UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended:

March 31, 2008

Commission File Number: 000-13823

FNB United Corp.

 (Exact name of Registrant as specified in its Charter)

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

(336) 626-8300

(Registrant's telephone number, including area code)

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

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

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

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

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

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

FNB United Corp. and Subsidiary

CONSOLIDATED BALANCE SHEETS (unaudited)

	March 31,			December 31,
	2008			2007
	(in thousands, except share and per share data)
ASSETS
Cash and due from banks	$	38,333		$	37,739
Interest-bearing bank balances		220			836
Federal funds sold		532			542
Investment securities:
Available for sale, at estimated fair value (amortized cost of $201,949, $182,127 and $160,903)		203,598			161,809
Held to maturity (estimated fair value of $28,023, $41,464 and $35,251)		28,030			35,650
Loans held for sale		15,121			17,586
Loans held for investment		1,541,119			1,446,116
Less allowance for loan losses		(18,215	)		(17,381	)
Net loans held for investment		1,522,904			1,428,735
Premises and equipment, net		48,059			46,614
Goodwill		110,195			110,195
Core deposit premiums		6,362			6,564
Other assets		61,929			60,236
Total Assets	$	2,035,283		$	1,906,506
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand deposits	$	167,511		$	158,564
Interest-bearing deposits:
Demand, savings and money market deposits		471,733			464,731
Time deposits of $100,000 or more		409,678			375,419
Other time deposits		436,727			442,328
Total deposits		1,485,649			1,441,042
Retail repurchase agreements		35,815			29,133
Federal Home Loan Bank advances		192,413			131,790
Federal funds purchased		28,000			13,500
Junior subordinated debentures		56,673			56,702
Other liabilities		19,591			18,083
Total Liabilities		1,818,141			1,690,250
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 - 11,425,052 and 11,426,902		28,563			28,567
Surplus		114,293			114,119
Retained earnings		74,452			74,199
Accumulated other comprehensive loss		(166	)		(629	)
Total Shareholders' Equity		217,142			216,256
Total Liabilities and Shareholders' Equity	$	2,035,283		$	1,906,506
See accompanying notes to consolidated financial statements.

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

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FNB United Corp. and Subsidiary

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME

Three Months Ended March 31, 2008 and March 31, 2007 (unaudited)

												Accumulated
												Other
	Common Stock								Retained			Comprehensive
	Shares			Amount			Surplus		Earnings			Income (Loss)			Total
	(in thousands, except share and per share data)
Balance, December 31, 2006		11,293,992		$	28,235		$	112,213	$	68,662		$	(1,442	)	$	207,668
Comprehensive income:
Net income		-			-			-		3,752			-			3,752
Other comprehensive income, net of taxes:
Unrealized securities losses		-			-			-		-			(94	)		(94	)
Total comprehensive income		-			-			-		-			-			3,658
Cash dividends declared, $.15 per share		-			-			-		(1,698	)		-			(1,698	)
Stock options:		-								-			-			-
Proceeds from options exercised		53,777			135			329		-			-			464
Compensation expense recognized		-			-			134		-			-			134
Net tax benefit related to option exercises		-			-			108		-			-			108
Restricted stock:										-			-
Compensation expense recognized		-			-			82		-			-			82
Other compensatory stock issued		432			1			7		-			-			8
Balance, March 31, 2007		11,348,201		$	28,371		$	112,873	$	70,716		$	(1,536	)	$	210,424
Balance, December 31, 2007		11,426,902		$	28,567		$	114,119	$	74,199		$	(629	)	$	216,256
Cumulative effect of a change in accounting principle - Adoption of EITF 06-4		-			-			-		(357	)		-			(357	)
Comprehensive income:
Net income		-			-			-		2,323			-			2,323
Other comprehensive income, net of taxes:
Unrealized securities gains		-			-			-		-			449			449
Application of SFAS No. 158		-			-			-		-			14			14
Total comprehensive income		-			-			-		-			-			2,483
Cash dividends declared, $.15 per share		-			-			-		(1,713	)		-			(1,713	)
Stock options:
Proceeds from options exercised		150			1			1		-			-			2
Compensation expense recognized		-			-			111		-			-			111
Restricted stock:
Shares issued/terminated,  subject to restriction		(2,000	)		(5	)		5		-			-			-
Compensation expense recognized		-			-			57		-			-			57
Balance, March 31, 2008		11,425,052		$	28,563		$	114,293	$	74,452		$	(166	)	$	217,142
See accompanying notes to consolidated financial statements.

