UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q









Quarterly
Report Pursuant to Section 13 or 15(d)


of
the Securities Exchange Act of 1934


For
the quarterly period ended:


March
31, 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  x   No 
 ̈





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   ̈  
No  x





At
May 9, 2008, 11,425,052 shares of the registrant's common stock, $2.50 par
value, were outstanding.













PART
I.  FINANCIAL INFORMATION


Item
1.  Financial Statements





FNB
United Corp. and Subsidiary


CONSOLIDATED
BALANCE SHEETS (unaudited)





March
      31,
            
            
            December
      31,2008
            
            
            2007(in
      thousands, except share and per share data)ASSETSCash
      and due from banks
            
            $
            38,333
            
            
            $
            37,739Interest-bearing
      bank balances
            
            
            220
            
            
            
            836Federal
      funds sold
            
            
            532
            
            
            
            542Investment
      securities:Available
      for sale, at estimated fair value (amortized cost of $201,949, $182,127
      and $160,903)
            
            
            203,598
            
            
            
            161,809Held
      to maturity (estimated fair value of $28,023, $41,464 and
      $35,251)
            
            
            28,030
            
            
            
            35,650Loans
      held for sale
            
            
            15,121
            
            
            
            17,586Loans
      held for investment
            
            
            1,541,119
            
            
            
            1,446,116Less
      allowance for loan losses
            
            
            (18,215
            )
            
            
            (17,381
            )Net
      loans held for investment
            
            
            1,522,904
            
            
            
            1,428,735Premises
      and equipment, net
            
            
            48,059
            
            
            
            46,614Goodwill
            
            
            110,195
            
            
            
            110,195Core
      deposit premiums
            
            
            6,362
            
            
            
            6,564Other
      assets
            
            
            61,929
            
            
            
            60,236Total
      Assets
            
            $
            2,035,283
            
            
            $
            1,906,506LIABILITIES
      AND SHAREHOLDERS' EQUITYDeposits:Noninterest-bearing
      demand deposits
            
            $
            167,511
            
            
            $
            158,564Interest-bearing
      deposits:Demand,
      savings and money market deposits
            
            
            471,733
            
            
            
            464,731Time
      deposits of $100,000 or more
            
            
            409,678
            
            
            
            375,419Other
      time deposits
            
            
            436,727
            
            
            
            442,328Total
      deposits
            
            
            1,485,649
            
            
            
            1,441,042Retail
      repurchase agreements
            
            
            35,815
            
            
            
            29,133Federal
      Home Loan Bank advances
            
            
            192,413
            
            
            
            131,790Federal
      funds purchased
            
            
            28,000
            
            
            
            13,500Junior
      subordinated debentures
            
            
            56,673
            
            
            
            56,702Other
      liabilities
            
            
            19,591
            
            
            
            18,083Total
      Liabilities
            
            
            1,818,141
            
            
            
            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, issued shares -
      11,425,052 and 11,426,902
            
            
            28,563
            
            
            
            28,567Surplus
            
            
            114,293
            
            
            
            114,119Retained
      earnings
            
            
            74,452
            
            
            
            74,199Accumulated
      other comprehensive loss
            
            
            (166
            )
            
            
            (629
            )Total
      Shareholders' Equity
            
            
            217,142
            
            
            
            216,256Total
      Liabilities andShareholders'
      Equity
            
            $
            2,035,283
            
            
            $
            1,906,506See
      accompanying notes to consolidated financial statements.





2





FNB
      United Corp. and SubsidiaryCONSOLIDATED
      STATEMENTS OF INCOME (unaudited)Three
      Months EndedMarch
      31,2008
            
            
            2007(in
      thousands, except share and
      per share data)Interest
      IncomeInterest
      and fees on loans
            
            $
            27,537
            
            
            $
            27,870Interest
      and dividends on investment securities:Taxable
      income
            
            
            2,134
            
            
            
            1,656Non-taxable
      income
            
            
            527
            
            
            
            553Other
      interest income
            
            
            12
            
            
            
            818Total
      interest income
            
            
            30,210
            
            
            
            30,897Interest
      ExpenseDeposits
            
            
            11,806
            
            
            
            12,798Retail
      repurchase agreements
            
            
            249
            
            
            
            305Federal
      Home Loan Bank advances
            
            
            1,692
            
            
            
            681Federal
      funds purchased
            
            
            124
            
            
            
            0Other
      borrowed funds
            
            
            909
            
            
            
            1,288Total
      interest expense
            
            
            14,780
            
            
            
            15,072Net
      Interest Income
            
            
            15,430
            
            
            
            15,825Provision
      for loan losses
            
            
            1,514
            
            
            
            524Net
      Interest Income After Provision for Loan Losses
            
            
            13,916
            
            
            
            15,301Noninterest
      IncomeService
      charges on deposit accounts
            
            
            2,084
            
            
            
            2,050Mortgage
      loan sales
            
            
            1,423
            
            
            
            1,138Trust
      and investment services
            
            
            463
            
            
            
            371Cardholder
      and merchant services income
            
            
            480
            
            
            
            507Other
      service charges, commissions and fees
            
            
            113
            
            
            
            336Bank
      owned life insurance
            
            
            249
            
            
            
