,566
                
                
                
                15,583
                
                
                
                27,482
                
                
                
                30,884Noninterest
      income
                
                
                4,743
                
                
                
                5,426
                
                
                
                9,771
                
                
                
                10,399Noninterest
      expense
                
                
                17,318
                
                
                
                15,369
                
                
                
                32,857
                
                
                
                29,981Income
      before income taxes
                
                
                991
                
                
                
                5,640
                
                
                
                4,396
                
                
                
                11,302Income
      taxes
                
                
                851
                
                
                
                1,949
                
                
                
                1,933
                
                
                
                3,859Net
      income
                
                $
                140
                
                
                $
                3,691
                
                
                $
                2,463
                
                
                $
                7,443Common
      share dataBasic
      earnings per share
                
                $
                0.01
                
                
                $
                0.33
                
                
                $
                0.22
                
                
                $
                0.66Diluted
      earnings per share
                
                
                0.01
                
                
                
                0.33
                
                
                $
                0.22
                
                
                
                0.66Dividends
      declared per share
                
                
                0.10
                
                
                
                0.15
                
                
                
                0.25
                
                
                
                0.30Book
      value per share
                
                
                18.81
                
                
                
                18.68
                
                
                
                18.81
                
                
                
                18.68Weighted
      average shares outstanding-basic
                
                
                11,414,330
                
                
                
                11,318,908
                
                
                
                11,409,630
                
                
                
                11,291,270Weighted
      average shares outstanding-diluted
                
                
                11,416,269
                
                
                
                11,343,367
                
                
                
                11,411,569
                
                
                
                11,319,427Financial
      condition dataTotal
      assets
                
                $
                2,055,020
                
                
                $
                1,863,407
                
                
                $
                2,055,020
                
                
                $
                1,863,407Securities
                
                
                211,573
                
                
                
                238,559
                
                
                
                211,573
                
                
                
                238,559Loans
      held for sale
                
                
                19,875
                
                
                
                27,123
                
                
                
                19,875
                
                
                
                27,123Net
      loans held for investment
                
                
                1,556,097
                
                
                
                1,336,871
                
                
                
                1,556,097
                
                
                
                1,336,871Deposits
                
                
                1,486,134
                
                
                
                1,445,330
                
                
                
                1,486,134
                
                
                
                1,445,330Goodwill
      and core deposit intangible
                
                
                114,556
                
                
                
                117,521
                
                
                
                114,556
                
                
                
                117,521Borrowings
                
                
                334,417
                
                
                
                157,436
                
                
                
                334,417
                
                
                
                157,436Shareholders'
      equity
                
                
                214,882
                
                
                
                212,472
                
                
                
                214,882
                
                
                
                212,472Average
      BalancesTotal
      assets
                
                $
                2,046,034
                
                
                $
                1,855,436
                
                
                $
                2,003,445
                
                
                $
                1,843,014Securities
                
                
                227,524
                
                
                
                258,519
                
                
                
                221,605
                
                
                
                254,824Loans
                
                
                1,577,769
                
                
                
                1,355,601
                
                
                
                1,542,519
                
                
                
                1,344,256Interest-earning
      assets
                
                
                1,805,293
                
                
                
                1,614,120
                
                
                
                1,764,124
                
                
                
                1,599,080Goodwill
      and core deposit intangible
                
                
                116,395
                
                
                
                118,030
                
                
                
                116,521
                
                
                
                118,129Deposits
                
                
                1,486,829
                
                
                
                1,448,022
                
                
                
                1,469,779
                
                
                
                1,437,390Total
      interest-bearing liabilities
                
                
                1,645,523
                
                
                
                1,459,458
                
                
                
                1,605,693
                
                
                
                1,451,703Shareholders'
      equity
                
                
                217,453
                
                
                
                211,679
                
                
                
                217,584
                
                
                
                210,435Performance
      RatiosReturn
      on average assets
                
                
                0.03
                %
                
                
                0.80
                %
                
                
                0.25
                %
                
                
                0.81
                %Return
      on tangible assets
                
                
                0.03
                %
                
                
                0.85
                %
                
                
                0.26
                %
                
                
                0.87
                %Return
      on average equity
                
                
                0.26
                %
                
                
                6.99
                %
                
                
                2.27
                %
                
                
                7.13
                %Return
      on tangible equity
                
                
                0.56
                %
                
                
                15.81
                %
                
                
                4.89
                %
                
                
                16.26
                %Net
      interest margin
                
                
                3.40
                %
                
                
                4.07
                %
                
                
                3.54
                %
                
                
                4.11
                %Noninterest
      income to average assets
                
                
                0.93
                %
                
                
                1.17
                %
                
                
                0.98
                %
                
                
                1.14
                %Noninterest
      expense to average assets
                
                
                3.40
                %
                
                
                3.32
                %
                
                
                3.29
                %
                
                
                3.28
                %Efficiency
      ratio
                
                
                87.94
                %
                
                
                71.53
                %
                
                
                81.84
                %
                
                
                70.91
                %








15


Application
of Critical Accounting Policies





The
Company's accounting policies are in accordance with accounting principles
generally accepted in the United States and with general practice within the
banking industry and are fundamental to understanding management's discussion
and analysis of results of operations and financial condition. The Company's
significant accounting policies are discussed in detail in Note 1 of the
consolidated financial statements.





Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses and goodwill
impairment. Actual results could differ from those estimates.




Allowance
for Loan Losses




The
allowance for loan losses, which is utilized to absorb actual losses in the loan
portfolio, is maintained at a level consistent with management’s best estimate
of probable loan losses incurred as of the balance sheet date.  The
Company’s allowance for loan losses is also analyzed quarterly by
management.  This analysis includes a methodology that separates the
total loan portfolio into homogeneous loan classifications for purposes of
evaluating risk.  The required allowance is calculated by applying a
risk adjusted reserve requirement to the dollar volume of loans within a
homogenous group.  Major loan portfolio subgroups include: risk graded
commercial loans, mortgage loans, home equity loans, retail loans and retail
credit lines.  Management also analyzes the loan portfolio on an
ongoing basis to evaluate current risk levels, and risk grades are adjusted
accordingly.  While management uses the best information available to
make evaluations, future adjustments may be necessary, if economic or other
conditions differ substantially from the assumptions used. See additional
discussion under “Asset
Quality.”