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

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FNB United Corp. and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

FNB United Corp. (“FNB United”) is a bank holding company whose wholly owned subsidiary is CommunityOne Bank, National Association (“CommunityOne”), formerly known as First National Bank and Trust Company prior to June 4, 2007. CommunityOne has three wholly owned subsidiaries, Dover Mortgage Company (“Dover”), First National Investor Services, Inc. and Premier Investment Services, Inc.  Through CommunityOne and Dover, FNB United offers a complete line of consumer, mortgage and business banking services, including loan, deposit, cash management, investment management and trust services, to individual and business customers. CommunityOne has offices in Alamance, Alexander, Ashe, Catawba, Chatham, Gaston, Guilford, Iredell, Montgomery, Moore, Orange, Randolph, Richmond, Rowan, Scotland, Watauga and Wilkes counties in North Carolina.  Dover, based in Charlotte, NC, joined FNB United in 2003 and has a retail origination network in key growth markets across the state, in addition to wholesale operations. Effective August 1, 2007, Dover became a subsidiary of CommunityOne. Premier Investment Services, Inc. is an inactive company.

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

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

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

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

2. Cash and Cash Equivalents

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

3.      Earnings per Share

Basic net income per share, or basic earnings per share (“EPS”), is computed by dividing net income by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if the Company’s potential common stock and contingently issuable shares, which consist of dilutive stock options and restricted stock, were exercised.  The numerator of the basic EPS computation is the same as the numerator of the diluted EPS computation

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

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

For the three months ended March 31, 2008 and 2007 there were 666,036 and 329,141 shares, respectively, related to stock options and restricted stock that were antidilutive since the exercise price exceeded the average market price for the period and were omitted from the calculation of diluted earnings per share for their respective periods. These common stock equivalents were omitted from the calculations of diluted EPS for their respective periods.

4. Allowance for Loan Losses

Changes in the allowance for loan losses were as follows:

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

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5. Postretirement Employee Benefit Plans

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

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

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

6. Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 enhances existing guidance for measuring assets and liabilities using fair value. Prior to the issuance of SFAS No. 157, guidance for applying fair value was incorporated in several accounting pronouncements. SFAS No. 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. SFAS No. 157 also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Under SFAS No. 157, fair value measurements are disclosed by level within that hierarchy. While SFAS No. 157 does not add any new fair value measurements, it does change current practice. Changes to practice include: (1) a requirement for an entity to include its own credit standing in the measurement of its liabilities; (2) a modification of the transaction price presumption; (3) a prohibition on the use of block discounts when valuing large blocks of securities for broker-dealers and investment companies; and (4) a requirement to adjust the value of restricted stock for the effect of the restriction even if the restriction lapses within one year. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company adopted the provisions of SFAS No. 157 effective January 1, 2008.  Refer to Note 8 to the consolidated financial statements for additional disclosures.

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

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159), which allows an entity the irrevocable option to elect fair value for the initial

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and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. Subsequent changes in fair value of these financial assets and liabilities would be recognized in earnings when they occur. SFAS 159 further establishes certain additional disclosure requirements. SFAS 159 is effective for the Company’s financial statements for the year beginning on January 1, 2008, with earlier adoption permitted.  The adoption of the provisions of SFAS 159 effective January 1, 2008 had no material effect on financial position or results of operations.