            236Other
      income
            
            
            45
            
            
            
            304Total
      noninterest income
            
            
            4,857
            
            
            
            4,942Noninterest
      ExpensePersonnel
      expense
            
            
            8,699
            
            
            
            8,420Net
      occupancy expense
            
            
            1,299
            
            
            
            1,178Furniture
      and equipment expense
            
            
            1,136
            
            
            
            1,113Data
      processing services
            
            
            457
            
            
            
            532Other
      expense
            
            
            3,777
            
            
            
            3,338Total
      noninterest expense
            
            
            15,368
            
            
            
            14,581Income
      Before Income Taxes
            
            
            3,405
            
            
            
            5,662Income
      taxes
            
            
            1,082
            
            
            
            1,910Net
      Income
            
            $
            2,323
            
            
            $
            3,752Net
      income per common share:Basic
            
            $
            0.20
            
            
            $
            0.33Diluted
            
            $
            0.20
            
            
            $
            0.33Weighted
      average number of common shares outstanding:Basic
            
            
            11,386,767
            
            
            
            11,263,325Diluted
            
            
            11,386,767
            
            
            
            11,295,221See
      accompanying notes to consolidated financial statements.




3





FNB
United Corp. and Subsidiary


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME


Three
Months Ended March 31, 2008 and March 31, 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
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,752
            
            
            
            -
            
            
            
            3,752Other
      comprehensive income, net of taxes:Unrealized
      securities losses
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (94
            )
            
            
            (94
            )Total
      comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,658Cash
      dividends declared, $.15 per share
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,698
            )
            
            
            -
            
            
            
            (1,698
            )Stock
      options:
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -Proceeds
      from options exercised
            
            
            53,777
            
            
            
            135
            
            
            
            329
            
            
            
            -
            
            
            
            -
            
            
            
            464Compensation
      expense recognized
            
            
            -
            
            
            
            -
            
            
            
            134
            
            
            
            -
            
            
            
            -
            
            
            
            134Net
      tax benefit related to option exercises
            
            
            -
            
            
            
            -
            
            
            
            108
            
            
            
            -
            
            
            
            -
            
            
            
            108Restricted
      stock:
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -
            
            
            
            -Compensation
      expense recognized
            
            
            -
            
            
            
            -
            
            
            
            82
            
            
            
            -
            
            
            
            -
            
            
            
            82Other
      compensatory stock issued
            
            
            432
            
            
            
            1
            
            
            
            7
            
            
            
            -
            
            
            
            -
            
            
            
            8Balance,
      March 31, 2007
            
            
            11,348,201
            
            
            $
            28,371
            
            
            $
            112,873
            
            
            $
            70,716
            
            
            $
            (1,536
            )
            
            $
            210,424Balance,
      December 31, 2007
            
            
            11,426,902
            
            
            $
            28,567
            
            
            $
            114,119
            
            
            $
            74,199
            
            
            $
            (629
            )
            
            $
            216,256Cumulative
      effect of a change in accounting principle - Adoption of EITF
      06-4
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (357
            )
            
            
            -
            
            
            
            (357
            )Comprehensive
      income:Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,323
            
            
            
            -
            
            
            
            2,323Other
      comprehensive income, net of taxes:Unrealized
      securities gains
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            449
            
            
            
            449Application
      of SFAS No. 158
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            14
            
            
            
            14Total
      comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,483Cash
      dividends declared, $.15 per share
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,713
            )
            
            
            -
            
            
            
            (1,713
            )Stock
      options:Proceeds
      from options exercised
            
            
            150
            
            
            
            1
            
            
            
            1
            
            
            
            -
            
            
            
            -
            
            
            
            2Compensation
      expense recognized
            
            
            -
            
            
            
            -
            
            
            
            111
            
            
            
            -
            
            
            
            -
            
            
            
            111Restricted
      stock:Shares
      issued/terminated,  subject to restriction
            
            
            (2,000
            )
            
            
            (5
            )
            
            
            5
            
            
            
            -
            
            
            
            -
            
            
            
            -Compensation
      expense recognized
            
            
            -
            
            
            
            -
            
            
            
            57
            
            
            
            -
            
            
            
            -
            
            
            
            57Balance,
      March 31, 2008
            
            
            11,425,052
            
            
            $
            28,563
            
            
            $
            114,293
            
            
            $
            74,452
            
            
            $
            (166
            )
            
            $
            217,142See
      accompanying notes to consolidated financial statements.




