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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2006

Commission file number 0-13823



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FNB UNITED CORP.

(Exact name of registrant as specified in its charter)



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

101 Sunset Avenue, Asheboro, North Carolina 27203

(Address of principal executive offices)

(336) 626-8300

(Registrants telephone number, including area code)



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

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

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

Large accelerated filer ̈Accelerated filer  x    Non-accelerated
filer ̈

The
registrant had 11,042,955 shares of $2.50 par value common stock outstanding at May 1, 2006.



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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FNB United Corp. and Subsidiaries

CONSOLIDATED BALANCE SHEETS (unaudited)



|                                                                                                                 |  |                                                 |           |   |                  |   |         |   |  |   |           |  
|---------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | --------- | - | ---------------- | - | ------- | - |  | - | --------- | -
|                                                                                                                 |  | March 31,                                       |           |   | December 31,2005 |  
|                                                                                                                 |  | 2006                                            |           |   | 2005             |   |        
|                                                                                                                 |  | (in thousands, except share and per share data) |          
|ASSETS                                                                                                           |  |                                                 |           |   |                  |   |         |   |  |   |           |  
|Cash and due from banks                                                                                          |  | $                                               | 20,751    |   |                  | $ | 13,916  |   |  | $ | 22,389    |  
|Interest-bearing bank balances                                                                                   |  |                                                 | 1,207     |   |                  |   | 757     |   |  |   | 2,310     |  
|Federal funds sold                                                                                               |  |                                                 | 17,829    |   |                  |   | 9,884   |   |  |   | 20,180    |  
|Investment securities:                                                                                           |  |                                                 |           |   |                  |   |         |   |  |   |           |  
|Available for sale, at estimated fair value (amortized cost of $115,237, $75,687 and $110,693)                   |  |                                                 | 114,689   |   |                  |   | 76,695  |   |  |   | 110,918   |  
|Held to maturity (estimated fair value of $42,106, $47,868 and $47,508)                                          |  |                                                 | 43,593    |   |                  |   | 49,206  |   |  |   | 48,888    |  
|Loans:                                                                                                           |  |                                                 |           |   |                  |   |         |   |  |   |           |  
|Loans held for sale                                                                                              |  |                                                 | 20,822    |   |                  |   | 26,174  |   |  |   | 17,615    |  
|Loans held for investment                                                                                        |  |                                                 | 799,888   |   |                  |   | 664,463 |   |  |   | 795,051   |  
|Less allowance for loan losses                                                                                   |  |                                                 | (9,960    | ) |                  |   | (7,556  | ) |  |   | (9,945    | )
|                                                                                                                 |  |                                                 |           |   |                  |   |         |   |  |   |           |  
|Net loans                                                                                                        |  |                                                 | 810,750   |   |                  |   | 683,081 |   |  |   | 802,721   |  
|                                                                                                                 |  |                                                 |           |   |                  |   |         |   |  |   |           |  
|Premises and equipment, net                                                                                      |  |                                                 | 25,422    |   |                  |   | 17,911  |   |  |   | 24,670    |  
|Goodwill                                                                                                         |  |                                                 | 31,389    |   |                  |   | 16,359  |   |  |   | 31,381    |  
|Other assets                                                                                                     |  |                                                 | 40,638    |   |                  |   | 27,960  |   |  |   | 38,628    |  
|                                                                                                                 |  |                                                 |           |   |                  |   |         |   |  |   |           |  
|Total Assets                                                                                                     |  | $                                               | 1,106,268 |   |                  | $ | 895,769 |   |  | $ | 1,102,085 |  
|                                                                                                                 |  |                                                 |           |   |                  |   |         |   |  |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                             |  |                                                 |           |   |                  |   |         |   |  |   |           |  
|Deposits:                                                                                                        |  |                                                 |           |   |                  |   |         |   |  |   |           |  
|Noninterest-bearing demand deposits                                                                              |  | $                                               | 105,824   |   |                  | $ | 81,831  |   |  | $ | 100,465   |  
|Interest-bearing deposits:                                                                                       |  |                                                 |           |   |                  |   |         |   |  |   |           |  
|Demand, savings and money market deposits                                                                        |  |                                                 | 239,648   |   |                  |   | 217,830 |   |  |   | 252,855   |  
|Time deposits of $100,000 or more                                                                                |  |                                                 | 234,194   |   |                  |   | 168,767 |   |  |   | 229,910   |  
|Other time deposits                                                                                              |  |                                                 | 270,895   |   |                  |   | 216,586 |   |  |   | 258,379   |  
|                                                                                                                 |  |                                                 |           |   |                  |   |         |   |  |   |           |  
|Total deposits                                                                                                   |  |                                                 | 850,561   |   |                  |   | 685,014 |   |  |   | 841,609   |  
|Retail repurchase agreements                                                                                     |  |                                                 | 15,642    |   |                  |   | 15,026  |   |  |   | 21,338    |  
|Federal Home Loan Bank advances                                                                                  |  |                                                 | 84,676    |   |                  |   | 68,418  |   |  |   | 86,225    |  
|Other borrowed funds                                                                                             |  |                                                 | 39,559    |   |                  |   | 35,686  |   |  |   | 39,004    |  
|Other liabilities                                                                                                |  |                                                 | 11,894    |   |                  |   | 8,704   |   |  |   | 11,594    |  
|                                                                                                                 |  |                                                 |           |   |                  |   |         |   |  |   |           |  
|Total Liabilities                                                                                                |  |                                                 | 1,002,332 |   |                  |   | 812,848 |   |  |   | 999,770   |  
|                                                                                                                 |  |                                                 |           |   |                  |   |         |   |  |   |           |  
|Shareholders 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 - 6,387,146, 5,601,053 and 6,370,486 |  |                                                 | 15,968    |   |                  |   | 14,003  |   |  |   | 15,926    |  
|Surplus                                                                                                          |  |                                                 | 23,870    |   |                  |   | 10,450  |   |  |   | 23,542    |  
|Retained earnings                                                                                                |  |                                                 | 64,430    |   |                  |   | 57,849  |   |  |   | 62,711    |  
|Accumulated other comprehensive income (loss)                                                                    |  |                                                 | (332      | ) |                  |   | 619     |   |  |   | 136       |  
|                                                                                                                 |  |                                                 |           |   |                  |   |         |   |  |   |           |  
|Total Shareholders Equity                                                                                       |  |                                                 | 103,936   |   |                  |   | 82,921  |   |  |   | 102,315   |  
|                                                                                                                 |  |                                                 |           |   |                  |   |         |   |  |   |           |  
|Total Liabilities and Shareholders Equity                                                                       |  | $                                               | 1,106,268 |   |                  | $ | 895,769 |   |  | $ | 1,102,085 |  
|                                                                                                                 |  |                                                 |           |   |                  |   |         |   |  |   |           |  

See accompanying notes to consolidated financial statements.



2



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FNB United Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME (unaudited)



|                                                    |  |                                                |           |      |   |           |  
|--------------------------------------------------- |  | ---------------------------------------------- | --------- | ---- | - | --------- | -
|                                                    |  | Three Months EndedMarch 31,                    |          
|                                                    |  | 2006                                           |           | 2005 |  
|                                                    |  | (in thousands, except shareand per share data) |          
|Interest Income                                     |  |                                                |           |      |   |           |  
|Interest and fees on loans                          |  | $                                              | 15,206    |      | $ | 10,554    |  
|Interest and dividends on investment securities:    |  |                                                |           |      |   |           |  
|Taxable income                                      |  |                                                | 1,296     |      |   | 806       |  
|Non-taxable income                                  |  |                                                | 460       |      |   | 422       |  
|Other interest income                               |  |                                                | 164       |      |   | 32        |  
|                                                    |  |                                                |           |      |   |           |  
|Total interest income                               |  |                                                | 17,126    |      |   | 11,814    |  
|                                                    |  |                                                |           |      |   |           |  
|Interest Expense                                    |  |                                                |           |      |   |           |  
|Deposits                                            |  |                                                | 5,503     |      |   | 3,030     |  
|Retail repurchase agreements                        |  |                                                | 164       |      |   | 79        |  
|Federal Home Loan Bank advances                     |  |                                                | 859       |      |   | 644       |  
|Federal funds purchased                             |  |                                                | 8         |      |   | 5         |  
|Other borrowed funds                                |  |                                                | 511       |      |   | 237       |  
|                                                    |  |                                                |           |      |   |           |  
|Total interest expense                              |  |                                                | 7,045     |      |   | 3,995     |  
|                                                    |  |                                                |           |      |   |           |  
|Net Interest Income                                 |  |                                                | 10,081    |      |   | 7,819     |  
|Provision for loan losses                           |  |                                                | 77        |      |   | 370       |  
|                                                    |  |                                                |           |      |   |           |  
|Net Interest Income After Provision for Loan Losses |  |                                                | 10,004    |      |   | 7,449     |  
|                                                    |  |                                                |           |      |   |           |  
|Noninterest Income                                  |  |                                                |           |      |   |           |  
|Service charges on deposit accounts                 |  |                                                | 1,417     |      |   | 1,282     |  
|Mortgage loan sales                                 |  |                                                | 963       |      |   | 877       |  
|Trust and investment services                       |  |                                                | 293       |      |   | 380       |  
|Cardholder and merchant services income             |  |                                                | 369       |      |   | 286       |  
|Other service charges, commissions and fees         |  |                                                | 250       |      |   | 241       |  
|Bank owned life insurance                           |  |                                                | 159       |      |   | 144       |  
|Other income (charge)                               |  |                                                | 59        |      |   | (48       | )
|                                                    |  |                                                |           |      |   |           |  
|Total noninterest income                            |  |                                                | 3,510     |      |   | 3,162     |  
|                                                    |  |                                                |           |      |   |           |  
|Noninterest Expense                                 |  |                                                |           |      |   |           |  
|Personnel expense                                   |  |                                                | 5,271     |      |   | 4,397     |  
|Net occupancy expense                               |  |                                                | 601       |      |   | 407       |  
|Furniture and equipment expense                     |  |                                                | 645       |      |   | 515       |  
|Data processing services                            |  |                                                | 593       |      |   | 312       |  
|Other expense                                       |  |                                                | 2,305     |      |   | 1,591     |  
|                                                    |  |                                                |           |      |   |           |  
|Total noninterest expense                           |  |                                                | 9,415     |      |   | 7,222     |  
|                                                    |  |                                                |           |      |   |           |  
|Income Before Income Taxes                          |  |                                                | 4,099     |      |   | 3,389     |  
|Income taxes                                        |  |                                                | 1,422     |      |   | 1,083     |  
|                                                    |  |                                                |           |      |   |           |  
|Net Income                                          |  | $                                              | 2,677     |      | $ | 2,306     |  
|                                                    |  |                                                |           |      |   |           |  
|Net income per common share:                        |  |                                                |           |      |   |           |  
|Basic                                               |  | $                                              | .42       |      | $ | .41       |  
|Diluted                                             |  |                                                | .42       |      |   | .40       |  
|                                                    |  |                                                |           |      |   |           |  
|Weighted average number of shares outstanding:      |  |                                                |           |      |   |           |  
|Basic                                               |  |                                                | 6,380,077 |      |   | 5,606,730 |  
|Diluted                                             |  |                                                | 6,445,107 |      |   | 5,755,682 |  
|                                                    |  |                                                |           |      |   |           |  

See accompanying notes to consolidated financial statements.