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

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

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

7. Comprehensive Income

Comprehensive income is defined as the change in equity of an enterprise during a period from transactions and other events and circumstances from nonowner sources and, accordingly, includes both net income and amounts referred to as other comprehensive income.  The items of other comprehensive income are included in the consolidated statement of shareholders’ equity and comprehensive income.  The accumulated balance of other comprehensive income is included in the shareholders’ equity section of the consolidated balance sheet.  The Company’s components of accumulated other comprehensive income at March 31, 2008 include unrealized gains (losses) on investment securities classified as available-for-sale and the effect of the application of SFAS No. 158 to defined benefit pension and other postretirement plans for employees.

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

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

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

8.  Fair value

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

Fair Value Hierarchy

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

Level 1 Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2 Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

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

Investment Securities Available-for-Sale

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

Loans Held for Sale

Loans held for sale are carried at the lower of cost or market value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar

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characteristics. As such, the Company classifies loans subjected to nonrecurring fair value adjustments as Level 2.

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and the related impairment is charged against the allowance or a specific allowance is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS 114, “Accounting by Creditors for Impairment of a Loan,” (SFAS 114). The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of the expected repayments or collateral meet or exceed the recorded investments in such loans. At March 31, 2008, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with SFAS 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Derivative Assets and Liabilities

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

Other Real Estate Owned

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

Mortgage Servicing Rights

Mortgage servicing rights are subject to impairment testing. A valuation model, which utilizes a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and a discount rate, is used in the completion of impairment testing. If the valuation model reflects a value less than the carrying value, loan servicing rights are adjusted to fair

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value through a valuation allowance as determined by the model. As such, the Company classifies mortgage servicing rights subjected to nonrecurring fair value adjustments as Level 3.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

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

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

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

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

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

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

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

Overview

Description of Operations

FNB United is a bank holding company with a full-service subsidiary bank, CommunityOne, which offers a complete line of consumer, mortgage and business banking services, including loan, deposit, cash management, investment management and trust services, to individual and business customers.  CommunityOne has offices in Alamance, Alexander, Ashe, Catawba, Chatham, Gaston, Guilford, Iredell, Montgomery, Moore, Orange, Randolph, Richmond, Rowan, Scotland, Watauga and Wilkes counties in North Carolina.

Additionally, CommunityOne has a mortgage banking subsidiary, Dover Mortgage Company, which originates, underwrites and closes loans for sale into the secondary market.  Dover, based in Charlotte, NC, joined FNB United in 2003 and has a retail origination network in key growth markets across the state, in addition to wholesale operations. Effective August 1, 2007, Dover became a subsidiary of CommunityOne.

Executive Summary

The Company earned $2.3 million in the first quarter of 2008, a 38% decline from earnings of $3.8 million in the same period of 2007. The decrease in net income resulted from declining levels of net interest income and noninterest income and higher levels of provision for loan losses and noninterest expense.  Quarterly basic and fully diluted earnings per common share decreased from $0.33, to $0.20.

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

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Financial highlights are presented in the accompanying table.

Table 1

Selected Financial Data

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

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Application of Critical Accounting Policies

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

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

Allowance for Loan Losses

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

Goodwill

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

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

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

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

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Summary

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

Results of Operations

Net Interest Income

Net interest income is the difference between interest income, principally from loans and investments, and interest expense, principally on customer deposits.  Changes in net interest income result from changes in interest rates and in the volume, or average dollar level, and mix of earning assets and interest-bearing liabilities.  An analysis is presented in Table 2 of the Company’s net interest income on a taxable-equivalent basis and average balance sheets for the three month period ended March 31, 2008 and 2007.