4





FNB
      United Corp. and SubsidiaryCONSOLIDATED
      STATEMENTS OF CASH FLOWS (unaudited)Three
      months ended,March
      31,2008
            
            
            2007(dollars
      in thousands)Operating
      ActivitiesNet
      income
            
            $
            2,323
            
            
            $
            3,752Adjustments
      to reconcile net income to cash provided by operating
      activities:Depreciation
      and amortization  of premises and equipment
            
            
            871
            
            
            
            905Provision
      for loan losses
            
            
            1,514
            
            
            
            524Deferred
      income taxes (benefit)
            
            
            (13
            )
            
            
            256Deferred
      loan fees and costs, net
            
            
            931
            
            
            
            (231
            )Premium
      amortization and discount accretion of investment securities,
      net
            
            
            (107
            )
            
            
            20Amortization
      of core deposit premiums
            
            
            202
            
            
            
            205Stock
      compensation expense
            
            
            168
            
            
            
            224Income
      from bank owned life insurance
            
            
            (249
            )
            
            
            (236
            )Mortgage
      loans held for sale:Origination
      of mortgage loans held for sale
            
            
            (71,238
            )
            
            
            (96,317
            )Proceeds
      from sale of mortgage loans held for sale
            
            
            74,626
            
            
            
            91,820Gain
      on mortgage loan sales
            
            
            (1,423
            )
            
            
            (1,138
            )Mortgage
      servicing rights capitalized
            
            
            (399
            )
            
            
            (200
            )Mortgage
      servicing rights amortization and impairment
            
            
            324
            
            
            
            100Changes
      in assets and liabilities:(Increase)
      decrease in interest receivable
            
            
            610
            
            
            
            (827
            )(Increase)
      decrease in other assets
            
            
            (291
            )
            
            
            1,415Increase
      in accrued interest and other liabilities
            
            
            1,276
            
            
            
            2,078Net
      cash provided by operating activities
            
            
            9,125
            
            
            
            2,350Investing
      ActivitiesAvailable-for-sale
      securities:Proceeds
      from maturities and calls
            
            
            17,126
            
            
            
            18,554Purchases
            
            
            (58,047
            )
            
            
            (69,794
            )Held-to-maturity
      securities:Proceeds
      from maturities and calls
            
            
            7,602
            
            
            
            512Net
      increase in loans held for investment
            
            
            (98,081
            )
            
            
            (12,038
            )Purchases
      of  premises and equipment
            
            
            (2,327
            )
            
            
            (994
            )Net
      cash used in investing activities
            
            
            (133,727
            )
            
            
            (63,760
            )Financing
      ActivitiesNet
      increase in deposits
            
            
            44,607
            
            
            
            44,698Increase
      in retail repurchase agreements
            
            
            6,682
            
            
            
            4,064Increase
      in Federal Home Loan Bank advances
            
            
            60,493
            
            
            
            41Increase
      in federal funds purchased
            
            
            14,500
            
            
            
            -Increase
      in other borrowings
            
            
            -
            
            
            
            5,407Proceeds
      from exercise of stock options
            
            
            2
            
            
            
            464Tax
      benefit from exercise of stock options
            
            
            -
            
            
            
            108Cash
      dividends paid
            
            
            (1,714
            )
            
            
            (1,920
            )Net
      cash provided by financing activities
            
            
            124,570
            
            
            
            52,862Net
      Decrease in Cash and Cash Equivalents
            
            
            (32
            )
            
            
            (8,548
            )Cash
      and Cash Equivalents at Beginning of Period
            
            
            39,117
            
            
            
            108,340Cash
      and Cash Equivalents at End of Period
            
            $
            39,085
            
            
            $
            99,792Supplemental
      disclosure of cash flow information:Cash
      paid during the period for:Interest
            
            $
            14,897
            
            
            $
            15,018Income
      taxes, net of refunds
            
            
            254
            
            
            
            -Noncash
      transactions:Foreclosed
      loans transferred to other real estate
            
            
            1,923
            
            
            
            -Unrealized
      securities gains (losses), net of income taxes (benefit)
            
            
            449
            
            
            
            (94
            )Application
      of SFAS No. 158 to employee benefit plan costs, net of income
      taxes
            
            
            14
            
            
            
            -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 a bank holding company whose wholly owned
subsidiary is 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 period ended March
31, 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




6





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




Three
      Months EndedMarch 31,2008
            
            
            2007Basic
      EPS denominator - Weighted average number of common shares
      outstanding
            
            
            11,386,767
            
            
            
            11,263,325Dilutive
      share effect arising from potential common stock issuances
            
            
            -
            
            
            
            31,896Diluted
      EPS denominator
            
            
            11,386,767
            
            
            
            11,295,221





For the
three months ended March 31, 2008 and 2007 there were 666,036 and 329,141
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. 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:





Allowance
      for Loan LossesThree
      Months EndedMarch
      31,2008
            
            
            2007(dollars
      in thousands)Balance
      at beginning of period
            
            $
            17,381
            
            
            $
            15,943Provision
      for loan losses
            
            
            1,514
            
            
            
            524Net
      charge-offsCharge-offs
            
            
            (1,046
            )
            
            
            (1,198
            )Recoveries
            
            
            366
            
            
            
            488Net
      charge-offs
            
            
            (680
            )
            
            
            (710
            )Balance,
      end of period
            
            $
            18,215
            
            
            $
            15,757Annualized
      net charge-offs during the period to average loans
            
            
            0.18
            %
            
            
            0.21
            %Annualized
      net charge-offs during the period to allowance for loan
    losses
            
            
            14.93
            %
            
            
            18.02
            %Allowance
      for loan loss to loans held for investment
            
            
            1.18
            %
            
            
            1.20
            %





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 EndedMarch
      31,Pension
      Plan
            
            2008
            
            
            2007(dollars
      in thousands)Service
      cost
            
            $
            66
            
            
            $
            60Interest
      Cost
            
            
            165
            
            
            