3



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FNB United Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME

Three Months Ended March 31, 2006 and March 31, 2005 (unaudited)



|                                                                |  |                                                 |   |  |         |        |   |                  |   |        |                                            |  |   |        |   |  |   |       |   |  |   |         |  
|--------------------------------------------------------------- |  | ----------------------------------------------- | - |  | ------- | ------ | - | ---------------- | - | ------ | ------------------------------------------ |  | - | ------ | - |  | - | ----- | - |  | - | ------- | -
|                                                                |  | Common Stock                                    |   |  | Surplus |        |   | RetainedEarnings |   |        | AccumulatedOtherComprehensiveIncome (Loss) |  |   | Total  |  
|                                                                |  | Shares                                          |   |  | Amount  |        |   |                  |   |       
|                                                                |  | (in thousands, except share and per share data) |  
|Balance, December 31, 2004                                      |  | 5,605,102                                       |   |  | $       | 14,013 |   |                  | $ | 10,643 |                                            |  | $ | 56,383 |   |  | $ | 1,108 |   |  | $ | 82,147  |  
|Comprehensive income:                                           |  |                                                 |   |  |         |        |   |                  |   |        |                                            |  |   |        |   |  |   |       |   |  |   |         |  
|Net income                                                      |  |                                                |   |  |         |       |   |                  |   |       |                                            |  |   | 2,306  |   |  |   |      |   |  |   | 2,306   |  
|Other comprehensive income:                                     |  |                                                 |   |  |         |        |   |                  |   |        |                                            |  |   |        |   |  |   |       |   |  |   |         |  
|Unrealized securities losses, net of income tax benefit of $307 |  |                                                |   |  |         |       |   |                  |   |       |                                            |  |   |       |   |  |   | (489  | ) |  |   | (489    | )
|                                                                |  |                                                 |   |  |         |        |   |                  |   |        |                                            |  |   |        |   |  |   |       |   |  |   |         |  
|Total comprehensive income                                      |  |                                                |   |  |         |       |   |                  |   |       |                                            |  |   |       |   |  |   |      |   |  |   | 1,817   |  
|                                                                |  |                                                 |   |  |         |        |   |                  |   |        |                                            |  |   |        |   |  |   |       |   |  |   |         |  
|Cash dividends declared, $.15 per share                         |  |                                                |   |  |         |       |   |                  |   |       |                                            |  |   | (840   | ) |  |   |      |   |  |   | (840    | )
|Common stock issued through:                                    |  |                                                 |   |  |         |        |   |                  |   |        |                                            |  |   |        |   |  |   |       |   |  |   |         |  
|Stock option plan                                               |  | 15,751                                          |   |  |         | 39     |   |                  |   | 157    |                                            |  |   |       |   |  |   |      |   |  |   | 196     |  
|Common stock repurchased                                        |  | (19,800                                         | ) |  |         | (49    | ) |                  |   | (350   | )                                          |  |   |       |   |  |   |      |   |  |   | (399    | )
|                                                                |  |                                                 |   |  |         |        |   |                  |   |        |                                            |  |   |        |   |  |   |       |   |  |   |         |  
|Balance, March 31, 2005                                         |  | 5,601,053                                       |   |  | $       | 14,003 |   |                  | $ | 10,450 |                                            |  | $ | 57,849 |   |  | $ | 619   |   |  | $ | 82,921  |  
|                                                                |  |                                                 |   |  |         |        |   |                  |   |        |                                            |  |   |        |   |  |   |       |   |  |   |         |  
|Balance, December 31, 2005                                      |  | 6,370,486                                       |   |  | $       | 15,926 |   |                  | $ | 23,542 |                                            |  | $ | 62,711 |   |  | $ | 136   |   |  | $ | 102,315 |  
|Comprehensive income:                                           |  |                                                 |   |  |         |        |   |                  |   |        |                                            |  |   |        |   |  |   |       |   |  |   |         |  
|Net income                                                      |  |                                                |   |  |         |       |   |                  |   |       |                                            |  |   | 2,677  |   |  |   |      |   |  |   | 2,677   |  
|Other comprehensive income:                                     |  |                                                 |   |  |         |        |   |                  |   |        |                                            |  |   |        |   |  |   |       |   |  |   |         |  
|Unrealized securities losses, net of income tax benefit of $306 |  |                                                |   |  |         |       |   |                  |   |       |                                            |  |   |       |   |  |   | (468  | ) |  |   | (468    | )
|                                                                |  |                                                 |   |  |         |        |   |                  |   |        |                                            |  |   |        |   |  |   |       |   |  |   |         |  
|Total comprehensive income                                      |  |                                                |   |  |         |       |   |                  |   |       |                                            |  |   |       |   |  |   |      |   |  |   | 2,209   |  
|                                                                |  |                                                 |   |  |         |        |   |                  |   |        |                                            |  |   |        |   |  |   |       |   |  |   |         |  
|Cash dividends declared, $.15 per share                         |  |                                                |   |  |         |       |   |                  |   |       |                                            |  |   | (958   | ) |  |   |      |   |  |   | (958    | )
|Stock option plan:                                              |  |                                                 |   |  |         |        |   |                  |   |        |                                            |  |   |        |   |  |   |       |   |  |   |         |  
|Proceeds from options exercised                                 |  | 16,660                                          |   |  |         | 42     |   |                  |   | 179    |                                            |  |   |       |   |  |   |      |   |  |   | 221     |  
|Compensation expense recognized                                 |  |                                                |   |  |         |       |   |                  |   | 119    |                                            |  |   |       |   |  |   |      |   |  |   | 119     |  
|Net tax effect related to stock option exercises                |  |                                                |   |  |         |       |   |                  |   | 30     |                                            |  |   |       |   |  |   |      |   |  |   | 30      |  
|                                                                |  |                                                 |   |  |         |        |   |                  |   |        |                                            |  |   |        |   |  |   |       |   |  |   |         |  
|Balance, March 31, 2006                                         |  | 6,387,146                                       |   |  | $       | 15,968 |   |                  | $ | 23,870 |                                            |  | $ | 64,430 |   |  | $ | (332  | ) |  | $ | 103,936 |  
|                                                                |  |                                                 |   |  |         |        |   |                  |   |        |                                            |  |   |        |   |  |   |       |   |  |   |         |  

See accompanying notes to consolidated financial statements.



4



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FNB United Corp. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)



|                                                                              |  |                             |        |   |      |   |         |  
|----------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                                                                              |  | Three Months EndedMarch 31, |       
|                                                                              |  | 2006                        |        |   | 2005 |  
|                                                                              |  | (in thousands)              |       
|Operating Activities:                                                         |  |                             |        |   |      |   |         |  
|Net income                                                                    |  | $                           | 2,677  |   |      | $ | 2,306   |  
|Adjustments to reconcile net income to net cash used in operating activities: |  |                             |        |   |      |   |         |  
|Depreciation and amortization of premises and equipment                       |  |                             | 523    |   |      |   | 406     |  
|Provision for loan losses                                                     |  |                             | 77     |   |      |   | 370     |  
|Deferred income taxes (benefit)                                               |  |                             | 153    |   |      |   | (226    | )
|Deferred loan fees and costs, net                                             |  |                             | (51    | ) |      |   | (25     | )
|Premium amortization and discount accretion of investment securities, net     |  |                             | 74     |   |      |   | 111     |  
|Amortization of intangibles                                                   |  |                             | 41     |   |      |   | 13      |  
|Stock option compensation expense                                             |  |                             | 119    |   |      |   |        |  
|Income from bank owned life insurance                                         |  |                             | (159   | ) |      |   | (144    | )
|Net increase in loans held for sale                                           |  |                             | (3,206 | ) |      |   | (14,526 | )
|Decrease (increase) in other assets                                           |  |                             | 168    |   |      |   | (126    | )
|Increase (decrease) in other liabilities                                      |  |                             | (548   | ) |      |   | 996     |  
|                                                                              |  |                             |        |   |      |   |         |  
|Net Cash Used in Operating Activities                                         |  |                             | (132   | ) |      |   | (10,845 | )
|                                                                              |  |                             |        |   |      |   |         |  
|Investing Activities:                                                         |  |                             |        |   |      |   |         |  
|Available-for-sale securities:                                                |  |                             |        |   |      |   |         |  
|Proceeds from maturities and calls                                            |  |                             | 1,098  |   |      |   | 699     |  
|Purchases                                                                     |  |                             | (5,657 | ) |      |   | (4,462  | )
|Held-to-maturity securities:                                                  |  |                             |        |   |      |   |         |  
|Proceeds from maturities and calls                                            |  |                             | 5,661  |   |      |   | 2,499   |  
|Purchases                                                                     |  |                             | (425   | ) |      |   | (401    | )
|Net increase in loans held for investment                                     |  |                             | (5,032 | ) |      |   | (12,159 | )
|Purchases of premises and equipment                                           |  |                             | (1,275 | ) |      |   | (1,203  | )
|Purchases of SBIC investments                                                 |  |                             | (750   | ) |      |   | (250    | )
|Other, net                                                                    |  |                             | (83    | ) |      |   | 91      |  
|                                                                              |  |                             |        |   |      |   |         |  
|Net Cash Used in Investing Activities                                         |  |                             | (6,463 | ) |      |   | (15,186 | )
|                                                                              |  |                             |        |   |      |   |         |  
|Financing Activities:                                                         |  |                             |        |   |      |   |         |  
|Net increase in deposits                                                      |  |                             | 8,973  |   |      |   | 25,470  |  
|Increase (decrease) in retail repurchase agreements                           |  |                             | (5,696 | ) |      |   | 1,208   |  
|Decrease in Federal Home Loan Bank advances                                   |  |                             | (1,500 | ) |      |   | (500    | )
|Decrease in federal funds purchased                                           |  |                             |       |   |      |   | (8,175  | )
|Increase in other borrowed funds                                              |  |                             | 555    |   |      |   | 13,120  |  
|Proceeds from exercise of stock options                                       |  |                             | 221    |   |      |   | 196     |  
|Tax benefit from exercise of stock options                                    |  |                             | 30     |   |      |   |        |  
|Common stock repurchased                                                      |  |                             |       |   |      |   | (399    | )
|Cash dividends paid                                                           |  |                             | (1,080 | ) |      |   | (841    | )
|                                                                              |  |                             |        |   |      |   |         |  
|Net Cash Provided by Financing Activities                                     |  |                             | 1,503  |   |      |   | 30,079  |  
|                                                                              |  |                             |        |   |      |   |         |  
|Net Increase (Decrease) in Cash and Cash Equivalents                          |  |                             | (5,092 | ) |      |   | 4,048   |  
|Cash and cash equivalents at beginning of period                              |  |                             | 44,879 |   |      |   | 20,509  |  
|                                                                              |  |                             |        |   |      |   |         |  
|Cash and Cash Equivalents at End of Period                                    |  | $                           | 39,787 |   |      | $ | 24,557  |  
|                                                                              |  |                             |        |   |      |   |         |  
|Supplemental disclosure of cash flow information:                             |  |                             |        |   |      |   |         |  
|Cash paid during the period for:                                              |  |                             |        |   |      |   |         |  
|Interest                                                                      |  | $                           | 6,987  |   |      | $ | 3,769   |  
|Income taxes                                                                  |  |                             | 285    |   |      |   | 396     |  
|Noncash transactions:                                                         |  |                             |        |   |      |   |         |  
|Foreclosed loans transferred to other real estate                             |  |                             | 42     |   |      |   | 532     |  
|Unrealized securities losses, net of income tax benefit                       |  |                             | (468   | ) |      |   | (489    | )

See accompanying notes to consolidated financial statements.



5



---

FNB United Corp. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

FNB United Corp.(FNB
United), formerly known as FNB Corp., is a bank holding company whose wholly owned subsidiaries are the First National Bank and Trust Company (First National Bank) and Dover Mortgage Company (Dover). First National Bank
has two wholly owned subsidiaries, First National Investor Services, Inc. and Premier Investment Services, Inc. Through its subsidiaries, FNB United offers a complete line of consumer, mortgage and business banking services, including loan, deposit,
cash management, investment management and trust services, to individual and business customers. First National Bank has offices in Alamance, Chatham, Guilford, Montgomery, Moore, Orange, Randolph, Richmond, Rowan and Scotland counties in North
Carolina. Dover Mortgage Company operates mortgage production offices in North Carolina at Charlotte, Carolina Beach, Goldsboro, Greensboro, Greenville, Lake Norman, Leland, Raleigh, Waxhaw and Wilmington.

The accompanying consolidated financial statements, prepared without audit, include the accounts of FNB United and its subsidiaries (collectively the
Corporation). All significant intercompany balances and transactions have been eliminated.

The preparation of the consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Operating results for the three
month period ended March 31, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2006.

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



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

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



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

United Financial, Inc.