Goodwill





We have
developed procedures to test goodwill for impairment on an annual basis. This
testing procedure evaluates possible impairment based on the
following:





The test
involves assigning tangible assets and liabilities, identified intangible assets
and goodwill to a reporting unit and comparing the fair value of this reporting
unit to its carrying value including goodwill. The value is determined assuming
a freely negotiated transaction between a willing buyer and a willing seller,
neither being under any compulsion to buy or sell and both having reasonable
knowledge of relevant facts. Accordingly, to derive the fair value of the
reporting unit, the following common approaches to valuing business combination
transactions involving financial institutions are utilized by the Company:
(1) the comparable transactions approach – specifically based on earnings,
book, assets and deposit premium multiples received in recent sales of
comparable bank franchises; and (2) the discounted cash flow approach. The
application of these valuation techniques takes into account the reporting
unit’s operating history, the current market environment and future
prospects.





If the
fair value of a reporting unit exceeds its carrying amount, goodwill of the
reporting unit is considered not impaired and no second step is required. If
not, a second test is required to measure the amount of goodwill impairment. The
second test of the overall goodwill impairment compares the implied fair value
of the reporting unit goodwill with the carrying amount of the goodwill. The
impairment loss shall equal the excess of carrying value over fair
value.





During
the second quarter of 2008, FNB United commenced an impairment evaluation of the
Dover Mortgage goodwill as a result of changes in the Dover business model,
which included the closing of certain offices that were not accretive to
earnings.  As a result, the impairment evaluation determined the
carrying value exceeded fair value. The Company made the decision to take a
goodwill impairment charge for the entire remaining carrying value of $1.8
million (pre-tax and after-tax), and this non-cash charge has been recorded as a
component of noninterest expense for the second quarter.


16


In
accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, the goodwill impairment analysis of Dover Mortgage as of June 30,
2008 necessitates an impairment analysis of the remaining entity-wide goodwill
of $108.4 million as of June 30, 2008. This analysis is underway and will be
completed by the end of the third quarter of 2008. Even though the fair value of
the enterprise reporting unit exceeded its carrying value as of the most recent
testing date, December 31, 2007, there can be no assurance that the pending
assessment of enterprise goodwill will indicate that its fair value exceeds its
carrying value.





Summary





Management
believes the accounting estimates related to the allowance for loan losses and
the goodwill impairment test are “critical accounting estimates” because:
(1) the estimates are highly susceptible to change from period to period
because they require management to make assumptions concerning the changes in
the types and volumes of the portfolios and anticipated economic conditions, and
(2) the impact of recognizing an impairment or loan loss could have a
material effect on the Company’s assets reported on the balance sheet as well as
its net earnings.





Results
of Operations





Net
Interest Income





Net
interest income is the difference between interest income, principally from
loans and investments, and interest expense, principally on customer
deposits.  Changes in net interest income result from changes in
interest rates and in the volume, or average dollar level, and mix of earning
assets and interest-bearing liabilities.  Analyses are presented in
Table 2 (three month periods
ended June 30, 2008 and 2007) and Table 3 (six month periods ended June 30,
2008 and 2007) of the Company’s net interest income on a
taxable-equivalent basis and average balance sheets.





For the
three months ended June 30, 2008, net interest income before the provision for
loan losses was $15.3 million, a decrease of $1.1 million, or 7%, from $16.4
million for the same quarter in 2007.  The decrease was primarily due
to a $191.2 million increase in average earning asset balances and a $186.1
million increase in interest bearing liabilities, offset by the 158 basis point
decrease in yield on earning assets, combined with a 103 basis point decrease in
interest-bearing liabilities.





The net
interest margin (taxable-equivalent net interest income divided by average
earning assets) compressed 67 basis points, to 3.40 % for the three months ended
June 30, 2008, compared to 4.07% in the same period in 2007.  The
decline in the net interest margin can be primarily attributed to the rapid
decline in the prime lending rate, from 8.25% at March 31, 2007 to 5.25% at June
30, 2008. The majority of this decline occurred between September 2007 and March
2008. Approximately two-thirds of our loan portfolio reprices based on prime
whereas our cost of interest-bearing liabilities does not react as quickly.
Another variable impacting the margin was the increased market demand for
liquidity which we built into our funding cost beginning in the second half of
2007. While the Company experienced a 158 basis point decrease in the yield on
earning assets, the cost of interest bearing liabilities decreased only 103
basis points.  Growth in earning assets was funded by higher cost
deposits and wholesale borrowings.





For the
six months ended June 30, 2008, net interest income before the provision for
loan losses was $31.0 million, a decrease of $1.5 million, or 5%, from $32.6
million for the same period in 2007.  The decrease was primarily due
to a $165.0 million increase in average earning asset balances and a $154.0
million increase in interest bearing liabilities, offset by the 123 basis point
decrease in yield on earning assets, combined with a 74 basis point decrease in
interest-bearing liabilities.





The net
interest margin (taxable-equivalent net interest income divided by average
earning assets) compressed 57 basis points, to 3.54 % for the six months ended
June 30, 2008, compared to 4.11% in the same period in 2007.  While
the Company experienced a 123 basis point decrease in the yield on earning
assets, the cost of interest bearing liabilities only decreased 74 basis
points.  Growth in earning assets was funded by higher cost deposits
and wholesale borrowings.