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

The net interest margin (taxable-equivalent net interest income divided by average earning assets) compressed 47 basis points to 3.68 % for the three months ended March 31, 2008, compared to 4.15% in the same period in 2007.  The decline in the net interest margin can be primarily attributed to the rapid decline in the prime lending rate, from 8.25% at March 31, 2007 to 5.25% at March 31, 2008. The majority of this decline occurred between September 2007 and March 2008. Approximately two-thirds of our loan portfolio reprices based on prime whereas our cost of interest-bearing liabilities doesn’t react as quickly. Another variable impacting the margin was the increased market demand for liquidity which we built into our funding cost beginning in the second half of 2007. While the Company experienced an 88 basis points decrease in the yield on earning assets, the cost of interest bearing liabilities only decreased 44 basis points.  Growth in earning assets was funded by higher cost deposits and wholesale borrowings.

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Table 2

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

(1) The fully tax equivalent basis is computed using a federal tax rate of 35%.

(2) The average loan balances include nonaccruing loans.

(3) The average balances for all periods include market adjustments to fair value for securities and loans available/held for sale.

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

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

Provision for Loan Losses

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

During the three month period ended March 31, 2008, management determined a charge to operations of $1.5 million would bring the allowance for loan losses to a balance considered to be adequate to reflect the growth in loans and to absorb probable losses inherent in the portfolio.  This amount compared to $524,000 for the first quarter of 2007. The level of the provision was primarily driven by growth in the loan portfolio. Net charge offs for the three months ended March 31, 2008 totaled $680,000, or 0.18% annualized of average loans, compared to $710,000, or 0.21% annualized of average loans for the same period in 2007. See “Asset Quality – Allowance for loan losses” for additional discussion on the allowance for loan losses.

Noninterest Income

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

Noninterest Expense

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

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Income Taxes

The Company’s provision for income taxes totaled $1.1 million for the first quarter of 2008 and $1.9 million for the same period in 2007. The decrease in the provision for 2008, compared to the prior year, results primarily from the decrease in taxable income. Our provision for income taxes, as a percentage of income before income taxes, was 31.8% for the three months ended March 31, 2008, compared to 33.7% for the three months ended March 31, 2007, reflective of different levels of tax-exempt earnings.

Financial Condition

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

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

Shareholders’ equity remains strong, with all of our regulatory capital ratios at levels that classify FNB United and CommunityOne as “adequately capitalized” under regulatory capital guidelines governing bank holding companies and banks. Shareholders’ equity increased to $217.1 million at the end of the first quarter 2008, compared to $216.3 million at December 31, 2007.  The adoption of the provisions of EITF Issue 06-4 effective January 1, 2008 resulted in a $357,000 reduction of retained earnings through recognition of the cumulative effect of a change in accounting principle. The Company declared dividends of $0.15 per share during the three months ended March 31, 2008.

Asset Quality

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

Nonperforming assets

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

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

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Allowance for loan losses

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

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

The allowance for loan losses, as a percentage of loans held for investment, amounted to 1.18% at March 31, 2008 and 1.20% at both December 31, 2007 and March 31, 2007.  The allowance percentage has remained within a range of 1.16% to 1.20% during the twelve-month period ended March 31, 2008, based on the results from application of the allowance model that assigns reserves to various components of the loan portfolio in order to provide for probable inherent losses. Adequate provisions and allowances for loan losses are based upon numerous factors including growth of the loan portfolio, delinquencies, net charge offs, nonperforming loans, and collateral values. Changes in the allowance for loan losses are presented in Note 4 to the Consolidated Financial Statements.

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

19

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

Liquidity Management

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

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

Commitments, Contingencies and Off-Balance Sheet Risk

In the normal course of business, various commitments are outstanding that are not reflected in the consolidated financial statements.  Significant commitments at March 31, 2008 are discussed below.

Commitments by CommunityOne to extend credit and undisbursed advances on customer lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  At March 31, 2008, total commitments to extend credit and undisbursed advances on customer lines of credit amounted to $457.6 million.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many commitments expire without being fully drawn, the total commitment amounts do not necessarily represent future cash requirements.  The Company evaluates each customer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, upon extension of credit is based on the credit evaluation of the borrower.