On November 4, 2005, the Corporation completed a merger for the acquisition of United Financial, Inc. (United),
holding company for Alamance Bank, headquartered in Graham, North Carolina. At



6



---

the date of merger, Alamance Bank operated three offices and, based on estimated fair values, had
$163,858,000 in total assets, $96,624,000 in loans and $112,961,000 in deposits. On February 1, 2006, Alamance Bank was merged into First National Bank.

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

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

Integrity Financial Corporation

On September 18, 2005, the Corporation entered into a definitive merger agreement to
acquire Integrity Financial Corporation (Integrity), headquartered in Hickory, North Carolina and the holding company for First Gaston Bank of North Carolina. Integritys second subsidiary bank, Catawba Valley Bank, was merged into
First Gaston Bank effective January 5, 2006. On March 15, 2006, the shareholders of FNB United and Integrity voted to approve the merger. The merger of the holding companies was effected on April 28, 2006 through the conversion of
each share of Integrity stock into 0.8743 shares of FNB United common stock and $5.20 in cash. The merger will be accounted for using the purchase method of accounting for business combinations. FNB Corp. changed its name to FNB United Corp. in the
merger. First Gaston Bank is expected to be merged with and into First National Bank in the third quarter of 2006. At December 31, 2005, Integrity operated seventeen offices through First Gaston Bank and Catawba Valley Bank and had
approximately $662,000,000 in total assets, $551,000,000 in deposits and $67,000,000 in shareholders equity. The goodwill and core deposit intangible expected to result from the merger are approximately $76,000,000 and $8,000,000,
respectively.



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

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



|                                                                             |  |                             |  |          
|---------------------------------------------------------------------------- |  | --------------------------- |  | ---------
|                                                                             |  | Three Months EndedMarch 31,
|                                                                             |  | 2006                        |  | 2005     
|Basic EPS denominator - Weighted average number of common shares outstanding |  | 6,380,077                   |  | 5,606,730
|Dilutive share effect arising from assumed exercise of stock options         |  | 65,030                      |  | 148,952  
|                                                                             |  |                             |  |          
|Diluted EPS denominator                                                      |  | 6,445,107                   |  | 5,755,682
|                                                                             |  |                             |  |          



7



---

For the three months ended March 31, 2006 and 2005, there were 152,718 and 161,262 stock options,
respectively, that were antidilutive since the exercise price exceeded the average market price. These common stock equivalents were omitted from the calculations of diluted EPS for their respective periods.



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

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

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

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

As of March 31, 2006, The Corporation has three share-based compensation plans in effect. The compensation cost charged against income for those plans for the three months ended March 31, 2006 was $119,000
and the related deferred tax benefit was $7,000.

The Corporation adopted stock compensation plans in 1993 and 2003 that allow for the
granting of incentive and nonqualified stock options to key employees and directors. The 2003 stock compensation plan also allows for the granting of restricted stock. Under terms of both the 1993 and



8



---

2003 plans, options are granted at prices equal to the fair market value of the common stock on the date
of grant. Options become exercisable after one year in equal, cumulative installments over a five-year period. No option shall expire later than ten years from the date of grant. No further grants can be made under the 1993 stock compensation plan
after March 10, 2003. Based on the stock options outstanding at March 31, 2006, a maximum of 394,795 shares of common stock has been reserved for issuance under the 1993 stock compensation plan. A maximum of 420,000 shares of common stock
has been reserved for issuance under the 2003 stock compensation plan. At March 31, 2006, there were 105,700 shares available under the 2003 plan for the granting of additional options.

The Corporation assumed a stock compensation plan in its merger acquisition of Carolina Fincorp in 2000. One grant of qualified and nonqualified stock
options was made under the plan in 1999 to key employees and directors at a price equal to fair market value on the date of grant. No additional grants will be made under the plan. Based on the stock options outstanding at March 31, 2006, a
maximum of 41,008 shares of common stock has been reserved for issuance under the stock compensation plan.

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

There were no options granted during the three months ended March 31, 2006 and the three months ended March 31, 2005.

The following is a summary of stock option activity for the three months ended March 31, 2006:



|                                      |  |         |   |  |                              |       |                                        |   |      
|------------------------------------- |  | ------- | - |  | ---------------------------- | ----- | -------------------------------------- | - | -----
|                                      |  | Shares  |   |  | WeightedAverageExercisePrice |       | AggregateIntrinsicValue (in thousands)
|Outstanding at December 31, 2005      |  | 768,963 |   |  | $                            | 16.54 |                                        |   |      
|Granted                               |  |        |   |  |                              |      |                                        |   |      
|Exercised                             |  | (16,660 | ) |  |                              | 13.28 |                                        |   |      
|Forfeited                             |  | (2,200  | ) |  |                              | 19.72 |                                        |   |      
|                                      |  |         |   |  |                              |       |                                        |   |      
|Outstanding at March 31, 2006         |  | 750,103 |   |  |                              | 16.61 |                                        | $ | 2,858
|                                      |  |         |   |  |                              |       |                                        |   |      
|Options exercisable at March 31, 2006 |  | 467,503 |   |  |                              | 14.77 |                                        |   | 2,641
|                                      |  |         |   |  |                              |       |                                        |   |      



9



---

At March 31, 2006, information concerning stock options outstanding and exercisable is as follows:



|                         |  |                     |  |                                                 |  |                              |       |                   |         |                              |   |      
|------------------------ |  | ------------------- |  | ----------------------------------------------- |  | ---------------------------- | ----- | ----------------- | ------- | ---------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                            
|Range of Exercise Prices |  | Shares              |  | WeightedAverageRemainingContractualLife (Years) |  | WeightedAverageExercisePrice |       | NumberExercisable |         | WeightedAverageExercisePrice
|$ 9.82 - 11.75           |  | 200,078             |  | 4.33                                            |  | $                            | 11.35 |                   | 200,078 |                              | $ | 11.35
|14.00 - 14.13            |  | 85,325              |  | 2.39                                            |  |                              | 14.07 |                   | 85,325  |                              |   | 14.07
|15.00 - 19.82            |  | 311,200             |  | 7.55                                            |  |                              | 18.00 |                   | 119,000 |                              |   | 17.10
|20.00 - 27.00            |  | 153,500             |  | 7.62                                            |  |                              | 22.03 |                   | 63,100  |                              |   | 22.14
|                         |  |                     |  |                                                 |  |                              |       |                   |         |                              |   |      
|                         |  | 750,103             |  | 6.12                                            |  |                              | 16.61 |                   | 467,503 |                              |   | 14.77
|                         |  |                     |  |                                                 |  |                              |       |                   |         |                              |   |      

For the three months ended March 31, 2006 and 2005, the intrinsic value of options exercised
was $43,000 and $121,000, respectively, and the grant-date fair value of options vested was $3,000 and $3,000, respectively.

The cash
proceeds from option exercises for the three months ended March 31, 2006 amounted to $221,000 and the related tax benefit recorded in shareholders equity for the tax deduction realized from these option exercises amounted to $30,000.

As of March 31, 2006, there was $1,340,000 of total unrecognized compensation cost related to non-vested share-based compensation
arrangements granted under all of the Corporations stock benefit plans. That cost is expected to be recognized over a weighted-average period of 3.1 years.

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

The adoption of SFAS No. 123R and its fair value compensation
cost recognition provisions are different from the non-recognition provisions under SFAS No. 123 and the intrinsic value method for compensation cost allowed APB No. 25. The effect (increase/(decrease)) of the adoption of SFAS
No. 123R for the three months ended March 31, 2006 (in thousands, except per share data) is as follows:



|                                           |  |   |      |  
|------------------------------------------ |  | - | ---- | -
|Income before income taxes                 |  | $ | (119 | )
|Net income                                 |  |   | (112 | )
|                                           | 
|Cash flow from operating activities        |  |   | (30  | )
|Cash flow provided by financing activities |  |   | 30   |  
|                                           | 
|Net income per share:                      |  |   |      |  
|Basic                                      |  |   | (.02 | )
|Diluted                                    |  |   | (.01 | )



10



---

The following illustrates the effect on net available to common stockholders if the Corporation had
applied the fair value recognition provisions of SFAS No. 123 to the results for the three months ended March 31, 2005 (in thousands, except per share data):



|                                                                                                                   |  |   |       |  
|------------------------------------------------------------------------------------------------------------------ |  | - | ----- | -
|Net income, as reported                                                                                            |  | $ | 2,306 |  
|Add: Stock-based employee compensation expense included in reported net income, net of related income tax effects  |  |   |      |  
|Less: Stock-based compensation determined under fair value based method of all awards, net of related income taxes |  |   | (98   | )
|                                                                                                                   |  |   |       |  
|Net income, pro forma                                                                                              |  | $ | 2,208 |  
|                                                                                                                   |  |   |       |  
|Net income per share:                                                                                              |  |   |       |  
|Basic:                                                                                                             |  |   |       |  
|As reported                                                                                                        |  | $ | .41   |  
|Pro forma                                                                                                          |  |   | .39   |  
|                                                                                                                   | 
|Diluted:                                                                                                           |  |   |       |  
|As reported                                                                                                        |  |   | .40   |  
|Pro forma                                                                                                          |  |   | .38   |  



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

Loans as presented are reduced by net
deferred loan fees of $889,000, $965,000 and $939,000 at March 31, 2006, March 31, 2005 and December 31, 2005, respectively.



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

Changes in the
allowance for loan losses were as follows:



|                               |  |                             |       |      |   |      
|------------------------------ |  | --------------------------- | ----- | ---- | - | -----
|                               |  | Three Months EndedMarch 31,
|                               |  | 2006                        |       | 2005
|                               |  | (in thousands)             
|Balance at beginning of period |  | $                           | 9,945 |      | $ | 7,293
|Charge-offs                    |  |                             | 549   |      |   | 196  
|Recoveries                     |  |                             | 487   |      |   | 89   
|                               |  |                             |       |      |   |      
|Net loan charge-offs           |  |                             | 62    |      |   | 107  
|Provision for loan losses      |  |                             | 77    |      |   | 370  
|                               |  |                             |       |      |   |      
|Balance at end of period       |  | $                           | 9,960 |      | $ | 7,556
|                               |  |                             |       |      |   |      



11



---

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

Significant components of other expense were as follows:



|                                  |  |                             |     |      |   |    
|--------------------------------- |  | --------------------------- | --- | ---- | - | ---
|                                  |  | Three Months EndedMarch 31,
|                                  |  | 2005                        |     | 2004
|                                  |  | (in thousands)             
|Stationery, printing and supplies |  | $                           | 279 |      | $ | 180
|Professional fees                 |  |                             | 206 |      |   | 118
|Communications                    |  |                             | 185 |      |   | 132
|Advertising and marketing         |  |                             | 180 |      |   | 201



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

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



|                                         |  |                                   |      |   |                                        |   |                                            |  |   |   
|---------------------------------------- |  | --------------------------------- | ---- | - | -------------------------------------- | - | ------------------------------------------ |  | - | --
|                                         |  | Three Months Ended March 31, 2006
|                                         |  | Pension Plan                      |      |   | Supplemental Executive Retirement
Plan |   | Other Postretirement Defined
Benefit Plans
|                                         |  | (in thousands)                   
|Service cost                             |  | $                                 | 201  |   |                                        | $ | 25                                         |  | $ | 22
|Interest cost                            |  |                                   | 163  |   |                                        |   | 23                                         |  |   | 22
|Expected return on plan assets           |  |                                   | (224 | ) |                                        |   |                                           |  |   |  
|Amortization of prior service cost       |  |                                   | 7    |   |                                        |   | 12                                         |  |   |  
|Amortization of transition obligation    |  |                                   |     |   |                                        |   |                                           |  |   | 5 
|Recognized net actuarial loss            |  |                                   | 48   |   |                                        |   | 8                                          |  |   | 3 
|                                         |  |                                   |      |   |                                        |   |                                            |  |   |   
|Net periodic postretirement benefit cost |  | $                                 | 195  |   |                                        | $ | 68                                         |  | $ | 52
|                                         |  |                                   |      |   |                                        |   |                                            |  |   |   



12



---

|                                         |  |                                   |      |   |                                     |   |                                         |  |   |   
|---------------------------------------- |  | --------------------------------- | ---- | - | ----------------------------------- | - | --------------------------------------- |  | - | --
|                                         |  | Three Months Ended March 31, 2005
|                                         |  | PensionPlan                       |      |   | SupplementalExecutiveRetirementPlan |   | OtherPostretirementDefinedBenefit Plans
|                                         |  | (in thousands)                   
|Service cost                             |  | $                                 | 159  |   |                                     | $ | 17                                      |  | $ | 17
|Interest cost                            |  |                                   | 156  |   |                                     |   | 19                                      |  |   | 21
|Expected return on plan assets           |  |                                   | (207 | ) |                                     |   |                                        |  |   |  
|Amortization of prior service cost       |  |                                   | 7    |   |                                     |   | 12                                      |  |   | 2 
|Amortization of transition obligation    |  |                                   |     |   |                                     |   |                                        |  |   | 5 
|Recognized net actuarial loss            |  |                                   | 38   |   |                                     |   | 5                                       |  |   | 3 
|                                         |  |                                   |      |   |                                     |   |                                         |  |   |   
|Net periodic postretirement benefit cost |  | $                                 | 153  |   |                                     | $ | 53                                      |  | $ | 48
|                                         |  |                                   |      |   |                                     |   |                                         |  |   |   

Due to the significant contributions $530,000 and $2,175,000 made in 2005 and 2004, respectively,
the Corporation does not expect to contribute any funds to its pension plan in 2006. The other postretirement benefit plans are unfunded plans; and consequently, there are no plan assets or cash contribution requirements other than for the direct
payment of benefits.