            161Expected
      return on plan assets
            
            
            (235
            )
            
            
            (235
            )Amortization
      of prior service cost
            
            
            1
            
            
            
            1Amortization
      of net actuarial loss
            
            
            2
            
            
            
            16Net
      periodic pension cost (income)
            
            $
            (1
            )
            
            $
            3Supplemental
      Executive Retirement PlanService
      cost
            
            $
            34
            
            
            $
            26Interest
      Cost
            
            
            36
            
            
            
            33Expected
      return on plan assets
            
            
            -
            
            
            
            -Amortization
      of prior service cost
            
            
            17
            
            
            
            18Amortization
      of net actuarial loss
            
            
            2
            
            
            
            7Net
      periodic SERP cost
            
            $
            89
            
            
            $
            84Other
      Postretirement Defined Benefit PlansService
      cost
            
            $
            4
            
            
            $
            4Interest
      Cost
            
            
            18
            
            
            
            18Expected
      return on plan assets
            
            
            -
            
            
            
            -Amortization
      of prior service cost (credit)
            
            
            (1
            )
            
            
            -Amortization
      of transition obligation
            
            
            -
            
            
            
            4Amortization
      of net actuarial loss (gain)
            
            
            -
            
            
            
            (1
            )Net
      periodic postretirement benefit cost
            
            $
            21
            
            
            $
            25





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
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





8





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 recognition of $500,000 in written loan commitments recorded at
fair value 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.




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 March 31, 2008 include unrealized gains (losses) on investment
securities classified as available-for-sale and the effect of the application of
SFAS No. 158 to defined benefit pension and other postretirement plans for
employees.





Information
concerning the income tax effects applicable to the components of other
comprehensive income included in the consolidated statements of shareholders’
equity and comprehensive income





9





and the
components of accumulated other comprehensive income included in the
shareholders’ equity section of the consolidated balance sheets is as
follows:





Three
      Months EndedMarch
      31,2008
            
            
            2007(dollars
      in thousands)Income
      tax expense (benefit) related to other comprehensive income
      (loss):Unrealized
      securities gains (losses)
            
            $
            294
            
            
            $
            (59
            )Application
      of SFAS No. 158 to employee benefit plans
            
            
            9
            
            
            
            -Total
            
            $
            303
            
            
            $
            (59
            )Accumulated
      other comprehensive income (loss):Unrealized
      securities gains
            
            $
            998
            
            
            $
            257Application
      of SFAS No. 158 to employee benefit plans
            
            
            (1,164
            )
            
            
            (1,793
            )Total
            
            $
            (166
            )
            
            $
            (1,536
            )





8. Fair
value





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.





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





10





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 March 31, 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. Examples of Level 2 derivatives are
interest rate swaps, foreign exchange and energy derivative
contracts.





Other Real Estate
Owned





Other
real estate owned (“OREO”) is adjusted to fair value upon transfer of the loans
to OREO. Subsequently, OREO is carried at the lower of carrying value or fair
value. Fair value is based upon independent market prices, appraised values of
the collateral or management’s estimation of the value of the collateral. When
the fair value of the collateral is based on an observable market price or a
current appraised value, the Company records the foreclosed asset as
nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the
appraised value and there is no observable market price, the Company records the
OREO as nonrecurring Level 3.





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





11





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)March
      31, 2008
            
            Total
            
            
            Level 1
            
            
            Level 2
            
            
            Level 3Investment
      securities available for sale
            
            $
            203,598
            
            
            $
            2,129
            
            
            $
            197,204
            
            
            $
            4,265Derivative
      assets
            
            
            554
            
            
            
            -
            
            
            
            54
            
            
            
            500Total
      assets at fair value
            
            $
            204,152
            
            
            $
            2,129
            
            
            $
            197,258
            
            
            $
            4,765Derivative
      liabilities
            
            $
            29
            
            
            $
            -
            
            
            $
            29
            
            
            $
            -Total
      liabilities at fair value
            
            $
            29
            
            
            $
            -
            
            
            $
            29
            
            
            $
            -





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)March
      31, 2008
            
            Total
            
            
            Level 1
            
            
            Level 2
            
            
            Level 3Loans
            
            $
            14,085
            
            
            $
            -
            
            
            $
            8,932
            
            
            $
            5,153Mortgage
      servicing rights
            
            
            2,975
            
            
            
            -
            
            
            
            -
            
            
            
            2,975Total
      assets at fair value
            
            $
            17,060
            
            
            $
            -
            
            
            $
            8,932
            
            
            $
            8,128





12





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” or the “Parent Company”) and its wholly owned
subsidiary, CommunityOne Bank, National Association (“CommunityOne”), formerly
known as First National Bank and Trust Company, prior to June 4, 2007,
collectively referred to as the “Company”, and 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. The following 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. Effective August 1, 2007, Dover became a
subsidiary of CommunityOne.





Executive
Summary





The
Company earned $2.3 million in the first quarter of 2008, a 38% decline from
earnings of $3.8 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 and noninterest
expense.  Quarterly basic and fully diluted earnings per common share
decreased from $0.33, to $0.20.