17


Table
2


Average
Balances and Net Interest Income Analysis


Three
      Months Ended June 30,2008
              
              
              2007Interest
              
              
              Average
              
              
              
              
              
              Interest
              
              
              AverageAverage
              
              
              Income
      /
              
              
              Yield
      /
              
              
              Average
              
              
              Income
      /
              
              
              Yield
      /Balance(3)
              
              Expense
              
              Rate
              
              
              Balance(3)
              
              Expense
              
              RateInterest
      earning assets:
              
              (Dollars
      in thousands)Loans
      (1)
              
              $
              1,577,769
              
              
              $
              25,908
              
              
              
              6.60
              %
              
              $
              1,355,601
              
              
              $
              28,623
              
              
              
              8.47
              %Taxable
      investment securities
              
              
              173,972
              
              
              
              1,959
              
              
              
              4.53
              
              
              
              172,077
              
              
              
              2,231
              
              
              
              5.20Tax-exempt
      investment securities (1)
              
              
              52,553
              
              
              
              774
              
              
              
              5.92
              
              
              
              54,528
              
              
              
              757
              
              
              
              5.57Other
      earning assets
              
              
              999
              
              
              
              5
              
              
              
              2.01
              
              
              
              31,914
              
              
              
              423
              
              
              
              5.32Total
      earning assets
              
              
              1,805,293
              
              
              
              28,646
              
              
              
              6.38
              
              
              
              1,614,120
              
              
              
              32,034
              
              
              
              7.96Non-earning
      assets:Cash
      and due from banks
              
              
              30,845
              
              
              
              
              
              
              
              
              
              
              
              31,733Goodwill
      and core deposit premiums
              
              
              116,395
              
              
              
              
              
              
              
              
              
              
              
              118,030Other
      assets, net
              
              
              93,501
              
              
              
              
              
              
              
              
              
              
              
              91,553Total
      assets
              
              $
              2,046,034
              
              
              
              
              
              
              
              
              
              
              $
              1,855,436Interest
      bearing liabilities:Interest-bearing
      demand deposits
              
              
              170,040
              
              
              
              227
              
              
              
              0.54
              
              
              
              166,362
              
              
              
              666
              
              
              
              1.61Savings
      deposits
              
              
              42,002
              
              
              
              26
              
              
              
              0.25
              
              
              
              49,628
              
              
              
              35
              
              
              
              0.28Money
      market deposits
              
              
              286,604
              
              
              
              1,843
              
              
              
              2.59
              
              
              
              258,143
              
              
              
              2,678
              
              
              
              4.16Time
      deposits
              
              
              823,572
              
              
              
              8,526
              
              
              
              4.16
              
              
              
              811,182
              
              
              
              9,866
              
              
              
              4.88Retail
      repurchase agreements
              
              
              33,963
              
              
              
              163
              
              
              
              1.93
              
              
              
              28,012
              
              
              
              319
              
              
              
              4.57Federal
      Home Loan Bank advances
              
              
              201,639
              
              
              
              1,829
              
              
              
              3.65
              
              
              
              64,662
              
              
              
              674
              
              
              
              4.18Federal
      funds purchased
              
              
              30,293
              
              
              
              174
              
              
              
              2.31
              
              
              
              1,864
              
              
              
              27
              
              
              
              5.81Other
      borrowed funds
              
              
              57,410
              
              
              
              588
              
              
              
              4.12
              
              
              
              79,605
              
              
              
              1,390
              
              
              
              7.00Total
      interest bearing liabilities
              
              
              1,645,523
              
              
              
              13,376
              
              
              
              3.27
              
              
              
              1,459,458
              
              
              
              15,655
              
              
              
              4.30Other
      liabilities and shareholders' equity:Noninterest-bearing
      demand deposits
              
              
              164,611
              
              
              
              
              
              
              
              
              
              
              
              162,707Other
      liabilities
              
              
              18,447
              
              
              
              
              
              
              
              
              
              
              
              21,592Shareholders'
      equity
              
              
              217,453
              
              
              
              
              
              
              
              
              
              
              
              211,679Total
      liabilities and equity
              
              $
              2,046,034
              
              
              
              
              
              
              
              
              
              
              $
              1,855,436Net
      interest income and net yield on earning assets (3) (4)
              
              
              $
              15,270
              
              
              
              3.40
              %
              
              
              
              
              
              $
              16,379
              
              
              
              4.07
              %Interest
      rate spread (5)
              
              
              
              
              
              
              
              
              
              
              3.11
              %
              
              
              
              
              
              
              
              
              
              
              3.66
              %
  (1)
      The fully tax equivalent basis is computed using a federal tax rate of
      35%.(2)
      The average loan balances include nonaccruing loans.(3)
      The average balances for all years include market adjustments to fair
      value for securities and loans available/held for sale.(4)
      Net yield on earning assets is computed by dividing net interest income by
      average earning assets.(5)
      Earning asset yield minus interest bearing liabilities
    rate.


18


Table
3


Average
Balances and Net Interest Income Analysis


Six
      Months Ended June 30,2008
              
              
              2007Interest
              
              
              Average
              
              
              
              
              
              Interest
              
              
              AverageAverage
              
              
              Income
      /
              
              
              Yield
      /
              
              
              Average
              
              
              Income
      /
              
              
              Yield
      /Balance(3)
              
              Expense
              
              Rate
              
              
              Balance(3)
              
              Expense
              
              RateInterest
      earning assets:
              
              (Dollars
      in thousands)Loans
      (1)
              
              $
              1,542,519
              
              
              $
              53,497
              
              
              
              6.97
              %
              
              $
              1,344,256
              
              
              $
              56,550
              
              
              
              8.48
              %Taxable
      investment securities
              
              
              166,344
              
              
              
              4,094
              
              
              
              4.95
              
              
              
              152,303
              
              
              
              3,887
              
              
              
              5.15Tax-exempt
      investment securities (1)
              
              
              53,997
              
              
              
              1,585
              
              
              
              5.90
              
              
              
              55,621
              
              
              
              1,608
              
              
              
              5.83Other
      earning assets
              
              
              1,264
              
              
              
              17
              
              
              
              2.70
              
              
              
              46,900
              
              
              
              1,241
              
              
              
              5.34Total
      earning assets
              
              
              1,764,124
              
              
              
              59,193
              
              
              
              6.75
              
              
              
              1,599,080
              
              
              
              63,286
              
              
              
              7.98Non-earning
      assets:Cash
      and due from banks
              
              
              31,492
              
              
              
              
              
              
              
              
              
              
              
              32,760Goodwill
      and core deposit premiums
              
              
              116,521
              
              
              
              
              
              
              
              
              
              
              
              118,129Other
      assets, net
              
              
              91,307
              
              
              
              
              
              
              
              
              
              
              