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

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

In connection with its asset/liability management objectives, the Corporation in 2004 entered into an interest rate swap on a $7,000,000 Federal Home Loan Bank (FHLB) advance that converts the fixed rate cash flow
exposure on the FHLB advance to a variable rate cash flow. As structured, the pay-variable, receive-fixed swap is evaluated as being a fair value hedge with no ineffectiveness; and, consequently, the difference in cash flows in each period between
the variable rate interest payments that the Corporation makes and the fixed rate interest payments received is currently reported in earnings.

For the three months ended March 31, 2006 and 2005, the interest rate swap resulted in a net increase of $21,000 and a net reduction of $13,000, respectively, in the interest expense that would otherwise have been reported for the FHLB
advance. The fair value of the swap at March 31, 2006 was recorded on the consolidated balance sheet as a liability in the amount of $345,000, offset by a valuation adjustment in the same amount to the FHLB advance.

The Corporation has also identified the following derivative instruments which were recorded on the consolidated balance sheet at March 31, 2006:
commitments to originate fixed rate residential mortgage loans and forward sales commitments.



13



---

Dover Mortgage Company originates certain fixed rate residential mortgage loans with the intention of
selling these loans. Between the time that Dover enters into an interest rate lock or a commitment to originate a fixed rate residential mortgage loan with a potential borrower and the time the closed loan is sold, the Corporation is subject to
variability in market prices related to these commitments. The Corporation believes that it is prudent to limit the variability of expected proceeds from the future sales of these loans by entering into forward sales commitments and commitments to
deliver loans into a mortgage-backed security. The commitments to originate fixed rate residential mortgage loans and the forward sales commitments are freestanding derivative instruments. They do not qualify for hedge accounting treatment so their
fair value adjustments are recorded through the income statement in income from mortgage loan sales. The commitments to originate fixed rate residential mortgage loans totaled $32,560,000 at March 31, 2006, and the related forward sales
commitments totaled $32,560,000. Loans held for sale by Dover Mortgage Company totaled $19,572,000 at March 31, 2006, and the related forward sales commitments totaled $19,572,000.

First National Bank had loans held for sale of $1,250,000 at March 31, 2006. Binding commitments of First National Bank for the origination of
mortgage loans intended to be held for sale at March 31, 2006 were not material.



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

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

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R (SFAS No. 123R), Share-Based
Payment, which is a revision of FASB Statement No. 123 Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25 Accounting for Stock Issued to Employees. SFAS No. 123R requires companies
to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees over the period during which an employee is required to provide service in exchange for the award (presumptively
the vesting period). SFAS No. 123R sets accounting requirements for share-based compensation to employees, including employee-stock purchase plans (ESPPs). Awards to most nonemployee directors will be accounted for as
employee awards. This Statement was to be effective for public companies that do not file as small business issuers as of the beginning of interim or annual reporting periods beginning after June 15, 2005. In April 2005, the Securities and
Exchange Commission (SEC) issued Release No. 2005-57, which defers the effective date of SFAS No. 123R for many registrants. Registrants that do not file as small business users must adopt SFAS No. 123R as of the beginning
of their first annual period beginning after June 15, 2005. The Corporation adopted the provisions of SFAS No. 123R on January 1, 2006 as discussed in Note 4 above.



14



---

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

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



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

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



|                                                    |  |                                   |           |                      |   |        |       |  |   |       |   |  |   |          
|--------------------------------------------------- |  | --------------------------------- | --------- | -------------------- | - | ------ | ----- |  | - | ----- | - |  | - | ---------
|                                                    |  | Three Months Ended March 31, 2006
|                                                    |  | FirstNationalBank                 |           | DoverMortgageCompany |   |        | Other |  |   | Total
|                                                    |  | (in thousands)                   
|Interest income                                     |  | $                                 | 16,935    |                      | $ | 191    |       |  | $ |      |   |  | $ | 17,126   
|Interest expense                                    |  |                                   | 6,570     |                      |   | 169    |       |  |   | 306   |   |  |   | 7,045    
|                                                    |  |                                   |           |                      |   |        |       |  |   |       |   |  |   |          
|Net interest income                                 |  |                                   | 10,365    |                      |   | 22     |       |  |   | (306  | ) |  |   | 10,081   
|Provision for loan losses                           |  |                                   | 77        |                      |   |       |       |  |   |      |   |  |   | 77       
|                                                    |  |                                   |           |                      |   |        |       |  |   |       |   |  |   |          
|Net interest income after provision for loan losses |  |                                   | 10,288    |                      |   | 22     |       |  |   | (306  | ) |  |   | 10,004   
|Noninterest income                                  |  |                                   | 2,621     |                      |   | 831    |       |  |   | 58    |   |  |   | 3,510    
|Noninterest expense                                 |  |                                   | 8,501     |                      |   | 846    |       |  |   | 68    |   |  |   | 9,415    
|                                                    |  |                                   |           |                      |   |        |       |  |   |       |   |  |   |          
|Income (loss) before income taxes                   |  |                                   | 4,408     |                      |   | 7      |       |  |   | (316  | ) |  |   | 4,099    
|Income taxes (benefit)                              |  |                                   | 1,523     |                      |   | 9      |       |  |   | (110  | ) |  |   | 1,422    
|                                                    |  |                                   |           |                      |   |        |       |  |   |       |   |  |   |          
|Net income (loss)                                   |  | $                                 | 2,885     |                      | $ | (2     | )     |  | $ | (206  | ) |  | $ | 2,677    
|                                                    |  |                                   |           |                      |   |        |       |  |   |       |   |  |   |          
|Total assets                                        |  | $                                 | 1,081,019 |                      | $ | 25,008 |       |  | $ | 241   |   |  | $ | 1,106,268
|Net loans                                           |  |                                   | 791,178   |                      |   | 19,572 |       |  |   |      |   |  |   | 810,750  
|Goodwill                                            |  |                                   | 27,605    |                      |   | 3,784  |       |  |   |      |   |  |   | 31,389   



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|                                                    |  |                                   |         |                      |   |        |       |  |   |       |   |  |   |        
|--------------------------------------------------- |  | --------------------------------- | ------- | -------------------- | - | ------ | ----- |  | - | ----- | - |  | - | -------
|                                                    |  | Three Months Ended March 31, 2005
|                                                    |  | FirstNationalBank                 |         | DoverMortgageCompany |   |        | Other |  |   | Total
|                                                    |  | (in thousands)                   
|Interest income                                     |  | $                                 | 11,652  |                      | $ | 162    |       |  | $ |      |   |  | $ | 11,814 
|Interest expense                                    |  |                                   | 3,758   |                      |   | 118    |       |  |   | 119   |   |  |   | 3,995  
|                                                    |  |                                   |         |                      |   |        |       |  |   |       |   |  |   |        
|Net interest income                                 |  |                                   | 7,894   |                      |   | 44     |       |  |   | (119  | ) |  |   | 7,819  
|Provision for loan losses                           |  |                                   | 370     |                      |   |       |       |  |   |      |   |  |   | 370    
|                                                    |  |                                   |         |                      |   |        |       |  |   |       |   |  |   |        
|Net interest income after provision for loan losses |  |                                   | 7,524   |                      |   | 44     |       |  |   | (119  | ) |  |   | 7,449  
|Noninterest income                                  |  |                                   | 2,470   |                      |   | 729    |       |  |   | (37   | ) |  |   | 3,162  
|Noninterest expense                                 |  |                                   | 6,306   |                      |   | 928    |       |  |   | (12   | ) |  |   | 7,222  
|                                                    |  |                                   |         |                      |   |        |       |  |   |       |   |  |   |        
|Income (loss) before income taxes                   |  |                                   | 3,688   |                      |   | (155   | )     |  |   | (144  | ) |  |   | 3,389  
|Income taxes (benefit)                              |  |                                   | 1,190   |                      |   | (58    | )     |  |   | (49   | ) |  |   | 1,083  
|                                                    |  |                                   |         |                      |   |        |       |  |   |       |   |  |   |        
|Net income (loss)                                   |  | $                                 | 2,498   |                      | $ | (97    | )     |  | $ | (95   | ) |  | $ | 2,306  
|                                                    |  |                                   |         |                      |   |        |       |  |   |       |   |  |   |        
|Total assets                                        |  | $                                 | 864,706 |                      | $ | 30,662 |       |  | $ | 401   |   |  | $ | 895,769
|Net loans                                           |  |                                   | 657,699 |                      |   | 25,382 |       |  |   |      |   |  |   | 683,081
|Goodwill                                            |  |                                   | 12,583  |                      |   | 3,776  |       |  |   |      |   |  |   | 16,359 



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

For the three months ended
March 31, 2006 and 2005, total comprehensive income, consisting of net income and unrealized securities gains and losses, net of taxes, was $2,209,000 and $1,817,000, respectively.



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

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

Overview

Description of Operations

FNB United is a bank holding company with a full-service subsidiary bank, First National Bank, that offers a complete line of consumer,
mortgage and business banking services, including loan, deposit, cash management, investment management and trust services, to individual and business customers. First National Bank has offices in Alamance, Chatham, Guilford, Montgomery, Moore,
Orange, Randolph, Richmond, Rowan and Scotland counties in North Carolina. On April 28, 2006, FNB United acquired a second bank subsidiary, First Gaston Bank of North Carolina, through its merger with Integrity Financial Corporation, as
discussed below.

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

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

Merger Acquisition of United Financial, Inc. in 2005

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



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Merger Acquisition of Integrity Financial Corporation in 2006

On September 18, 2005, the Corporation entered into a definitive merger agreement to acquire Integrity Financial Corporation (Integrity),
headquartered in Hickory, North Carolina and the holding company for First Gaston Bank of North Carolina. Integritys second subsidiary bank, Catawba Valley Bank, was merged into First Gaston Bank effective January 5, 2006. On
March 15, 2006, the shareholders of FNB United and Integrity voted to approve the merger. The merger of the holding companies was effected on April 28, 2006 through the conversion of each share of Integrity stock into 0.8743 shares of FNB
United common stock and $5.20 in cash. The merger will be accounted for using the purchase method of accounting for business combinations. FNB Corp. changed its name to FNB United Corp. in the merger. First Gaston Bank is expected to be merged with
and into First National Bank in the third quarter of 2006. At December 31, 2005, Integrity operated seventeen offices through First Gaston Bank and Catawba Valley Bank and had approximately $662,000,000 in total assets, $551,000,000 in deposits
and $67,000,000 in shareholders equity. The goodwill and core deposit intangible expected to result from the merger are approximately $76,000,000 and $8,000,000, respectively.