Total
assets were $2.04 billion at March 31, 2008, up 9% from March 31, 2007 and 7%
from December 31, 2007.  Gross loans held for investment of $1.54
billion at March 31, 2008 represented an increase of $228.0 million, or 17% from
$1.31 billion at March 31, 2007 and an increase of $95.0 million, or 7%, from
$1.45 billion at December 31, 2007.  Total deposits of $1.49 billion
at March 31, 2008 represented an increase of $19.9 million, or 1%, from $1.47
billion at March 31, 2007 and an increase of $44.6 million, or 3%, from $1.44
billion at December 31, 2007.





13





Financial
highlights are presented in the accompanying table.





Table
1


Selected
Financial Data





As
      of / For the Quarter Ended3/31/2008
              
              
              3/31/2007Selected
      components income statement data
              
              (dollars
      in thousands, except per sharedata)Interest
      income
              
              $
              30,210
              
              
              $
              30,897Interest
      expense
              
              
              14,780
              
              
              
              15,072Net
      interest income
              
              
              15,430
              
              
              
              15,825Provision
      for loan losses
              
              
              1,514
              
              
              
              524Net
      interest income after provision for loan losses
              
              
              13,916
              
              
              
              15,301Noninterest
      income
              
              
              4,857
              
              
              
              4,942Noninterest
      expense
              
              
              15,368
              
              
              
              14,581Income
      before income taxes
              
              
              3,405
              
              
              
              5,662Income
      taxes
              
              
              1,082
              
              
              
              1,910Net
      income
              
              $
              2,323
              
              
              $
              3,752Common
      share dataBasic
      earnings per share
              
              $
              0.20
              
              
              $
              0.33Diluted
      earnings per share
              
              
              0.20
              
              
              
              0.33Dividends
              
              
              0.15
              
              
              
              0.15Book
      value per share
              
              
              19.07
              
              
              
              18.54Weighted
      average shares outstanding-basic
              
              
              11,386,767
              
              
              
              11,263,325Weighted
      average shares outstanding-diluted
              
              
              11,386,767
              
              
              
              11,295,221Financial
      condition dataTotal
      assets
              
              $
              2,035,283
              
              
              $
              1,874,404Securities
              
              
              231,628
              
              
              
              224,870Loans
      held for sale
              
              
              15,121
              
              
              
              26,497Net
      loans held for investment
              
              
              1,522,904
              
              
              
              1,297,411Deposits
              
              
              1,485,649
              
              
              
              1,465,711Goodwill
              
              
              110,195
              
              
              
              110,961Borrowings
              
              
              312,901
              
              
              
              176,530Shareholders'
      equity
              
              
              217,142
              
              
              
              210,424Average
      BalancesTotal
      assets
              
              $
              1,960,265
              
              
              $
              1,827,595Securities
              
              
              213,852
              
              
              
              224,870Loans
              
              
              1,506,582
              
              
              
              1,330,199Interest-earning
      assets
              
              
              1,721,964
              
              
              
              1,582,818Deposits
              
              
              1,452,024
              
              
              
              1,426,640Total
      interest-bearning liabilities
              
              
              1,565,911
              
              
              
              1,441,278Shareholders'
      equity
              
              
              217,716
              
              
              
              209,579Performance
      RatiosReturn
      on average assets
              
              
              0.48
              %
              
              
              0.83
              %Return
      on tangible assets
              
              
              0.51
              %
              
              
              0.89
              %Return
      on average equity
              
              
              4.28
              %
              
              
              7.26
              %Return
      on tangible equity
              
              
              9.22
              %
              
              
              16.64
              %Net
      interest margin
              
              
              3.68
              %
              
              
              4.15
              %Noninterest
      income to average assets
              
              
              0.99
              %
              
              
              1.10
              %Noninterest
      expense to average assets
              
              
              3.14
              %
              
              
              3.24
              %Efficiency
      ratio
              
              
              75.75
              %
              
              
              70.21
              %




14





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 at
yearend. 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.





As of the
most recent testing date, December 31, 2007, the fair value of the reporting
unit exceeded its carrying amount.





15





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.  An analysis is presented in
Table 2 of the Company’s net interest income on a taxable-equivalent basis and
average balance sheets for the three month period ended March 31, 2008 and
2007.





For the
three months ended March 31, 2008, net interest income before the provision for
loan losses was $15.4 million, a decrease of $395,000, or 3%, from $15.8 million
for the same quarter in 2007.  The decrease was primarily due to a
$139.1 million increase in average earning asset balances and a $124.6 million
increase in interest bearing liabilities, offset by the 88 basis point decrease
in yield on earning assets, combined with a 44 basis point decrease in interest
bearing liabilities.





The net
interest margin (taxable-equivalent net interest income divided by average
earning assets) compressed 47 basis points to 3.68 % for the three months ended
March 31, 2008, compared to 4.15% 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
March 31, 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 doesn’t 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 an 88 basis points decrease in the yield on
earning assets, the cost of interest bearing liabilities only decreased 44 basis
points.  Growth in earning assets was funded by higher cost deposits
and wholesale borrowings.