              93,045Total
      assets
              
              $
              2,003,444
              
              
              
              
              
              
              
              
              
              
              $
              1,843,014Interest
      bearing liabilities:Interest-bearing
      demand deposits
              
              
              165,975
              
              
              
              567
              
              
              
              0.69
              
              
              
              167,603
              
              
              
              1,382
              
              
              
              1.66Savings
      deposits
              
              
              41,659
              
              
              
              52
              
              
              
              0.25
              
              
              
              49,925
              
              
              
              70
              
              
              
              0.28Money
      market deposits
              
              
              273,750
              
              
              
              3,856
              
              
              
              2.83
              
              
              
              249,427
              
              
              
              5,114
              
              
              
              4.13Time
      deposits
              
              
              827,018
              
              
              
              17,954
              
              
              
              4.37
              
              
              
              811,068
              
              
              
              19,477
              
              
              
              4.84Retail
      repurchase agreements
              
              
              32,073
              
              
              
              412
              
              
              
              2.58
              
              
              
              27,260
              
              
              
              624
              
              
              
              4.62Federal
      Home Loan Bank advances
              
              
              185,519
              
              
              
              3,521
              
              
              
              3.82
              
              
              
              65,245
              
              
              
              1,355
              
              
              
              4.19Federal
      funds purchased
              
              
              22,667
              
              
              
              298
              
              
              
              2.64
              
              
              
              937
              
              
              
              27
              
              
              
              5.81Other
      borrowed funds
              
              
              57,032
              
              
              
              1,497
              
              
              
              5.28
              
              
              
              80,238
              
              
              
              2,678
              
              
              
              6.73Total
      interest bearing liabilities
              
              
              1,605,693
              
              
              
              28,157
              
              
              
              3.53
              
              
              
              1,451,703
              
              
              
              30,727
              
              
              
              4.27Other
      liabilities and shareholders' equity:Noninterest-bearing
      demand deposits
              
              
              161,377
              
              
              
              
              
              
              
              
              
              
              
              159,367Other
      liabilities
              
              
              18,790
              
              
              
              
              
              
              
              
              
              
              
              21,509Shareholders'
      equity
              
              
              217,584
              
              
              
              
              
              
              
              
              
              
              
              210,435Total
      liabilities and equity
              
              $
              2,003,444
              
              
              
              
              
              
              
              
              
              
              $
              1,843,014Net
      interest income and net yield on earning assets (3) (4)
              
              
              $
              31,036
              
              
              
              3.54
              %
              
              
              
              
              
              $
              32,559
              
              
              
              4.11
              %Interest
      rate spread (5)
              
              
              
              
              
              
              
              
              
              
              3.22
              %
              
              
              
              
              
              
              
              
              
              
              3.71
              %
  (1)
      The fully tax equivalent basis is computed using a federal tax rate of
      35%.(2)
      The average loan balances include nonaccruing loans.(3)
      The average balances for all years include market adjustments to fair
      value for securities and loans available/held for sale.(4)
      Net yield on earning assets is computed by dividing net interest income by
      average earning assets.(5)
      Earning asset yield minus interest bearing liabilities
    rate.


19


Provision
for Loan Losses





The
provision for loan losses is charged against earnings in order to maintain the
allowance for loan losses at a level that reflects management’s evaluation of
the incurred losses inherent in the portfolio. The amount of the provision is
based on continuing assessments of nonperforming and “watch list” loans,
analytical reviews of loan loss experience in relation to outstanding loans,
loan charge offs, nonperforming asset trends and management’s judgment with
respect to current and expected economic conditions and their impact on the
existing credit portfolio.





During
the three-month period ended June 30, 2008, management determined a charge to
operations of $1.4 million would bring the allowance for loan losses to a
balance considered to be adequate to reflect the growth in loans and to absorb
probable losses inherent in the portfolio.  This amount compared to
$476,000 for the second quarter of 2007. The level of the provision was
primarily driven by growth in the loan portfolio. Net charge offs for the three
months ended June 30, 2008 totaled $753,000, or 0.19% annualized of average
loans, compared to $528,000, or 0.16% annualized of average loans for the same
period in 2007.





For the
six-month period ended June 30, 2008, the provision for loan losses was $2.9
million, compared to $1.0 million in the same period of 2007.  The
level of the provision was primarily driven by growth in the loan portfolio. Net
charge offs for the six months ended June 30, 2008 totaled $1.4 million, or
0.19% annualized of average loans, compared to $1.2 million, or 0.18% annualized
of average loans for the same period in 2007.





Noninterest
Income





For the
three months ended June 30, 2008, total noninterest income was $4.7 million, a
decrease of $683,000, or 13%, compared to the same period in 2007. The primary
factor impacting this decrease was a decline in mortgage loan sales to the
secondary market which generated $564,000 less income in the 2008 second quarter
than for the same period a year ago. This was attributable, primarily, to a 32%
decline in the volume of mortgage loans originated for sale. The SAB 109
accrual, as discussed below, was adjusted at June 30 to reflect the current fair
value of loan commitments and resulted in a decrease of $32,000. The combination
of the other areas netted a $119 thousand decrease, compared to the prior
year.





For the
six months ended June 30, 2008, total noninterest income was $9.8 million, a
decrease of $628,000, or 6%, compared to the same period in
2007.  Mortgage loan sales income was $2.2 million in the first half
of 2008, compared to $2.5 million for the same period in 2007. The 2008
year-to-date mortgage loan income was impacted by the adoption of the provisions
of SAB 109 effective January 1, 2008, which resulted in the initial recognition
of $500,000 in written loan commitments, recorded at fair value through
earnings, and was more than offset by a decrease in mortgage loan sales income
associated with the slowing housing market. The origination of mortgage loans
for sale to the secondary market declined 29% in 2008, compared to the same
period a year ago. Trust and investment services income was up $99,000. The
noninterest income category of other service charges, commissions and fees was
down $208,000, compared to 2007, primarily the result of a $99,000 decrease in
fees generated by Dover, combined with net $63,000 writedowns of mortgage
servicing rights.