Primary Financial Data for 2006

The Corporation earned $2,677,000 in the first quarter of 2006, a
16.1% increase from earnings of $2,306,000 in the same period of 2005. Basic earnings per share increased from $.41 to $.42 and diluted earnings per share increased from $.40 to $.42 for percentage increases of 2.4% and 5.0%, respectively. As noted
above, Alamance Bank was acquired through merger effective November 4, 2005, impacting both net income and the calculation of earnings per share since the acquisition date and also the comparability of operating results on a year-to-date basis
between 2006 and 2005 (see Note 12 to the Consolidated Financial Statements for business segment information and also below in Significant Factors Affecting Earnings in 2006 and 2005). Largely reflecting the Alamance Bank acquisition,
which added $163,168,000 or approximately 17.5% to total assets at the time of acquisition, total assets were $1,106,268,000 at March 31, 2006, up 23.5% from March 31, 2005 and 0.4% from December 31, 2005. Loans amounted to
$820,710,000 at March 31, 2006, increasing 18.8% from March 31, 2005 and 1.0% from December 31, 2005. Total deposits were up 24.2% from March 31, 2005 and 1.1% from December 31, 2005, amounting to $850,561,000 at
March 31, 2006.

Significant Factors Affecting Earnings in 2006 and 2005

The acquisition of Alamance Bank has affected the comparability of operating results, as the consolidated financial statements include the results of
operations of Alamance Bank since November 4, 2005 and prior period financial information has not been restated. Consequently, the results of operations for the first quarter of 2006 include the results of the former Alamance Bank operations
while the results of the first quarter of 2005 do not. As noted above, the Alamance acquisition added approximately 17.5% to total assets at the time of acquisition.

The comparability of operating results has also been impacted by the adoption in the second quarter of 2005 of new regulatory guidance on the accounting for courtesy overdraft programs. The initial result from
adoption of this guidance was a $324,000 increase in the provision for loan losses in the second quarter of 2005, the effect of which was partially offset by a $156,000 increase in income from service charges on deposit accounts. In periods
subsequent to the second quarter of 2005, the regulatory guidance on accounting for courtesy overdraft programs will have a continuing effect on the results of operations by increasing the level of both the provision for loan losses and income from
service charges on deposit accounts, although these effects should tend to be offsetting with only a minor impact on net income. The total increase in the provision for loan losses in 2005 due to the new regulatory guidance was $712,000 and for the
first quarter of 2006 was $45,000.



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As discussed in Note 5 to the Consolidated Financial Statements, effective January 1, 2006, the
Corporation adopted Statement of Financial Accounting Standards No. 123R (SFAS No. 123R), Share-Based Payment, which requires companies to recognize in the income statement the grant-date fair value of stock options
and other equity-based compensation issued to employees over the period during which an employee is required to provide service in exchange for the award (presumptively the vesting period). As a result of this adoption, stock-based compensation in
the amount of $119,000, related to stock options previously granted, was charged against income in the first quarter of 2006. The related deferred tax benefit was $7,000. Prior to the adoption of SFAS No. 123R, the Corporation used the
intrinsic value method as prescribed by APB No. 25 and thus recognized no compensation expense for options granted with exercise prices equal to the fair market value of the common stock on the date of grant.

Prime rate increases resulting from the tightening measures utilized by the Federal Reserve for monetary policy purposes since mid-2004 have tended to
improve the yield on earning assets, although the cost of funds is being impacted by the general increase in interest rates. Net interest income increased $2,262,000 or 28.9% in the first quarter of 2006 compared to the same period in 2005,
reflecting the effect of a 22.6% increase in the level of average earning assets coupled with an increase in the net interest margin, stated on a taxable equivalent basis, from 4.08% in 2005 to 4.26% in 2006.

Noninterest expense increased $2,193,000 or 30.4% in the first quarter of 2006 compared to the same period in 2005, due largely to the addition of
Alamance Bank as discussed above and also by the cost of certain integration and data and other systems conversions which resulted from the merger of Alamance Bank with and into First National Bank effective February 1, 2006.

Critical Accounting Policies

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

Earnings Review

The Corporations net income increased $371,000 or 16.1% in the first quarter of 2006 compared to the same period of 2005. Earnings were positively impacted in the first quarter of 2006 by increases of $2,262,000
or 28.9% in net interest income and $348,000 in noninterest income and by a $293,000 reduction in the provision for loan losses, which gains were significantly offset by a $2,193,000 increase in noninterest expense. Certain factors specifically
affecting the elements of income and expense and the comparability of operating results for the first quarter periods of 2006 and 2005 were discussed in the Overview  Significant Factors Affecting Earnings in 2006 and 2005.



19



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On an annualized basis, return on average assets decreased from 1.05% in the first quarter of 2005 to
0.98% in the first quarter of 2006. Return on average shareholders equity decreased from 11.03% to 10.26% in comparing the same periods. In the first quarter of 2006, return on tangible assets and equity (calculated by deducting average
goodwill and core deposit premiums from average assets and from average equity) amounted to 1.01% and 14.91%, respectively.

Net Interest Income

Net interest income is the difference between interest income, principally from loans and investments, and interest expense,
principally on customer deposits. Changes in net interest income result from changes in interest rates and in the volume, or average dollar level, and mix of earning assets and interest-bearing liabilities.

Net interest income was $10,081,000 in the first quarter of 2006 compared to $7,819,000 in the same period of 2005. This increase of $2,262,000 or 28.9%
resulted from a 22.6% increase in the level of average earning assets coupled with an improvement in the net yield on earning assets, or net interest margin, from 4.08% in 2005 to 4.26% in 2006. On a taxable equivalent basis, the increase in net
interest income in the first quarter of 2006 was $2,285,000, reflecting changes in the relative mix of taxable and non-taxable earning assets in each period.

Table 1 on page 30 sets forth for the periods indicated information with respect to the Corporations average balances of assets and liabilities, as well as the total dollar amounts of interest income (taxable
equivalent basis) from earning assets and interest expense on interest-bearing liabilities, resultant rates earned or paid, net interest income, net interest spread and net yield on earning assets. Net interest spread refers to the difference
between the average yield on earning assets and the average rate paid on interest-bearing liabilities. Net yield on earning assets, or net interest margin, refers to net interest income divided by average earning assets and is influenced by the
level and relative mix of earning assets and interest-bearing liabilities. Changes in net interest income on a taxable equivalent basis, as measured by volume and rate variances, are also analyzed in Table 1. Volume refers to the average dollar
level of earning assets and interest-bearing liabilities.

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

Following a generally low-rate environment for interest rates both earned and paid by the Corporation, the Federal Reserve took action to raise the level
of interest rates by 25 basis points at the end of June 2004, due to concern about increasing inflationary pressures, causing the prime rate to increase to 4.25% in July 2004. Four additional rate increases of 25 basis points each during the second
six months of 2004, eight more such rate increases in 2005 and two more in 2006 have raised the prime rate to the 7.75% level at March 31, 2006. The prime rate averaged 4.12% in 2003, rising to 4.33% in 2004 and 6.15% in 2005.

The prime rate averaged 7.39% in the first quarter of 2006 compared to 5.34% in the first quarter of 2005. The net interest spread, in comparing first
quarter periods, increased by 10 basis points from 3.80% in 2005 to 3.90% in 2006, reflecting the effect of an increase in the average total yield on earning assets that more than offset the increase in the average rate paid on interest-bearing
liabilities, or cost of funds. The yield on earning assets increased by 107 basis points from 6.09% in 2005 to 7.16% in 2006, while the cost of funds increased by 97 basis points from 2.29% to 3.26%.



20



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Provision for Loan Losses

This provision is the charge against earnings to provide an allowance or reserve for probable losses inherent in the loan portfolio. The amount of each periods charge is affected by several considerations
including managements evaluation of various risk factors in determining the adequacy of the allowance (see Asset Quality), actual loan loss experience and loan portfolio growth. Earnings were positively impacted in the first
quarter of 2006, compared to the same period of 2005, by a $293,000 reduction in the provision for loan losses. This reduction reflected in part a smaller increase in loans held for investment in the 2006 first quarter compared to the 2005 first
quarter. As discussed in the Overview  Significant Factors Affecting Earnings in 2006 and 2005, the provision for loan losses has been affected by the adoption in the second quarter of 2005 of new regulatory guidance on the
accounting for courtesy overdraft programs, resulting in a $45,000 provision increase in the first quarter of 2006. Further effects from adoption of the new regulatory guidance are discussed in the Overview.

The allowance for loan losses, as a percentage of loans held for investment, amounted to 1.25% at March 31, 2006, 1.14% at March 31, 2005 and
1.25% at December 31, 2005. The allowance percentage has increased based on the results from application of the allowance model that assigns reserves to various components of the loan portfolio in order to provide for probable inherent losses
and also from the effect of the relative allowance level assigned to the loans of Alamance Bank, which was acquired on November 4, 2005 as discussed in the Overview.

Noninterest Income

Noninterest income increased $348,000 or 11.0% in the first quarter of 2006
compared to the same period of 2005, reflecting in part the acquisition of Alamance Bank on November 4, 2005 as discussed in the Overview  Significant Factors Affecting Earnings in 2006 and 2005. The increase in service
charges on deposit accounts was due mainly to the adoption in the second quarter of 2005 of new regulatory guidance on the accounting for courtesy overdraft programs as also discussed in the Overview  Significant Factors Affecting
Earnings in 2006 and 2005. The decrease in income from trust and investment services was largely related to the general decrease in the volume of sales of annuity products.

Noninterest Expense

Noninterest expense was $2,193,000 or 30.4% higher in the first quarter of 2006
compared to the same period of 2005, due largely to the acquisition of Alamance Bank on November 4, 2005 and the costs associated with its merger with and into First National bank effective February 1, 2006 as discussed in the
Overview  Significant Factors Affecting Earnings in 2006 and 2005. Similarly, the opening of a new branch office in Greensboro, North Carolina in January 2006 increased noninterest expense in the first quarter of 2006 compared to
the same period of 2005. Personnel expense was also impacted in the 2006 first quarter by the adoption of SFAR No. 123R which requires the recognition of stock-based compensation as discussed in the Overview  Significant Factors
Affecting Earnings in 2006 and 2005.

Income Taxes

The effective income tax rate increased from 32.0% in the first quarter of 2005 to 34.7% in the same period of 2006 due principally to the significant increase in the ratio of taxable to non-taxable income.
Additionally, the effective federal income tax rate increased from 34% in 2005 to 35% in 2006.



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Liquidity

Liquidity for First National Bank refers to its continuing ability to meet deposit withdrawals, fund loan and capital expenditure commitments, maintain reserve requirements, pay operating expenses and provide funds to the Parent Company for
payment of dividends, debt service and other operational requirements. Liquidity is immediately available from five major sources: (a) cash on hand and on deposit at other banks, (b) the outstanding balance of federal funds sold,
(c) lines for the purchase of federal funds from other banks, (d) the line of credit established at the Federal Home Loan Bank, less charges against that line for existing advances and letters of credit used to secure public funds on
deposit, and (e) the investment securities portfolio. All debt securities are of investment grade quality and, if the need arises, can be promptly liquidated on the open market or pledged as collateral for short-term borrowing.

Consistent with the general approach to liquidity, loans and other assets of First National Bank are based primarily on a core of local deposits and
First National Banks capital position. To date, the steady increase in deposits, retail repurchase agreements and capital, supplemented by Federal Home Loan Bank advances and a modest amount of brokered deposits, has been adequate to fund loan
demand in First National Banks market area, while maintaining the desired level of immediate liquidity and a substantial investment securities portfolio available for both immediate and secondary liquidity purposes.

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

Commitments, Contingencies and Off-Balance Sheet Risk

In the normal course of business, various
commitments are outstanding that are not reflected in the consolidated financial statements. Significant commitments at March 31, 2006 are discussed below.

Commitments by First National Bank to extend credit and undisbursed advances on customer lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the
contract. At March 31, 2006, total commitments to extend credit and undisbursed advances on customer lines of credit amounted to $198,012,000. Commitments generally have fixed expiration dates or other termination clauses and may require
payment of a fee. Since many commitments expire without being fully drawn, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customers creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary, upon extension of credit is based on the credit evaluation of the borrower.