16





Table
2





Average
      Balance Sheet and Net Interest Income AnalysisFully
      Taxable Equivalent BasisThree
      Months Ended March 31,2008
            
            
            
            
            
            
            
            
            2007Average
              Balance(3)
            
            
            Interest
              Income
      /
              Expense
            
            
            Average
              Yield
      /
              Rate
            
            
            Average
              Balance(3)
            
            
            Interest
              Income
      /
              Expense
            
            
            Average
              Yield
      /
              RateInterest
      earning assets:
            
            (Dollars
      in thousands)Loans
      (1)
            
            $
            1,506,582
            
            
            $
            27,589
            
            
            
            7.37
            %
            
            $
            1,330,199
            
            
            $
            27,927
            
            
            
            8.51
            %Taxable
      investment securities
            
            
            158,411
            
            
            
            2,134
            
            
            
            5.42
            
            
            
            133,842
            
            
            
            1,656
            
            
            
            5.02Tax-exempt
      investment securities (1)
            
            
            55,441
            
            
            
            811
            
            
            
            5.88
            
            
            
            56,727
            
            
            
            851
            
            
            
            6.08Other
      earning assets
            
            
            1,530
            
            
            
            12
            
            
            
            3.15
            
            
            
            62,050
            
            
            
            818
            
            
            
            5.35Total
      earning assets
            
            
            1,721,964
            
            
            
            30,546
            
            
            
            7.13
            
            
            
            1,582,818
            
            
            
            31,252
            
            
            
            8.01Non-earning
      assets:Cash
      and due from banks
            
            
            32,163
            
            
            
            
            
            
            
            
            
            
            
            33,760Goodwill
      and core deposit premiums
            
            
            116,655
            
            
            
            
            
            
            
            
            
            
            
            118,229Other
      assets, net
            
            
            89,483
            
            
            
            
            
            
            
            
            
            
            
            92,788Total
      assets
            
            $
            1,960,265
            
            
            
            
            
            
            
            
            
            
            $
            1,827,595Interest
      bearing liabilities:Interest-bearing
      demand deposits
            
            
            161,910
            
            
            
            533
            
            
            
            1.32
            
            
            
            168,858
            
            
            
            716
            
            
            
            1.72Savings
      deposits
            
            
            41,316
            
            
            
            61
            
            
            
            0.59
            
            
            
            50,225
            
            
            
            114
            
            
            
            0.92Money
      market deposits
            
            
            260,898
            
            
            
            1,803
            
            
            
            2.78
            
            
            
            240,614
            
            
            
            2,436
            
            
            
            4.11Time
      deposits
            
            
            830,464
            
            
            
            9,409
            
            
            
            4.56
            
            
            
            810,952
            
            
            
            9,532
            
            
            
            4.77Retail
      repurchase agreements
            
            
            30,183
            
            
            
            249
            
            
            
            3.32
            
            
            
            26,499
            
            
            
            305
            
            
            
            4.67Federal
      Home Loan Bank advances
            
            
            169,398
            
            
            
            1,692
            
            
            
            4.02
            
            
            
            65,834
            
            
            
            681
            
            
            
            4.20Federal
      funds purchased
            
            
            15,040
            
            
            
            124
            
            
            
            3.32
            
            
            
            0.00
            
            
            
            0.00
            
            
            
            0.00Other
      borrowed funds
            
            
            56,702
            
            
            
            909
            
            
            
            6.45
            
            
            
            78,296
            
            
            
            1,288
            
            
            
            6.67Total
      interest bearing liabilities
            
            
            1,565,911
            
            
            
            14,780
            
            
            
            3.80
            
            
            
            1,441,278
            
            
            
            15,072
            
            
            
            4.24Other
      liabilities and shareholders' equity:Noninterest-bearing
      demand deposits
            
            
            157,436
            
            
            
            
            
            
            
            
            
            
            
            155,991Other
      liabilities
            
            
            19,202
            
            
            
            
            
            
            
            
            
            
            
            21,148Shareholders'
      equity
            
            
            217,716
            
            
            
            
            
            
            
            
            
            
            
            209,178Total
      liabilities and equity
            
            $
            1,960,265
            
            
            
            
            
            
            
            
            
            
            $
            1,827,595Net
      interest income and net yield on earning assets (3) (4)
            
            
            
            
            
            $
            15,766
            
            
            
            3.68
            %
            
            
            
            
            
            $
            16,180
            
            
            
            4.15
            %Interest
      rate spread (5)
            
            
            
            
            
            
            
            
            
            
            3.34
            %
            
            
            
            
            
            
            
            
            
            
            3.77
            %





(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 periods include market adjustments to fair value
for securities and loans available/held for sale.


(4)
Net yield on earning assets is computed by dividing net interest income by
average earning assets.


(5)
Earning asset yield minus interest bearing liabilities rate.





Provision
for Loan Losses





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 March 31, 2008, management determined a charge to
operations of $1.5 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
$524,000 for the first 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 March 31, 2008 totaled $680,000, or 0.18% annualized of average loans,
compared to $710,000, or 0.21% annualized of average loans for the same period
in 2007. See “Asset
Quality – Allowance for loan
losses” for additional discussion on the allowance for loan
losses.