Noninterest
Expense





Noninterest
expense for the second quarter of 2008 was $17.3 million, a $1.9 million, or
13%, increase, compared to the second quarter a year ago.   The
second quarter of 2008 includes a $1.8 million writedown of goodwill associated
with the acquisition of Dover Mortgage. Excluding the goodwill impairment
charge, noninterest expense was flat to the second quarter 2007. During the
second quarter of 2008, FNB United commenced an impairment evaluation of the
Dover Mortgage goodwill as a result of changes in the Dover


20


business
model, which included the closing of certain offices tht were not accretive to
earnings.  As a result,the impairment evaluation determined the
carrying value exceeded fair value. The Company made the decision to take a
goodwill impairment charge for the entire remaining carrying value of $1.8
million (pre-tax and after-tax), and this non-cash charge has been recorded as a
component of noninterest expense for the second quarter.  For the
second quarter of 2008, losses on sale of foreclosed property, included in other
expense, totaled $191,000, compared to $28,000 for the same period in
2007.





For the
first six months of 2008, noninterest expense was $32.9 million, a $2.9 million,
or 10% increase, compared to the same period in 2007.  This increase
included the impact of the Dover goodwill impairment charge of $1.8 million
taken in second quarter 2008. Personnel expense increased $989,000, which
included $802,000 in incentive plan accruals and accruals related to medical
insurance. For the first six months of 2008, losses on sale of foreclosed
property, included in other expense, totaled $358,000, compared to $59,000 for
the same period in 2007. Other expense was impacted favorably in 2008 by a
$336,000 decrease in rebranding expense. These rebranding expenses during 2007
were one-time costs associated with changing the name of First National Bank and
Trust Company and all of its divisions to CommunityOne Bank.





Income
Taxes





The
Company’s provision for income taxes totaled $851,000 for the second quarter of
2008 and $1.9 million for the same period in 2007. The decrease in the provision
for 2008, compared to the prior year, results primarily from the decrease in
taxable income. Our provision for income taxes, as a percentage of income before
income taxes, was 30.5% for the three months ended June 30, 2008, exclusive of
the impact of the non tax -deductible $1.8 million writedown of goodwill
associated with the acquisition of Dover Mortgage, compared to 34.6% for the
three months ended June 30, 2007, reflective of different levels of tax-exempt
earnings.




The
Company’s provision for income taxes totaled $1.9 million for the first six
months of 2008 and $3.9 million for the same period in 2007. The decrease in the
provision for 2008, compared to the prior year, results primarily from the
decrease in taxable income. Our provision for income taxes, as a percentage of
income before income taxes, was 31.2% for the six months ended June 30, 2008,
exclusive of the impact of the non tax-deductible $1.8 million writedown of
goodwill associated with the acquisition of Dover Mortgage, compared to 34.1%
for the six months ended June 30, 2007, reflective of different levels of
tax-exempt earnings.




Financial
Condition




Since
December 31, 2007, the Company’s assets have increased $148.5 million, to $2.06
billion at June 30, 2008. The principal factors impacting this overall increase
during the first six months of 2008 were a $128.8 million increase in loans held
for investment, combined with a $14.1 million increase in net
investments.  Loans held for investment at June 30, 2008 totaled $1.57
billion, compared to $1.45 billion at yearend 2007, an increase of 9%.
Investment securities of $211.6 million at June 30, 2008 were 7% higher than the
$197.4 million balance at December 31, 2007.





Deposits
totaled $1.49 billion at June 30, 2008, compared to $1.44 billion at December
31, 2007.  At the end of the second quarter 2008, noninterest-bearing
deposits were $164.1 million, or 11.0%, of total deposits.  Borrowings
at the Federal Home Loan Bank of Atlanta (“FHLB”) totaled $202.4 million at June
30, 2008, compared to $131.8 million at December 31, 2007. On May 27, 2008, FNB
United entered into a revolving credit agreement in the original principal
amount of $10 million, of which none has been drawn down as of June 30, 2008.
Any funds drawn down would be invested in, and quality as, Tier 1 capital of
CommunityOne. On June 30, 2008, CommunityOne entered into a subordinated debt
loan agreement, providing for a $15 million subordinated term loan that is
intended to qualify as Tier 2 capital.  The increase in the FHLB
borrowings, combined with the increase of federal funds purchased, was used to
fund the growth in the portfolio of loans held for investment. Retail repurchase
agreements totaled $32.3 million at June 30, 2008 and $29.1 million at December
31, 2007.





Shareholders’
equity is strong, with all of our regulatory capital ratios at levels that
classify the Company as “well capitalized” under bank regulatory capital
guidelines. Shareholders’ equity was $214.9 million at the


21


end
of the second quarter 2008, compared to $216.3 million at December 31,
2007.  The Company declared dividends of $0.25 per share during the
six months ended June 30, 2008.




Investment
Securities





The
Company evaluates all securities on a quarterly basis, and more frequently when
economic conditions warrant additional evaluations, to determine if an other-than-temporary impairment (OTTI) exists pursuant to
guidelines established in FSP 115-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments.  In
evaluating the possible impairment of securities, consideration is given to the
length of time and the extent to which the fair value has been less than book
value, the financial conditions and near-term prospects of the issuer, and the
ability and intent of the Company to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair
value.  In analyzing an issuer’s financial condition, the Company may
consider whether the securities are issued by the federal government or its
agencies or government sponsored agencies, whether downgrades by bond rating
agencies have occurred, and the results of reviews of the issuer’s financial
condition.  If management determines that an investment experienced an
OTTI, the loss is recognized in the income statement as a realized
loss.  Any recoveries related to the value of these securities are
recorded as an unrealized gain (as other comprehensive income (loss) in
stockholders’ equity) and not recognized in income until the security is
ultimately sold.





During
the first six months of 2008, the market for Collateralized Debt Obligations
(“CDOs”) deteriorated. The Company owns one CDO issue with a current book value
as of June 30, 2008 of $5.0 million. With very limited marketability of the
security and rates well above the stated rate of this security, the current
trading activity is well below par, at the current level of $3.4 million for
this security. The credit rating of the CDO is unchanged from its issuance and
the Company’s position is superior to other positions within the CDO. After
extensive review, and with the expectation that the Company will receive all
contractual cash flows, management determined that no OTTI was necessary.
Management will continue to monitor this security for future OTTI.