First
National Bank issues standby letters of credit whereby it guarantees the performance of a customer to a third party if a specified triggering event or condition occurs. The guarantees generally expire within one year and may be automatically renewed
depending on the terms of the guarantee. All standby letters of credit provide for recourse against the customer on whose behalf the letter of credit was issued, and this recourse may be further secured by a pledge of assets. The maximum potential
amount of undiscounted future payments related to standby letters of credit was $6,197,000 at March 31, 2006 and $6,445,000 at March 31, 2005. Due to insignificance, the Corporation has recorded no liability at March 31, 2006 for the
current carrying amount of the obligation to perform as a guarantor.



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Dover Mortgage Company originates certain fixed rate residential mortgage loans with the intention of
selling these loans. Between the time that Dover enters into an interest rate lock or a commitment to originate a fixed rate residential mortgage loan with a potential borrower and the time the closed loan is sold, the Corporation is subject to
variability in market prices related to these commitments. The Corporation believes that it is prudent to limit the variability of expected proceeds from the future sales of these loans by entering into forward sales commitments and commitments to
deliver loans into a mortgage-backed security. The commitments to originate fixed rate residential mortgage loans and the forward sales commitments are freestanding derivative instruments. They do not qualify for hedge accounting treatment so their
fair value adjustments are recorded through the income statement in income from mortgage loan sales. The commitments to originate fixed rate residential mortgage loans totaled $32,560,000 at March 31, 2006, and the related forward sales
commitments totaled $32,560,000. Loans held for sale by Dover Mortgage Company totaled $19,572,000 at March 31, 2006, and the related forward sales commitments totaled $19,572,000.

First National Bank had loans held for sale of $1,250,000 at March 31, 2006. Binding commitments of First National Bank for the origination of
mortgage loans intended to be held for sale at March 31, 2006 were not material.

The Corporation does not have any special purpose
entities or other similar forms of off-balance sheet financing.

Asset/Liability Management and Interest Rate Sensitivity

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

The Corporations balance sheet was asset-sensitive at March 31, 2006. An asset-sensitive position means that, for
cumulative gap measurement periods of one year or less, there are more assets than liabilities subject to immediate repricing as market rates change. Because immediately rate sensitive assets exceed rate sensitive interest-bearing liabilities, the
earnings position could improve in a rising rate environment and could deteriorate in a declining rate environment, depending on the correlation of rate changes in these two categories. Included in interest-bearing liabilities subject to rate
changes within 90 days is a portion of the interest-bearing demand, savings and money market deposits. These types of deposits historically have not repriced coincidentally with or in the same proportion as general market indicators.

Capital Adequacy

Under guidelines established by the
Board of Governors of the Federal Reserve System, capital adequacy is currently measured for regulatory purposes by certain risk-based capital ratios, supplemented by a leverage capital ratio. The risk-based capital ratios are determined by
expressing allowable capital amounts, defined in terms of Tier 1, Tier 2 and Tier 3, as a percentage of risk-weighted assets, which are computed by measuring the relative credit risk of both the asset categories on the balance sheet and various
off-balance sheet exposures. Tier 1 capital consists primarily of common shareholders equity and qualifying amounts of



23



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perpetual preferred stock and trust preferred securities, net of goodwill and other disallowed intangible assets. Tier 2
capital, which is limited to the total of Tier 1 capital, includes allowable amounts of subordinated debt, mandatory convertible debt, preferred stock, trust preferred securities and the allowance for loan losses. Tier 3 capital, applicable only to
financial institutions subject to certain market risk capital guidelines, is capital allocated to support the market risk related to a financial institutions ongoing trading activities. At March 31, 2006, FNB United and First National
Bank were not subject to the market risk capital guidelines and, accordingly, had no Tier 3 capital allocation. Total capital, for risk-based purposes, consists of the sum of Tier 1, Tier 2 and Tier 3 capital. Under current requirements, the minimum
total capital ratio is 8.00% and the minimum Tier 1 capital ratio is 4.00%. At March 31, 2006, FNB United and First National Bank had total capital ratios of 10.99% and 10.76%, respectively, and Tier 1 capital ratios of 9.90% and 9.67%.

The leverage capital ratio, which serves as a minimum capital standard, considers Tier 1 capital only and is expressed as a percentage of
average total assets for the most recent quarter, after reduction of those assets for goodwill and other disallowed intangible assets at the measurement date. As currently required, the minimum leverage capital ratio is 4.00%. At March 31,
2006, FNB United and First National Bank had leverage capital ratios of 8.63% and 8.47%, respectively.

First National Bank is also
required to comply with prompt corrective action provisions established by the Federal Deposit Insurance Corporation Improvement Act. To be categorized as well-capitalized, a bank must have a minimum ratio for total capital of 10.00%, for Tier 1
capital of 6.00% and for leverage capital of 5.00%. As noted above, First National Bank met all of those ratio requirements at March 31, 2006 and, accordingly, is well-capitalized under the regulatory framework for prompt corrective action.

Balance Sheet Review

The growth in
total assets at March 31, 2006 compared to March 31, 2005 largely reflected the acquisition of Alamance Bank on November 4, 2005, as discussed in the Overview. Significant estimated fair values initially recorded for
Alamance Bank included total assets of $163,668,000, investment securities of $34,712,000, loans of $96,624,000, deposits of $112,961,000 and Federal Home Loan Bank advances of $21,866,000. Total assets at March 31, 2006 were $210,499,000 or
23.5% higher than at March 31, 2005 and were $4,183,000 or 0.4% higher than at December 31, 2005. By similar comparison, deposits were ahead by $165,547,000 or 24.2% and $8,952,000 or 1.1%. Average assets increased 24.5% in the first
quarter of 2006 compared to the same period of 2005, while average deposits increased 24.0%.

Investment Securities

Additions to the investment securities portfolio depend to a large extent on the availability of investable funds that are not otherwise needed to satisfy
loan demand. During the twelve-month period ended March 31, 2006, there was a net increase of $32,381,000 or 25.7% in the level of investment securities, due primarily to the addition of $34,712,000 in investment securities from the Alamance
Bank acquisition on November 4, 2005, as discussed in the Balance Sheet Review. There was a net reduction in the level of investment securities of $1,524,000 or 1.0% during the first quarter of 2006. Investable funds not otherwise
utilized are temporarily invested as federal funds sold or as interest-bearing balances at other banks, the level of which is affected by such considerations as near-term loan demand and liquidity needs.



24



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Loans

The Corporations primary source of revenue and largest component of earning assets is the loan portfolio. During the twelve-month period ended March 31, 2006, loans increased $130,073,000 or 18.8%, due largely to the addition of
$96,624,000 in loans from the Alamance Bank acquisition on November 4, 2005, as discussed in the Balance Sheet Review. The net loan increase during the first quarter of 2006 was $8,044,000 or 1.0%. Average loans were $134,105,000 or
19.9% higher in the first quarter of 2006 than in the same period of 2005. The ratio of average loans to average deposits, in comparing first quarter periods, decreased from 100.1% in 2005 to 96.8% in 2006. The ratio of loans to deposits at
March 31, 2006 was 96.5%.

Loan growth during the twelve-month period ended March 31, 2006, including the loans added by the
Alamance Bank acquisition, was primarily due to increases in the portfolios related to commercial and other real estate loans, construction loans and 1-4 family residential mortgage loans. During the first quarter of 2006, loan growth primarily
resulted from these same portfolios.

Asset Quality

Management considers the asset quality of First National Bank to be of primary importance. A formal loan review function, independent of loan origination, is used to identify and monitor problem loans. As part of the
loan review function, a third party assessment group is employed to review the underwriting documentation and risk grading analysis.

In
determining the allowance for loan losses and any resulting provision to be charged against earnings, particular emphasis is placed on the results of the loan review process. Consideration is also given to a review of individual loans, historical
loan loss experience, the value and adequacy of collateral, and economic conditions in First National Banks market area. For loans determined to be impaired, the allowance is based on discounted cash flows using the loans initial
effective interest rate or the fair value of the collateral for certain collateral dependent loans. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be
received on impaired loans that may be susceptible to significant change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review First National Banks allowance for loan losses. Such
agencies may require First National Bank to recognize changes to the allowance based on their judgments about information available to them at the time of their examinations. Loans are charged off when in the opinion of management, they are deemed
to be uncollectible. Recognized losses are charged against the allowance, and subsequent recoveries are added to the allowance.

At
March 31, 2006, the Corporation had impaired loans which totaled $206,000, of which, loans totaling $118,000 were also on nonaccrual status. The related allowance for loan losses on these loans amounted to $93,000. At March 31, 2005, the
Corporation had impaired loans which totaled $1,084,000 and were also on nonaccrual status. The related allowance for loan losses on these loans amounted to $399,000. At December 31, 2005, the Corporation had no loans that were considered to be
impaired.

At March 31, 2006, nonperforming loans were $10,100,000 in total, nonaccrual loans and accruing loans past due 90 days or
more amounting to $8,549,000 and $1,551,000, respectively. At March 31, 2005, nonperforming loans were $5,773,000 in total, nonaccrual loans and accruing loans past due 90 days or more amounting to $5,336,000 and $437,000, respectively. At
December 31, 2005, nonperforming loans were $6,046,000 in total, nonaccrual loans and accruing loans past due 90 days or more amounting to $5,398,000 and $648,000, respectively.



25



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

Earnings were positively impacted in the first quarter of 2006, compared to the same period of 2005, by a $293,000 reduction in the provision for loan losses. This reduction reflected in part a smaller increase in
loans held for investment in the 2006 first quarter compared to the 2005 first quarter. As discussed in the Overview  Significant Factors Affecting Earnings in 2006 and 2005, the provision for loan losses has been affected by the
adoption in the second quarter of 2005 of new regulatory guidance on the accounting for courtesy overdraft programs, resulting in a $45,000 provision increase in the first quarter of 2006. Further effects from adoption of the new regulatory guidance
are discussed in the Overview.

The allowance for loan losses, as a percentage of loans held for investment, amounted to 1.25%
at March 31, 2006, 1.14% at March 31, 2005 and 1.25% at December 31, 2005. The allowance percentage has increased based on the results from application of the allowance model that assigns reserves to various components of the loan
portfolio in order to provide for probable inherent losses and also from the effect of the relative allowance level assigned to the loans of Alamance Bank, which was acquired on November 4, 2005 as discussed in the Overview.

Management believes the allowance for loan losses of $9,960,000 at March 31, 2006 is adequate to cover probable losses in the loan
portfolio; however, assessing the adequacy of the allowance is a process that requires considerable judgment.

Managements judgments
are based on numerous assumptions about current events which it believes to be reasonable, but which may or may not be valid. Thus there can be no assurance that loan losses in future periods will not exceed the current allowance or that future
increases in the allowance will not be required. No assurance can be given that managements ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future
additions to the allowance, thus adversely affecting the operating results of the Corporation.

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



|                               |  |                             |       |      |   |      
|------------------------------ |  | --------------------------- | ----- | ---- | - | -----
|                               |  | Three Months EndedMarch 31,
|                               |  | 2006                        |       | 2005
|                               |  | (in thousands)             
|Balance at beginning of period |  | $                           | 9,945 |      | $ | 7,293
|Charge-offs                    |  |                             | 549   |      |   | 196  
|Recoveries                     |  |                             | 487   |      |   | 89   
|                               |  |                             |       |      |   |      
|Net loan charge-offs           |  |                             | 62    |      |   | 107  
|Provision for loan losses      |  |                             | 77    |      |   | 370  
|                               |  |                             |       |      |   |      
|Balance at end of period       |  | $                           | 9,960 |      | $ | 7,556
|                               |  |                             |       |      |   |      



26



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Deposits

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

The level and mix of deposits has been specifically affected by the addition of $112,961,000 in deposits from the Alamance Bank acquisition on
November 4, 2005, as discussed in the Balance Sheet Review. Total deposits increased $165,547,000 or 24.2% during the twelve-month period ended March 31, 2006 and $8,952,000 or 1.1% during the first quarter of 2006. Significant
increases by deposit category for the twelve-month period ended March 31, 2006 were as follows: $23,993,000 for noninterest-bearing demand deposits, $18,069,000 for interest-bearing demand deposits and $119,736,000 for time deposits. The level
of total time deposits is affected by changes in the level of time deposits obtained from governmental units, these latter deposits amounting to $76,797,000, $71,684,000 and $72,710,000 at March 31, 2006, March 31, 2005 and
December 31, 2005, respectively.