Noninterest
Income





For the
three months ended March 31, 2008, total noninterest income was $4.9 million, a
decrease of $85,000, or 2%, compared to the same period in 2007. Service charge
income on deposit accounts, the largest component of noninterest income, was
$2.1 million for 2008 and 2007.  The $285,000 increase in mortgage
loan income was largely due to the adoption of the provisions of SAB 109
effective January 1, 2008, which resulted in the recognition of $500,000 in
written loan commitments recorded at fair value through earnings and
was somewhat offset by a decrease in mortgage loan sales income associated
with the slowing housing market.  Trust and investment services income
was up $92,000 on increased assets under management and increased securities
sales, compared to the same period in 2007.  In addition, other
service charges, commissions and fees were down $223,000 over the first quarter
of 2007, primarily the result of a $150,000 writedown of mortgage servicing
rights. This writedown was the result of a quarterend impairment evaluation
performed by an independent third party consultant. Other income declined
$259,000 primarily as the result of an increase of $136,000 in losses on OREO
properties, combined with the discontinuance of factoring activities which
resulted in a decrease of $122,000, compared to the first quarter of
2007.





Noninterest
Expense





Noninterest
expense for the first quarter of 2008 was $15.4 million, a $787,000, or 5%,
increase, compared to the first quarter a year ago.   Personnel
expense increase of $279,000 related primarily to normal increases in salaries
of $134,000, or 3%, increased payroll taxes and $76,000 increase related to an
enhanced 401(k) plan. Net occupancy expense increased $121,000 resulting from
increased maintenance and repair costs and increased property taxes. The
$439,000 increase in other expense was the result of a number of items. The
provision for unfunded commitments of $232,000 was attributable primarily to the
increase in unfunded off-balance sheet commitments, which was related to the
significant increase in loan volume during the quarter. Loan expense increase of
$134,000 was related to the significant growth in the loan portfolio during
1Q2008, compared to the same period a year ago. Expanded advertising program in
effect during the first quarter of 2008 was the primary reason contributing to
the $102,000 increase in advertising. OREO expense was up $69,000 as the Company
continued to address asset quality issues.





17





Income
Taxes





The
Company’s provision for income taxes totaled $1.1 million for the first
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 31.8% for the three months ended March 31, 2008,
compared to 33.7% for the three months ended March 31, 2007, reflective of
different levels of tax-exempt earnings.




Financial
Condition




Since
December 31, 2007, the Company’s assets have increased $128.8 million, to $2.04
billion at March 31, 2008. The principal factors impacting this overall increase
during the first three months of 2008 were a $34.2 million increase in net
investments, combined with a $94.2 million increase in net loans held for
investment.  Loans held for investment at March 31, 2008 totaled
$1.54 billion, compared to $1.45 billion at yearend 2007, an increase of 7%.
Investment securities of $231.6 million at March 31, 2008 were 17% higher
than the $197.5 million balance at December 31, 2007.





Deposits
totaled $1.49 billion at March 31, 2008, compared to $1.44 billion at December
31, 2007.  At the end of the first quarter 2008, noninterest-bearing
deposits were $167.5 million, or 11.3%, of total deposits.  Borrowings
at the Federal Home Loan Bank of Atlanta (“FHLB”) totaled $192.4 million at
March 31, 2008, compared to $131.8 million at December 31, 2007. The increase in
the FHLB borrowings were used to fund the growth in the portfolio of loans held
for investment. Retail repurchase agreements totaled $35.8 million at March 31,
2008and $29.1 million at December 31, 2007.




Shareholders’
equity remains strong, with all of our regulatory capital ratios at levels that
classify FNB United and CommunityOne as “adequately capitalized” under
regulatory capital guidelines governing bank holding companies and banks.
Shareholders’ equity increased to $217.1 million at the end of the first quarter
2008, compared to $216.3 million at December 31, 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. The Company declared dividends of
$0.15 per share during the three months ended March 31, 2008.





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 thereof and is generally carried at fair value, less estimated
costs to sell.





Nonperforming
loans at March 31, 2008 were $16.4 million, or 1.06% of loans held for
investment, compared to $12.7 million, or 0.96% of loans held for investment at
March 31, 2007 and $18.7 million or 1.29% of loans held for investment at
December 31, 2007.  Other real estate owned was $4.1 million at March
31, 2008, compared to $3.1 million at March 31, 2007 and $2.9 million at
December 31, 2007.





18





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 allowance 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 combined with recent loss experience associated with
the loan portfolio from the Company’s most recent acquisition 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 1.18% at March 31, 2008 and 1.20% at both December 31, 2007 and
March 31, 2007.  The allowance percentage has remained within a range
of 1.16% to 1.20% during the twelve-month period ended March 31, 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.