At June
30, 2008, the remainder of the Company’s securities available-for-sale with an
unrealized loss position were, in management’s belief, primarily due to
differences in market interest rates as compared to those of the underlying
securities.  Management does not believe any of these securities are
other-than-temporarily impaired.  At June 30, 2008, the Company has
both the intent and ability to hold these impaired securities for a period of
time necessary to recover the unrealized losses; however, the Company may from
time to time dispose of an impaired security in response to asset/liability
management decisions, future market movements, business plan changes, or if the
net proceeds could be reinvested at a rate of return that is expected to recover
the loss within a reasonable period of time.





Asset
Quality





Management
considers the asset quality of CommunityOne 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.





Nonperforming
assets





Nonperforming
assets are comprised of nonaccrual loans, accruing loans past due 90 days or
more and other real estate owned (“OREO”).  Loans are placed in
nonaccrual status when, in management’s opinion, the collection of all or a
portion of interest becomes doubtful.  Loans are returned to accrual
status when the factors indicating doubtful collectibility cease to exist and
the loan has performed in accordance with its terms for a demonstrated period of
time.  OREO represents real estate acquired through foreclosure or
deed in lieu of foreclosure and is generally carried at fair value, less
estimated costs to sell.





22


Nonperforming
loans at June 30, 2008 were $12.7 million, or 0.80% of loans held for
investment, compared to $11.6 million, or 0.86% of loans held for investment at
June 30, 2007, and $18.7 million or 1.29% of loans held for investment at
December 31, 2007.  Other real estate owned was $5.8 million at June
30, 2008, compared to $3.1 million at June 30, 2007, and $2.9 million at
December 31, 2007.





Allowance for loan
losses





In
determining the allowance for loan losses and any resulting provision to be
charged against earnings, particular emphasis is placed on the results of the
loan review process.  Consideration is also given to a review of
individual loans, historical loan loss experience, the value and adequacy of
collateral and economic conditions in CommunityOne’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
CommunityOne’s allowance for loan losses.  Such agencies may require
CommunityOne to recognize changes to the allowance based on their judgments
about information available to them at the time of their
examinations.  Loans are charged off when, in the opinion of
management, they are deemed to be uncollectible.  Recognized losses
are charged against the allowance, and subsequent recoveries are added to the
allowance.





The
adequacy of the allowance for loan losses is measured on a quarterly basis
against an allocation model that assigns reserves to various components of the
loan portfolio in order to provide for probable inherent
losses.  Homogeneous pools of loans are segregated, and
classifications of individual loans within certain of these pools are identified
using risk grades derived from regulatory risk guidelines and additional
internal parameters.  Utilizing the trailing four-year historical loss
experience of CommunityOne (prior to the merger with Integrity) combined with
recent loss experience with the acquired Integrity loan portfolio and the
assessment of portfolio quality and diversification trends and economic factors,
a range of appropriate reserves is calculated for each classification and pool
of loans.  Allocated to each pool is a reserve amount within the
calculated range, as supported by the historical loss
ratios.  Additional reserves are estimated and assigned to the most
adversely classified loans based upon an individual analysis of present-value
repayment and/or liquidation projections of each loan.  A portion of
the total reserve may be unallocated to any specific segment of the loan
portfolio, but will not exceed the upper limit of the total calculated reserve
range when aggregated with allocated portions.  The determination
within the allowance model of allocated and unallocated components is not
necessarily indicative of future losses or allocations.  The entire
balance of the allowance for loan losses is available to absorb losses in any
segment of the loan portfolio.





The
allowance for loan losses, as a percentage of loans held for investment,
amounted to 1.20% at June 30, 2008, 1.20% at December 31, 2007 and 1.16% at June
30, 2007.  The allowance percentage has remained within a range of
1.16% to 1.20% during the twelve-month period ended June 30, 2008, 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. Adequate provisions and allowances for loan losses are based upon
numerous factors including growth of the loan portfolio, delinquencies, net
charge offs, nonperforming loans, and collateral values. Changes in the
allowance for loan losses are presented in Note 4 to the Consolidated Financial
Statements.





Management
believes the allowance for loan losses of $18.8 million at June 30, 2008 is
adequate to cover probable losses inherent in the loan portfolio; however,
assessing the adequacy of the allowance is a process that requires continuous
evaluation and considerable judgment.  Management’s judgments are
based on numerous assumptions about current events which it believes to be
reasonable, but which may or may not be valid.  Thus, there can be no
assurance that loan losses in future periods will not exceed the current
allowance


23


or that
future increases in the allowance will not be required.  No assurance
can be given that management’s ongoing evaluation of the loan portfolio in light
of changing economic conditions and other relevant circumstances will not
require significant future additions to the allowance, thus adversely affecting
the operating results of the Company.





Liquidity
Management





Liquidity
management refers to the ability to meet day-to-day cash flow requirements based
primarily on activity in loan and deposit accounts of the Company’s
customers.  Deposit withdrawals, loan funding and general corporate
activity create a need for liquidity for the Company.  Liquidity is
derived from sources such as deposit growth; maturity, calls, or sales of
investment securities; principal and interest payments on loans; access to
borrowed funds or lines of credit; and profits.





Consistent
with the general approach to liquidity, loans and other assets of CommunityOne
are based primarily on a core of local deposits and CommunityOne’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
CommunityOne’s market area, while maintaining the desired level of immediate
liquidity and a substantial investment securities portfolio available for both
immediate and secondary liquidity purposes.





Commitments,
Contingencies and Off-Balance Sheet Risk





In the
normal course of business, various commitments are outstanding that are not
reflected in the consolidated financial statements.  Significant
commitments at June 30, 2008 are discussed below.





Commitments
by CommunityOne 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, 2008, total
commitments to extend credit and undisbursed advances on customer lines of
credit amounted to $470.7 million.  Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee.  Since many commitments expire without being fully drawn, the
total commitment amounts do not necessarily represent future cash
requirements.  The Company evaluates each customer’s creditworthiness
on a case-by-case basis.  The amount of collateral obtained, if deemed
necessary, upon extension of credit is based on the credit evaluation of the
borrower.