Business Development Matters

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

As discussed in the Overview and in Note 3 to the Consolidated Financial Statements, the Corporation completed a merger
on April 28, 2006 for the acquisition of Integrity Financial Corporation (Integrity), headquartered in Hickory, North Carolina and the holding company for First Gaston Bank. First Gaston Bank is expected to be merged with and into
First National Bank in the third quarter of 2006.

In conjunction with the completion of the Integrity merger, FNB Uniteds wholly
owned and newly formed subsidiary, FNB United Statutory Trust II, issued $30,000,000 of trust preferred securities on April 27, 2006. The proceeds of the trust preferred securities, along with the proceeds of $928,000 received by the trust from
the issuance of its common securities to FNB United, were used to purchase $30,928,000 of FNB



27



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Uniteds junior subordinated debt securities. The proceeds of FNB Uniteds junior subordinated debt securities
are primarily being used to fund the cash portion of the merger consideration to the former Integrity shareholders. The trust preferred securities bear interest at a variable rate based on the three-month LIBOR rate plus 1.32% and mature on
June 30, 2036, but may be redeemed at the option of FNB United beginning on June 30, 2011.

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

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

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

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

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

Accounting Pronouncement Matters

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

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

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



28



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Non-GAAP Measures

This Quarterly Report on Form 10-Q contains financial information determined by methods other than in accordance with generally accepted accounting principles (GAAP). The Corporations management uses
these non-GAAP measures in their analysis of the Corporations performance. These non-GAAP measures exclude average goodwill and core deposit premiums from the calculations of return on average assets and return on average equity. Management
believes presentations of financial measures excluding the impact of goodwill and core deposit premiums provide useful supplemental information that is essential to a proper understanding of the operating results of the Corporations core
businesses. In addition, certain designated net interest income amounts are presented on a taxable equivalent basis. Management believes that the presentation of net interest income on a taxable equivalent basis aids in the comparability of net
interest income arising from taxable and tax-exempt sources. These disclosures should not be viewed as a substitute for results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be
presented by other companies.

Cautionary Statement for Purpose of the Safe Harbor Provisions of the Private Securities Litigation Reform
Act of 1995

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



29



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Table 1

Average
Balances and Net Interest Income Analysis

THREE MONTHS ENDED MARCH 31



|                                           |  |                                                  |           |                          |      |                            |        |                  |                 |      |                          |         |                            |   |        |                             |      |           |  |   |       |   |  |   |       |  |   |       |  
|------------------------------------------ |  | ------------------------------------------------ | --------- | ------------------------ | ---- | -------------------------- | ------ | ---------------- | --------------- | ---- | ------------------------ | ------- | -------------------------- | - | ------ | --------------------------- | ---- | --------- |  | - | ----- | - |  | - | ----- |  | - | ----- | -
|                                           |  | 2006                                             |           |                          | 2005 |                            |        | 2006 Versus 2005 |                
|                                           |  | Average Balance                                  |           | Interest Income/ Expense |      | Average Rates Earned/ Paid |        |                  | Average Balance |      | Interest Income/ Expense |         | Average Rates Earned/ Paid |   |        | Interest Variancedue to (1) |      | NetChange | 
|                                           |  |                                                  |           |                          |      |                            | Volume |                  |                 | Rate |                         
|                                           |  | (Taxable Equivalent Basis, Dollars in Thousands) |          
|Earning Assets                             |  |                                                  |           |                          |      |                            |        |                  |                 |      |                          |         |                            |   |        |                             |      |           |  |   |       |   |  |   |       |  |   |       |  
|Loans (2) (3)                              |  | $                                                | 809,513   |                          | $    | 15,234                     |        | 7.62             | %               |      | $                        | 675,408 |                            | $ | 10,584 |                             | 6.34 | %         |  | $ | 2,306 |   |  | $ | 2,344 |  | $ | 4,650 |  
|Investment securities (2):                 |  |                                                  |           |                          |      |                            |        |                  |                 |      |                          |         |                            |   |        |                             |      |           |  |   |       |   |  |   |       |  |   |       |  
|Taxable income                             |  |                                                  | 112,754   |                          |      | 1,347                      |        | 4.78             |                 |      |                          | 77,269  |                            |   | 844    |                             | 4.37 |           |  |   | 418   |   |  |   | 85    |  |   | 503   |  
|Non-taxable income                         |  |                                                  | 49,168    |                          |      | 713                        |        | 5.80             |                 |      |                          | 46,032  |                            |   | 662    |                             | 5.75 |           |  |   | 45    |   |  |   | 6     |  |   | 51    |  
|Other earning assets                       |  |                                                  | 14,968    |                          |      | 164                        |        | 4.45             |                 |      |                          | 5,777   |                            |   | 33     |                             | 2.37 |           |  |   | 84    |   |  |   | 47    |  |   | 131   |  
|                                           |  |                                                  |           |                          |      |                            |        |                  |                 |      |                          |         |                            |   |        |                             |      |           |  |   |       |   |  |   |       |  |   |       |  
|Total earning assets                       |  |                                                  | 986,403   |                          |      | 17,458                     |        | 7.16             |                 |      |                          | 804,486 |                            |   | 12,123 |                             | 6.09 |           |  |   | 2,853 |   |  |   | 2,482 |  |   | 5,335 |  
|                                           |  |                                                  |           |                          |      |                            |        |                  |                 |      |                          |         |                            |   |        |                             |      |           |  |   |       |   |  |   |       |  |   |       |  
|Cash and due from banks                    |  |                                                  | 20,498    |                          |      |                            |        |                  |                 |      |                          | 17,705  |                            |   |        |                             |      |           |  |   |       |   |  |   |       |  |   |       |  
|Goodwill                                   |  |                                                  | 31,383    |                          |      |                            |        |                  |                 |      |                          | 16,341  |                            |   |        |                             |      |           |  |   |       |   |  |   |       |  |   |       |  
|Other assets, net                          |  |                                                  | 53,589    |                          |      |                            |        |                  |                 |      |                          | 38,306  |                            |   |        |                             |      |           |  |   |       |   |  |   |       |  |   |       |  
|                                           |  |                                                  |           |                          |      |                            |        |                  |                 |      |                          |         |                            |   |        |                             |      |           |  |   |       |   |  |   |       |  |   |       |  
|Total Assets                               |  | $                                                | 1,091,873 |                          |      |                            |        |                  |                 |      | $                        | 876,838 |                            |   |        |                             |      |           |  |   |       |   |  |   |       |  |   |       |  
|                                           |  |                                                  |           |                          |      |                            |        |                  |                 |      |                          |         |                            |   |        |                             |      |           |  |   |       |   |  |   |       |  |   |       |  
|Interest-Bearing Liabilities               |  |                                                  |           |                          |      |                            |        |                  |                 |      |                          |         |                            |   |        |                             |      |           |  |   |       |   |  |   |       |  |   |       |  
|Interest-bearing deposits:                 |  |                                                  |           |                          |      |                            |        |                  |                 |      |                          |         |                            |   |        |                             |      |           |  |   |       |   |  |   |       |  |   |       |  
|Demand deposits                            |  | $                                                | 112,194   |                          |      | 353                        |        | 1.27             |                 |      | $                        | 92,873  |                            |   | 133    |                             | 0.58 |           |  |   | 33    |   |  |   | 187   |  |   | 220   |  
|Savings deposits                           |  |                                                  | 49,705    |                          |      | 40                         |        | 0.33             |                 |      |                          | 52,356  |                            |   | 42     |                             | 0.32 |           |  |   | (3    | ) |  |   | 1     |  |   | (2    | )
|Money market deposits                      |  |                                                  | 82,246    |                          |      | 462                        |        | 2.28             |                 |      |                          | 72,386  |                            |   | 308    |                             | 1.73 |           |  |   | 46    |   |  |   | 108   |  |   | 154   |  
|Certificates and other time deposits       |  |                                                  | 492,839   |                          |      | 4,648                      |        | 3.82             |                 |      |                          | 378,714 |                            |   | 2,547  |                             | 2.73 |           |  |   | 904   |   |  |   | 1,197 |  |   | 2,101 |  
|Retail repurchase agreements               |  |                                                  | 17,183    |                          |      | 164                        |        | 3.87             |                 |      |                          | 15,507  |                            |   | 79     |                             | 2.08 |           |  |   | 9     |   |  |   | 76    |  |   | 85    |  
|Federal Home Loan Bank advances            |  |                                                  | 85,262    |                          |      | 859                        |        | 4.09             |                 |      |                          | 68,667  |                            |   | 644    |                             | 3.81 |           |  |   | 165   |   |  |   | 50    |  |   | 215   |  
|Federal funds purchased                    |  |                                                  | 540       |                          |      | 8                          |        | 6.11             |                 |      |                          | 979     |                            |   | 5      |                             | 2.09 |           |  |   | (3    | ) |  |   | 6     |  |   | 3     |  
|Other borrowed funds                       |  |                                                  | 37,492    |                          |      | 511                        |        | 5.53             |                 |      |                          | 26,349  |                            |   | 237    |                             | 3.65 |           |  |   | 124   |   |  |   | 150   |  |   | 274   |  
|                                           |  |                                                  |           |                          |      |                            |        |                  |                 |      |                          |         |                            |   |        |                             |      |           |  |   |       |   |  |   |       |  |   |       |  
|Total interest-bearing liabilities         |  |                                                  | 877,461   |                          |      | 7,045                      |        | 3.26             |                 |      |                          | 707,831 |                            |   | 3,995  |                             | 2.29 |           |  |   | 1,275 |   |  |   | 1,775 |  |   | 3,050 |  
|                                           |  |                                                  |           |                          |      |                            |        |                  |                 |      |                          |         |                            |   |        |                             |      |           |  |   |       |   |  |   |       |  |   |       |  
|Noninterest-bearing demand deposits        |  |                                                  | 99,439    |                          |      |                            |        |                  |                 |      |                          | 78,113  |                            |   |        |                             |      |           |  |   |       |   |  |   |       |  |   |       |  
|Other liabilities                          |  |                                                  | 10,590    |                          |      |                            |        |                  |                 |      |                          | 7,236   |                            |   |        |                             |      |           |  |   |       |   |  |   |       |  |   |       |  
|Shareholders equity                       |  |                                                  | 104,383   |                          |      |                            |        |                  |                 |      |                          | 83,658  |                            |   |        |                             |      |           |  |   |       |   |  |   |       |  |   |       |  
|                                           |  |                                                  |           |                          |      |                            |        |                  |                 |      |                          |         |                            |   |        |                             |      |           |  |   |       |   |  |   |       |  |   |       |  
|Total Liabilities and Shareholders Equity |  | $                                                | 1,091,873 |                          |      |                            |        |                  |                 |      | $                        | 876,838 |                            |   |        |                             |      |           |  |   |       |   |  |   |       |  |   |       |  
|                                           |  |                                                  |           |                          |      |                            |        |                  |                 |      |                          |         |                            |   |        |                             |      |           |  |   |       |   |  |   |       |  |   |       |  
|Net Interest Income and Spread             |  |                                                  |           |                          | $    | 10,413                     |        | 3.90             | %               |      |                          |         |                            | $ | 8,128  |                             | 3.80 | %         |  | $ | 1,578 |   |  | $ | 707   |  | $ | 2,285 |  
|                                           |  |                                                  |           |                          |      |                            |        |                  |                 |      |                          |         |                            |   |        |                             |      |           |  |   |       |   |  |   |       |  |   |       |  
|Net Yield on Earning Assets                |  |                                                  |           |                          |      |                            |        | 4.26             | %               |      |                          |         |                            |   |        |                             | 4.08 | %         |  |   |       |   |  |   |       |  |   |       |  
|                                           |  |                                                  |           |                          |      |                            |        |                  |                 |      |                          |         |                            |   |        |                             |      |           |  |   |       |   |  |   |       |  |   |       |  

---

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

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

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



30



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Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

The Corporations market risk arises
primarily from interest rate risk inherent in its lending and deposit-taking activities. The structure of the Corporations loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net market values
and net interest income. The Corporation does not maintain a trading account nor is the Corporation subject to currency exchange risk or commodity price risk. Interest rate risk is monitored as part of the Corporations asset/liability
management function, which is discussed above in Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations under the heading Asset/Liability Management and Interest Rate
Sensitivity.