During
the quarter ended March 31, 2008, a majority of the asset quality indicators
improved, compared to December 31, 2007. The assessment of loans at March 31,
2008 determined that the amount of loans impaired had decreased $1.5 million
since yearend, while the amount of impairment on these loans increased $160,000
during the same period. Commercial nonaccrual loans decreased by nearly $2.0
million during the quarter, or from 1.264% of the commercial loan portfolio at
December 31, 2007, to 1.024% at March 31, 2008. Generally, the consumer
portfolio quality metrics improved. Past due loans decreased to their lowest
point since early 2007 while the loss experience fell to its lowest level in
more than a year. However, commercial real estate concentrations increased from
33.6% of the commercial portfolio at December 31, 2007, to 41.3% at the end of
the first quarter. At March 31, 2007, the allowance was $13.4 million which
represented 1.24% of total loans and 10.82 times nonperforming loans. After
taking into consideration these factors, as well as the Company’s market economy
and other factors inherent in the loan portfolio, the Company established the
allowance for loan losses at $18.2 million, which represented 1.18% of total
loans and 1.11 times nonperforming loans. The allowance for loan losses at
December 31, 2007 was $17.4 million and represented 1.20% of total loans which
was 0.93 times nonperforming loans. As a percentage of loans outstanding, the
allowance declined from the prior yearend as a result of improving trends in
credit quality and strong loan growth and is based on the model described
above.





19







Management
believes the allowance for loan losses of $18.2 million at March 31,
2008 is adequate to cover probable losses in the loan portfolio; however,
assessing the adequacy of the allowance is a process that requires continuous
evaluation and considerable judgment.  Management’s judgments are
based on numerous assumptions about current events which it believes to be
reasonable, but which may or may not be valid.  Thus, there can be no
assurance that loan losses in future periods will not exceed the current
allowance or that future increases in the allowance will not be
required.  No assurance can be given that management’s ongoing
evaluation of the loan portfolio in light of changing economic conditions and
other relevant circumstances will not require significant future additions to
the allowance, thus adversely affecting the operating results of the
Company.





Liquidity
Management





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





Consistent
with the general approach to liquidity, loans and other assets of the Company
are based primarily on a core of local deposits and the Company’s capital
position.  Comparing the first quarter 2008 to the first quarter 2007,
the Company has supplemented growth in core deposits and retail repurchase
agreements with brokered deposits and Federal Home Loan Bank advances. This has
been adequate to fund loan demand in the Company’s market area, while
maintaining the desired level of immediate liquidity and a substantial
investment securities portfolio available for both immediate and secondary
liquidity purposes.





Commitments,
Contingencies and Off-Balance Sheet Risk





In the
normal course of business, various commitments are outstanding that are not
reflected in the consolidated financial statements.  Significant
commitments at March 31, 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 March 31, 2008, total
commitments to extend credit and undisbursed advances on customer lines of
credit amounted to $457.6 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 $2.5 million at March
31, 2008, $2.7 million at December 31, 2007 and $6.8 million at March 31,
2007.





20





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 residential mortgage loans totaled $8.1 million at March
31, 2008, and the related forward sales commitments totaled $8.1
million.  Loans held for sale by Dover totaled $9.1 million at March
31, 2008, and the related forward sales commitments totaled $8.1
million.





CommunityOne
had loans held for sale of $6.0 million at March 31, 2008.  Binding
commitments of CommunityOne for the origination of mortgage loans intended to be
held for sale at March 31, 2008 were $29.3 million. The Company does
not have any special purpose entities or other similar forms of off-balance
sheet financing.





Asset/Liability
Management and Interest Rate Sensitivity





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





The
Company’s balance sheet was asset-sensitive at March 31, 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
financial holding companies, as regulated institutions, must meet required
levels of capital.  The OCC and the Federal Reserve, which are the
primary regulatory agencies for CommunityOne and the Company, 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.





As shown
in the accompanying table, the Company and CommunityOne have capital levels
exceeding the requirements for “adequately capitalized” bank holding companies
and banks as of March 31, 2008.





21





Regulatory
      GuidelinesWell
              Capitalized
            
            Adequately
              Capitalized
            
            FNB
      United
            
            CommunityOneTotal
      Capital
            10.0%
            
            8.0%
            
            9.7%
            
            9.6%Tier
      1 Capital
            6.0
            
            4.0
            
            7.4
            
            8.5Leverage
      Capital
            5.0
            
            4.0
            
            7.2
            
            8.3




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,





22





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
March 31, 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.





During
the fourth quarter of 2006, the Company’s management first learned that FNB
United did not maintain effective internal control over financial reporting as
it did not have controls designed and in place for an adequate amount of time to
provide assurance that nonroutine transactions were being handled
properly.





23





Management
is in the process of remediating its controls for nonroutine
transactions.  FNB United reviews its disclosure controls and
procedures, which may include its internal controls over financial reporting, on
an ongoing basis and may from time to time make changes aimed at enhancing their
effectiveness. During the first quarter of 2008, the Company began utilizing a
policy on nonroutine transactions.





24





PART
      II.
            OTHER
      INFORMATION





Item
      1.
            Legal
      Proceedings




None.




Item
      1.A.
            Risk
      Factors




No
material changes.




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




Not
Applicable.




Item
      3.
            Defaults
      Upon Senior Securities




Not
Applicable.




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




None.




Item
      5.
            Other
      Information




None.




Item
      6.
            Exhibits




Exhibits to this report are listed in
the index to exhibits on pages 26, 27, 28 and 29 of this report.





25





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)May  12,
      2008
            /s/ Mark A.
      SeversonMark
      A. SeversonChief
      Financial Officer





26





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.





27





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.




28




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.




29




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 by
      reference 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, 2006.31.10
            
            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.






30