CommunityOne
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 $2.4 million at June
30, 2008, $2.7 million at December 31, 2007 and $2.9 million at June 30,
2007.





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 Company is subject to variability in market prices related to these
commitments.  The Company believes that it is prudent to limit the
variability of expected proceeds from the future sales of these loans by
entering into forward sales commitments and commitments to deliver loans into a
mortgage-backed security.  The commitments to originate fixed rate
residential mortgage loans and the forward sales commitments are freestanding
derivative instruments.  They do not qualify for hedge accounting
treatment so their fair value adjustments are recorded through the income
statement in income from mortgage loan sales.  The commitments to
originate fixed rate


24


residential
mortgage loans totaled $15.7 million at June 30, 2008, and the related forward
sales commitments totaled $15.7 million.  Loans held for sale by Dover
totaled $14.7 million at June 30, 2008, and the related forward sales
commitments totaled $14.7 million.





CommunityOne
had loans held for sale of $5.1 million at June 30, 2008.  Commitments
of CommunityOne for the origination of mortgage loans intended to be held for
sale at June 30, 2008 were $13.2 million. The Company does not have any special
purpose entities or other similar forms of off-balance sheet
financing.





Asset/Liability
Management and Interest Rate Sensitivity





One of
the primary objectives of asset/liability management is to maximize the net
interest margin while minimizing the earnings risk associated with changes in
interest rates.  One method used to manage interest rate sensitivity
is to measure, over various time periods, the interest rate sensitivity
positions, or gaps; however, this method addresses only the magnitude of timing
differences and does not address earnings or market value.  Therefore,
management uses an earnings simulation model to prepare, on a regular basis,
earnings projections based on a range of interest rate scenarios in order to
more accurately measure interest rate risk.





The
Company’s balance sheet was asset-sensitive at June 30, 2008.  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 Resources





Banks and
bank holding companies, as regulated institutions, must meet required levels of
capital.  The Commissioner and the Federal Reserve, which are the
primary regulatory agencies for CommunityOne and FNB United, respectively, have
adopted minimum capital regulations or guidelines that categorize components and
the level of risk associated with various types of assets.  Financial
institutions are required to maintain a level of capital commensurate with the
risk profile assigned to their assets in accordance with the
guidelines.





On May
27, 2008, FNB United entered into a revolving credit agreement in the original
principal amount of $10 million, of which none has been drawn down as of June
30, 2008. Any funds drawn down would be invested in, and qualify as, Tier 1
capital of CommunityOne. On June 30, 2008, CommunityOne entered into a
subordinated debt loan agreement, providing for a $15 million subordinated term
loan that qualifies as Tier 2 capital.  The loan will mature on June
30, 2015 and bears interest at three-month LIBOR plus 3.50%.  See Note
8 – Financial Instruments for additional information.





As shown
in the accompanying table, FNB United and its wholly owned banking subsidiary
have capital levels exceeding the minimum levels for “well capitalized” bank
holding companies and banks as of June 30, 2008.


25





Regulatory
      GuidelinesWell
              Capitalized
            
            Adequately
              Capitalized
            
            FNB
      United
            
            CommunityOneTotal
      Capital
            10.0%
            
            8.0%
            
            10.54%
            
            10.38%Tier
      1 Capital
            6.0
            
            4.0
            
            7.46
            
            8.46Leverage
      Capital
            5.0
            
            4.0
            
            6.99
            
            7.93





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 Company’s management uses these non-GAAP measures in
their analysis of the Company’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 Company’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 Company 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 Company 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 Company.  Forward-looking statements are
based on management’s current views and assumptions and involve risks and
uncertainties that could significantly affect expected results.  The
Company wishes to caution the reader that factors, such as those listed below,
in some cases have affected and could affect the Company’s actual results,
causing actual results to differ materially from those in any forward-looking
statement.   These factors include, without
limitation:  (i) competitive pressure in the banking industry or in
the Company’s markets may increase significantly, (ii) changes in the interest
rate environment may reduce margins, (iii) general economic conditions, either
nationally or regionally, may be less favorable than expected, resulting in,
among other things, credit quality deterioration, (iv) changes may occur in
banking legislation and regulation, (v) changes may occur in general business
conditions, (vi) changes may occur in the securities markets, and (vii) changes
in real estate 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 Company’s most
recent Annual Report on Form 10-K. All forward-looking statements speak only as
of the date on which such statements are made, and the Company undertakes no
obligation to update any statement,


26


whether
written or oral, to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated
events.





Item
3.  Quantitative and Qualitative Disclosures about Market
Risk





Market
risk is the possible chance of loss from unfavorable changes in market prices
and rates.  These changes may result in a reduction of current and
future period net interest income, which is the favorable spread earned from the
excess of interest income on interest-earning assets, over interest expense on
interest-bearing liabilities.





The
Company’s market risk arises primarily from interest rate risk inherent in its
lending and deposit-taking activities.  The structure of the Company’s
loan and deposit portfolios is such that a significant decline in interest rates
may adversely impact net market values and net interest income.  The
Company does not maintain a trading account nor is the Company subject to
currency exchange risk or commodity price risk.  Interest rate risk is
monitored as part of the Company’s asset/liability management function, which is
discussed 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.”





The
Company considers interest rate risk to be its most significant market risk,
which could potentially have the greatest impact on operating earnings. The
Company is asset sensitive, which means that falling interest rates could result
in a reduced amount of net interest income.  The monitoring of
interest rate risk is part of the Company’s overall asset/liability management
process.  The primary oversight of asset/liability management rests
with the Company’s Asset and Liability Committee.  The Committee meets
on a regular basis to review asset/liability activities and to monitor
compliance with established policies.





Management
does not believe there has been any significant change in the overall analysis
of financial instruments considered market risk sensitive, as measured by the
factors of contractual maturities, average interest rates and estimated fair
values, since the analysis prepared and presented in conjunction with the Form
10-K Annual Report for the fiscal year ended December 31, 2007.