CommunityOne issues standby letters of credit whereby it guarantees the performance of a customer to a third party if a specified triggering event or condition occurs.  The guarantees generally expire within one year and may be automatically renewed depending on the terms of the guarantee.  All standby letters of credit provide for recourse against the customer on whose behalf the letter of credit was issued, and this recourse may be further secured by a pledge of assets.  The maximum potential amount of undiscounted future payments related to standby letters of credit was $2.5 million at March 31, 2008, $2.7 million at December 31, 2007 and $6.8 million at March 31, 2007.

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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 Company is subject to variability in market prices related to these commitments.  The Company believes that it is prudent to limit the variability of expected proceeds from the future sales of these loans by entering into forward sales commitments and commitments to deliver loans into a mortgage-backed security.  The commitments to originate fixed rate residential mortgage loans and the forward sales commitments are freestanding derivative instruments.  They do not qualify for hedge accounting treatment so their fair value adjustments are recorded through the income statement in income from mortgage loan sales.  The commitments to originate fixed rate residential mortgage loans totaled $8.1 million at March 31, 2008, and the related forward sales commitments totaled $8.1 million.  Loans held for sale by Dover totaled $9.1 million at March 31, 2008, and the related forward sales commitments totaled $8.1 million.

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

Asset/Liability Management and Interest Rate Sensitivity

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

The Company’s balance sheet was asset-sensitive at March 31, 2008.  An asset-sensitive position means that, for cumulative gap measurement periods of one year or less, there are more assets than liabilities subject to immediate repricing as market rates change.  Because immediately rate sensitive assets exceed rate sensitive interest-bearing liabilities, the earnings position could improve in a rising rate environment and could deteriorate in a declining rate environment, depending on the correlation of rate changes in these two categories.  Included in interest-bearing liabilities subject to rate changes within 90 days is a portion of the interest-bearing demand, savings and money market deposits.  These types of deposits historically have not repriced coincidentally with or in the same proportion as general market indicators.

Capital Resources

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

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

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	Regulatory Guidelines
	Well Capitalized	Adequately Capitalized	FNB United	CommunityOne
Total Capital	10.0%	8.0%	9.7%	9.6%
Tier 1 Capital	6.0	4.0	7.4	8.5
Leverage Capital	5.0	4.0	7.2	8.3

Non-GAAP Measures

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

Cautionary Statement for Purpose of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), which can be identified by the use of forward-looking terminology such as “believes”, “expects”, “plans”, “projects”, “goals”, “estimates”, “may”, “could”, “should”, or “anticipates” or the negative thereof or other variations thereon of comparable terminology, or by discussions of strategy that involve risks and uncertainties.  In addition, from time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing.  Such forward-looking statements may be included in, but are not limited to, various filings made by the Company with the Securities and Exchange Commission, or press releases or oral statements made by or with the approval of an authorized executive officer of the Company.  Forward-looking statements are based on management’s current views and assumptions and involve risks and uncertainties that could significantly affect expected results.  The Company wishes to caution the reader that factors, such as those listed below, in some cases have affected and could affect the Company’s actual results, causing actual results to differ materially from those in any forward-looking statement.   These factors include, without limitation:  (i) competitive pressure in the banking industry or in the Company’s markets may increase significantly, (ii) changes in the interest rate environment may reduce margins, (iii) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, credit quality deterioration, (iv) changes may occur in banking legislation and regulation, (v) changes may occur in general business conditions, (vi) changes may occur in the securities markets, and (vii) changes in real estate markets. Readers should also consider information on risks and uncertainties contained in the discussions of competition, supervision and regulation, and effect of governmental policies contained in the Company’s most recent Annual Report on Form 10-K. All forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any statement,

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

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

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

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

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

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

Item 4.  Controls and Procedures

Evaluation of disclosure controls and procedures

As of March 31, 2008, the end of the period covered by this report, FNB United carried out an evaluation under the supervision and with the participation of the Company’s management, including FNB United’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of FNB United’s disclosure controls and procedures.  In designing and evaluating the Company’s disclosure controls and procedures, FNB United and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and FNB United’s management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures.  Based upon the evaluation, the Chief Executive Officer, and Chief Financial Officer concluded that, the Company’s disclosure controls and procedures were ineffective to provide reasonable assurance that information required to be disclosed by FNB United in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

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

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

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1.A. Risk Factors

No material changes.