Management does not believe there has been any significant change in the overall analysis of financial instruments
considered market risk sensitive, as measured by the factors of contractual maturities, average interest rates and estimated fair values, since the analysis prepared and presented in conjunction with the Form 10-K Annual Report for the fiscal year
ended December 31, 2005.

Item 4. Controls and Procedures

As of March 31, 2006, the end of the period covered by this report, FNB United carried out an evaluation under the supervision and with the participation of the 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 are effective to provide reasonable assurance that information required to be disclosed by FNB United in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commissions rules and forms. No significant change in the companys internal control over financial reporting occurred during the quarterly period ended March 31, 2006 that has materially
affected, or is reasonably likely to materially affect, FNB Uniteds internal control over financial reporting. FNB United reviews its disclosure controls and procedures, which may include its internal controls over financial reporting, on an
ongoing basis and may from time to time make changes aimed at enhancing their effectiveness.



31



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PART II. OTHER INFORMATION

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

Issuer Purchases of Equity
Securities

|                                  |  |                                  |  |                              |   |                                                                                  |   |                                                                                |        
|--------------------------------- |  | -------------------------------- |  | ---------------------------- | - | -------------------------------------------------------------------------------- | - | ------------------------------------------------------------------------------ | -------
|Three Months Ended March 31, 2006 |  | Total Number of Shares Purchased |  | Average Price Paid per Share |   | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |   | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
|January 1 to January 31           |  |                                 |  | $                            |  |                                                                                  |  |                                                                                | 298,800
|February 1 to February 28         |  |                                 |  |                              |  |                                                                                  |  |                                                                                | 298,800
|March 1 to March 31               |  |                                 |  |                              |  |                                                                                  |  |                                                                                | 298,800
|                                  |  |                                  |  |                              |   |                                                                                  |   |                                                                                |        
|Total                             |  |                                 |  |                              |  |                                                                                  |  |                                                                                | 298,800
|                                  |  |                                  |  |                              |   |                                                                                  |   |                                                                                |        

On July 21, 2005, the Corporation announced that the Board of Directors had authorized a
program for the repurchase of up to 300,000 shares of common stock during the period commencing August 1, 2005 and ending July 31, 2006.

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

On March 15, 2006, FNB Corp. conducted a special
meeting of shareholders to approve the agreement and plan of merger dated as of September 18, 2005 by and between FNB Corp. and Integrity Financial Corporation. The FNB Corp. shareholders approved the merger agreement at the meeting as well as
a proposal to amend FNB Corp.s articles of incorporation to increase the authorized number of shares of FNB Corp. common stock from 10,000,000 to 50,000,000. Shares represented at the meeting either in person or by proxy totaled 4,460,865 or
69.9% of the shares entitled to vote. The following table sets forth the results of the voting for each proposal:



|                                               |  |           |  |              |  |            |  |           
|---------------------------------------------- |  | --------- |  | ------------ |  | ---------- |  | ----------
|Proposal                                       |  | Votes For |  | VotesAgainst |  | Abstaining |  | % VotesFor
|Approve Agreement and Plan of Merger           |  | 4,396,691 |  | 38,045       |  | 26,128     |  | 98.6      
|Approve Amendment to Articles of Incorporation |  | 4,280,122 |  | 159,162      |  | 21,580     |  | 95.9      

Item 6. Exhibits

Exhibits to this report are listed in the index to exhibits on pages 34, 35, 36 and 37 of this report.



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SIGNATURES

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



|                  |  |                  |  |                                             
|----------------- |  | ---------------- |  | --------------------------------------------
|                  |  | FNB United Corp.
|                  |  | (Registrant)    
|                  |  |                 
|Date: May 9, 2006 |  | By:              |  | /s/ Jerry A. Little                         
|                  |  |                  |  | Jerry A. Little                             
|                  |  |                  |  | Treasurer and Secretary                     
|                  |  |                  |  | (Principal Financial and Accounting Officer)



33



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INDEX TO EXHIBITS



|            |  |                                                                                                                                                                                                                                                                         
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                                  
|2.10        |  | Agreement and Plan of Merger dated as of September 18, 2005 by and between the Registrant and Integrity Financial Corporation, incorporated herein by reference to Exhibit 2.11 to the
Registrants Form 10-Q Quarterly Report for the quarter ended September 30, 2005.
|            | 
|3.10        |  | Articles of Incorporation of the Registrant, incorporated herein by reference to Exhibit 3.1 to the Registrants Form S-14 Registration Statement (No. 2-96498) filed March 16,
1985.                                                                                   
|            | 
|3.11        |  | Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 10, 1988, incorporated herein by reference to Exhibit 19.10 to the Registrants Form 10-Q Quarterly Report
for the quarter ended June 30, 1988.                                       
|            | 
|3.12        |  | Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 12, 1998, incorporated herein by reference to Exhibit 3.12 to the Registrants Form 10-Q Quarterly Report
for the quarter ended June 30, 1998.                                        
|            | 
|3.13        |  | Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 23, 2003, incorporated herein by reference to Exhibit 3.13 to the Registrants Form 10-Q Quarterly Report
for the quarter ended June 30, 2003.                                        
|            | 
|3.14        |  | Articles of Amendment to Articles of Incorporation of the Registrant, adopted March 15, 2006.                                                                                                                                                                           
|            | 
|3.15        |  | Articles of Merger, setting forth amendment to Articles of Incorporation of the Registrant, effective April 28, 2006.                                                                                                                                                   
|            | 
|3.20        |  | Amended and Restated Bylaws of the Registrant, adopted July 21, 2005, incorporated herein by reference to Exhibit 3.20 to the Registrants Form 10-Q Quarterly Report for the quarter ended
June 30, 2005.                                                              
|            | 
|4.10        |  | Specimen of Registrants Common Stock Certificate, incorporated herein by reference to Exhibit 4 to Amendment No. 1 to the Registrants Form S-14 Registration Statement (No. 2-96498)
filed April 19, 1985.                                                            
|            | 
|4.20        |  | Indenture dated as of November 4, 2005, between FNB Corp. and U.S. Bank, National Association, as trustee, incorporated herein by reference to Exhibit 4.1 to the Registrants Form 8-K
Current Report dated November 4, 2005.                                          



34



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|            |  |                                                                                                                                                                                                                                                                                                                                                                                            
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                     
|4.21        |  | Amended and Restated Declaration of Trust of FNB United Statutory Trust I dated as of November 4, 2005, among FNB Corp., as sponsor, U.S. Bank, National Association, as institutional trustee,
and Michael C. Miller and Jerry A. Little, as administrators, incorporated herein by reference to Exhibit 4.2 to the Registrants Form 8-K Current Report dated November 4, 2005.          
|            | 
|4.30        |  | Junior Subordinated Indenture dated as of April 27, 2006, between FNB Corp. and Wilmington Trust Company, as trustee, incorporated herein by reference to Exhibit 4.1 to the Registrants
Form 8-K Current Report dated April 27, 2006 and filed April 28, 2006.                                                                                                                           
|            | 
|4.31        |  | Amended and Restated Trust Agreement of FNB United Statutory Trust II dated as of April 27, 2006, among FNB Corp., as sponsor, Wilmington Trust Company, as institutional trustee, and Michael C.
Miller and Jerry A. Little, as administrators, incorporated herein by reference to Exhibit 4.2 to the Registrants Form 8-K Current Report dated April 27, 2006 and filed April 28, 2006.
|            | 
|10.10*      |  | Form of Split Dollar Insurance Agreement dated as of November 1, 1987 between First National Bank and Trust Company and certain of its key employees and directors, incorporated herein by
reference to Exhibit 19.20 to the Registrants Form 10-Q Quarterly Report for the quarter ended June 30, 1988.                                                                                  
|            | 
|10.11*      |  | Form of Amendment to Split Dollar Insurance Agreement dated as of November 1, 1994 between First National Bank and Trust Company and certain of its key employees and directors, incorporated
herein by reference to Exhibit 10.11 to the Registrants Form 10-KSB Annual Report for the fiscal year ended December 31, 1994.                                                              
|            | 
|10.20*      |  | Stock Compensation Plan as amended effective May 12, 1998, incorporated herein by reference to Exhibit 10.30 to the Registrants Form 10-Q Quarterly Report for the quarter ended June 30,
1998.                                                                                                                                                                                           
|            | 
|10.21*      |  | Form of Incentive Stock Option Agreement between FNB Corp. and certain of its key employees, pursuant to the Registrants Stock Compensation Plan, incorporated herein by reference to
Exhibit 10.31 to the Registrants Form 10-KSB Annual Report for the fiscal year ended December 31, 1994.                                                                                            
|            | 
|10.22*      |  | Form of Nonqualified Stock Option Agreement between FNB Corp. and certain of its directors, pursuant to the Registrants Stock Compensation Plan, incorporated herein by reference to Exhibit
10.32 to the Registrants Form 10-KSB Annual Report for the fiscal year ended December 31, 1994.                                                                                             
|            | 
|10.23*      |  | FNB Corp. 2003 Stock Incentive Plan, incorporated herein by reference to Exhibit 99.1 to the Registrants Registration Statement on Form S-8 (File No. 333-105442).                                                                                                                                                                                                                        



35



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|            |  |                                                                                                                                                                                                                                                                                                                                
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                                                                                         
|10.24*      |  | Form of Incentive Stock Option Agreement between FNB Corp. and certain of its key employees, pursuant to the Registrants 2003 Stock Incentive Plan, incorporated herein by reference to
Exhibit 10.24 to the Registrants Form 10-Q Quarterly Report for the quarter ended September 30, 2003.                                
|            | 
|10.25*      |  | Form of Nonqualified Stock Option Agreement between FNB Corp. and certain of its directors, pursuant to the Registrants 2003 Stock Incentive Plan, incorporated herein by reference to
Exhibit 10.25 to the Registrants Form 10-K Annual Report for the fiscal year ended December 31, 2003.                                 
|            | 
|10.30*      |  | Employment Agreement dated as of January 1, 2006 among FNB Corp., First National Bank and Trust Company and Michael C. Miller, incorporated herein by reference to Exhibit 10 to the
Registrants Current Report on Form 8-K filed on January 6, 2006.                                                                         
|            | 
|10.31*      |  | Carolina Fincorp, Inc. Stock Option Plan (assumed by the Registrant on April 10, 2000), incorporated herein by reference to Exhibit 99.1 to the Registrants Registration Statement on Form
S-8 (File No. 333-54702).                                                                                                          
|            | 
|10.32*      |  | Employment Agreement dated as of April 10, 2000 between First National Bank and Trust Company and R. Larry Campbell, incorporated herein by reference to Exhibit 10.32 to the Registrants
Form 10-K Annual Report for the fiscal year ended December 31, 2000.                                                                
|            | 
|10.33*      |  | Nonqualified Supplemental Retirement Plan with R. Larry Campbell, incorporated herein by reference to Exhibit 10(c) to the Annual Report on Form 10-KSB of Carolina Fincorp, Inc. for the fiscal
year ended June 30, 1997.                                                                                                     
|            | 
|10.34*      |  | Form of Change of Control Agreement between FNB Corp. and certain of its key employees and officers, incorporated herein by reference to Exhibit 10.35 to the Registrants Form 10-K Annual
Report for the fiscal year ended December 31, 2003.                                                                                
|            | 
|10.40       |  | Guarantee Agreement dated as of November 4, 2006, by FNB Corp. for the benefit of the holders of trust preferred securities, incorporated herein by reference to Exhibit 10.1 to the
Registrants Form 8-K Current Report dated November 4, 2005 and filed November 8, 2005.                                                   
|            | 
|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.



36



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



37