Item
4.  Controls and Procedures





Evaluation of disclosure
controls and procedures





As of
June 30, 2008, the end of the period covered by this report, FNB United carried
out an evaluation under the supervision and with the participation of the
Company’s management, including FNB United’s Chief Executive Officer and Chief
Financial Officer of the effectiveness of the design and operation of FNB
United’s disclosure controls and procedures.  In designing and
evaluating the Company’s disclosure controls and procedures, FNB United and its
management recognize that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and FNB United’s management necessarily was required
to apply its judgment in evaluating and implementing possible controls and
procedures.  Based upon the evaluation, the Chief Executive Officer,
and Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were ineffective to provide reasonable assurance that information
required to be disclosed by FNB United in the reports it files or submits under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and
forms.





As of
December 31, 2007, FNB United did not have controls designed and in place for
the proper recording of nonroutine transactions, such as the restructuring of
the Company’s
investment portfolio and the sale of the Company’s credit card
portfolio that occurred in the third quarters of 2006 and 2007, respectively.
FNB United has adopted policies and procedures for the proper recording of
nonroutine transactions and is in the process of implementing, utilizing and
evaluating these remedial measures. FNB United reviews its disclosure controls
and procedures, which may include its internal control over financial reporting,
on an ongoing basis and may from time to time make changes aimed at enhancing
their effectiveness. No control enhancements during the quarter ended June 30,
2008 have materially affected, or are reasonably likely to materially affect,
the Company’s
internal control over financial reporting.





27


PART
II.                      OTHER
INFORMATION





Item
      1.
            Legal
      ProceedingsNone.Item
      1.A.
            Risk
      FactorsNo
      material changes.Item
      2.
            Unregistered
      Sales of Equity Securities and Use of ProceedsNot
      Applicable.Item
      3.
            Defaults
      Upon Senior SecuritiesNot
      Applicable.Item
      4.
            Submission
      of Matters to a Vote of Security
Holders





(a)
            The
      annual meeting of the Corporation was held on Tuesday, May 13,
      2008.





(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:





VotesWithheld/Votes
      For
            AbstentionsFor
      Term Ending 2009Suzanne
      B. Rudy
            8,519,863
            367,768For
      Terms Ending 2010Jacob
      F. Alexander III
            8,539,915
            347,716Darrell
      L. Frye
            8,465,166
            422,466Hal
      F. Huffman, Jr.
            8,546,932
            340,700Lynn
      S. Lloyd
            8,546,907
            350,724J.
      M. Ramsay III
            8,545,576
            342,056





Item
      5.
            Other
      InformationNone.Item
      6.
            ExhibitsExhibits
      to this report are listed in the index to exhibits on pages 26, 27, 28 and
      29 of this report.








28


SIGNATURES





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











FNB
      United Corp.(Registrant)August
      8, 2008
            /s/Mark
      A. SeversonMark
      A. SeversonChief
      Financial Officer











29


INDEX
TO EXHIBITS





Exhibit
      No.
            Description of
      Exhibit3.10
            Articles
      of Incorporation of the Registrant, incorporated herein by reference to
      Exhibit 3.1 to the Registrant’s Form S-14 Registration Statement (No.
      2-96498) filed March 16, 1985.3.11
            Articles
      of Amendment to Articles of Incorporation of the Registrant, adopted May
      10, 1988, incorporated herein by reference to Exhibit 19.10 to the
      Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30,
      1988.3.12
            Articles
      of Amendment to Articles of Incorporation of the Registrant, adopted May
      12, 1998, incorporated herein by reference to Exhibit 3.12 to the
      Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30,
      1998.3.13
            Articles
      of Amendment to Articles of Incorporation of the Registrant, adopted May
      23, 2003, incorporated herein by reference to Exhibit 3.13 to the
      Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30,
      2003.3.14
            Articles
      of Amendment to Articles of Incorporation of the Registrant, adopted March
      15, 2006, incorporated herein by reference to Exhibit 3.14 to the
      Registrant’s Form 10-Q Quarterly Report for the quarter ended March 31,
      2006.3.15
            Articles
      of Merger, setting forth amendment to Articles of Incorporation of the
      Registrant, effective April 28, 2006, incorporated herein by reference to
      Exhibit 3.15 to the Registrant’s Form 10-Q Quarterly Report for the
      quarter ended March 31, 2006.3.20
            Amended
      and Restated Bylaws of the Registrant, adopted March 18, 2004,
      incorporated herein by reference to Exhibit 3.20 to the Registrant’s Form
      10-Q Quarterly Report for the quarter ended March 31,
  2004.4.10
            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.








30





Exhibit
      No.
            Description of
      Exhibit4.21
            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
      United Corp. 2003 Stock Incentive Plan, as amended, incorporated herein by
      reference to Exhibit 10.23 to the Registrant’s Form 10-Q Quarterly Report
      for the quarter ended March 31,
2007.











31





Exhibit
      No.
            Description of
      Exhibit10.24*
            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, incorporated herein by reference to Exhibit
      10.26 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended
      June 30, 2006.10.30*
            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 April10,
      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, incorporated herein by reference to Exhibit
      10.35 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended
      June 30, 2006.








32





Exhibit
      No.
            Description of
      Exhibit10.40
            Guarantee
      Agreement dated as of November 4, 2006, by FNB Corp. for the benefit of
      the holders of trust preferred securities, incorporated herein byreference
      to Exhibit 10.1 to the Registrant’s Form 8-K Current Report dated November
      4, 2005 and filed November 8, 2005.10.41
            Guarantee
      Agreement dated as of April 27, 2006, between FNB Corp. and Wilmington
      Trust Company, as guarantee trustee, for the benefit of the holders of
      trust preferred securities, incorporated herein by reference to Exhibit
      10.1 to the Registrant’s Form 8-K Current Report dated April 27, 2006 and
      filed April 28, 2006.10.42
            Revolving
      Credit Agreement dated as of May 27, 2008, between FNB United Corp. and
      SunTrust Bank.10.43
            Subordinated
      Debt Loan Agreement dated as of June 30, 2008, between CommunityOne Bank,
      National Association and SunTrust Bank.31.10
            Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.11
            Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32
            Certification
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.





______________





*
Management contract, or compensatory plan or arrangement.







33