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

Not Applicable.

Item 3. Defaults Upon Senior Securities

Not Applicable.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits

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

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SIGNATURES

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

	FNB United Corp.
	(Registrant)
May  12, 2008	/s/ Mark A. Severson
	Mark A. Severson
	Chief Financial Officer

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INDEX TO EXHIBITS

Exhibit No.	Description of Exhibit
3.10	Articles of Incorporation of the Registrant, incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form S-14 Registration Statement (No. 2-96498) filed March 16, 1985.
3.11	Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 10, 1988, incorporated herein by reference to Exhibit 19.10 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended  June 30, 1988.
3.12	Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 12, 1998, incorporated herein by reference to Exhibit 3.12 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 1998.
3.13	Articles of Amendment to Articles of Incorporation of the Registrant, adopted May 23, 2003, incorporated herein by reference to Exhibit 3.13 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 2003.
3.14	Articles of Amendment to Articles of Incorporation of the Registrant, adopted March 15, 2006, incorporated herein by reference to Exhibit 3.14 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended March 31, 2006.
3.15	Articles of Merger, setting forth amendment to Articles of Incorporation of the Registrant, effective April 28, 2006, incorporated herein by reference to Exhibit 3.15 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended March 31, 2006.
3.20	Amended and Restated Bylaws of the Registrant, adopted March 18, 2004, incorporated herein by reference to Exhibit 3.20 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended March 31, 2004.
4.10	Specimen of Registrant’s Common Stock Certificate, incorporated herein by reference to Exhibit 4 to Amendment No. 1 to the Registrant’s Form S-14 Registration Statement (No. 2-96498) filed April 19, 1985.
4.20	Indenture dated as of November 4, 2005, between FNB Corp. and U.S. Bank, National Association, as trustee, incorporated herein by reference to Exhibit 4.1 to the Registrant’s Form 8-K Current Report dated November 4, 2005.

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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 United Corp. 2003 Stock Incentive Plan, as amended, incorporated herein by reference to Exhibit 10.23 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended March 31, 2007.

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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.
10.26*	Form of Restricted Stock Agreement between FNB United Corp. and certain of its key employees and non-employee directors, pursuant to the Registrant’s 2003 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.26 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 2006.
10.30*	Employment Agreement dated as of January 1, 2006 among FNB Corp., First National Bank and Trust Company and Michael C. Miller, incorporated herein by reference to Exhibit 10 to the Registrant’s Current Report on Form 8-K filed on January 6, 2006.
10.31*	Carolina Fincorp, Inc. Stock Option Plan (assumed by the Registrant on April10, 2000), incorporated herein by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-54702).
10.32*	Employment Agreement dated as of April 10, 2000 between First National Bank and Trust Company and R. Larry Campbell, incorporated herein by reference to Exhibit 10.32 to the Registrant’s Form 10-K Annual Report for the fiscal year ended December 31, 2000.
10.33*	First Amendment to Employment Agreement dated as of June 30, 2006 between First National Bank and Trust Company and R. Larry Campbell, incorporated herein by reference to Exhibit 10 to the Registrant’s Form 8-K Current Report dated June 30, 2006 and filed July 7, 2006.
10.34*	Nonqualified Supplemental Retirement Plan with R. Larry Campbell, incorporated herein by reference to Exhibit 10(c) to the Annual Report on Form 10-KSB of Carolina Fincorp, Inc. for the fiscal year ended June 30, 1997.
10.35*	Form of Change of Control Agreement between FNB United Corp. and certain of its key employees and officers, incorporated herein by reference to Exhibit 10.35 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 2006.

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Exhibit No.	Description of Exhibit
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.
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.

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