10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the fiscal year ended December 31, 2008 Commission File Number 0-13823

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)

Securities Registered Pursuant to Section 12(g) of the Securities Exchange Act of 1934:

Title of each class

 Common Stock, $2.50 par value

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes £ No T

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes £ No T

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 T No £

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference to Part III of this Form 10-K or any amendment to this Form 10-K. £

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 £	Accelerated filer T	Non-accelerated filer £	Smaller reporting company £
		(Do not check if a smaller
		reporting company)

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

The aggregate market value of the Registrant’s common stock held by nonaffiliates of the Registrant, assuming, without admission, that all directors and officers of the Registrant may be deemed affiliates, was approximately $88.0 million as of June 30, 2008, the last business day of the Registrant’s most recently completed second fiscal quarter. As of March 12, 2009 (the most recent practicable date), the Registrant had outstanding 11,428,003 shares of Common Stock.

Portions of the Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held on May 12, 2009, are incorporated by reference in Part III of this report.

FNB United Corp.

Form 10-K

Table of Contents

Index		Page
PART I
Item 1.	Business	4
Item 1A.	Risk Factors	14
Item 1B.	Unresolved Staff Comments	18
Item 2.	Properties	18
Item 3.	Legal Proceedings	18
Item 4.	Submission of Matters to a Vote of Security Holders	18
PART II
Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	19
Item 6.	Selected Financial Data	21
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 7A.	Quantitative and qualitative Disclosures about Market Risk	39
Item 8.	Financial Statements and Supplementary Data	41
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	87
Item 9A.	Controls and Procedures	87
Item 9B.	Other Information	88
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	89
Item 11.	Executive Compensation	89
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	89
Item 13.	Certain Relationships and Related Transactions and Director Independence	89
Item 14.	Principal Accountant Fees and Services	89
PART IV
Item 15.	Exhibits and Financial Statement Schedules	90
	Signatures	95

Cautionary Statement Regarding Forward-Looking Statements

The statements contained in this Annual Report on Form 10-K of FNB United Corp (“FNB United”). that are not historical facts are forward-looking statements, as such term is defined in the Private Securities Litigation Reform Act of 1995.  These statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “plans,” “projects,” “goals,” “estimates,” “may,” “should,” “could,” “would,” “intends,” “outlook” or “anticipates,” or the negative of such terms, variations of these and similar words, or by discussions of strategy that involve risks and uncertainties.  In addition, from time to time FNB United 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 FNB United with the Securities and Exchange Commission, or press releases or oral statements made by or with the approval of an authorized officer of FNB United.  Forward-looking statements are based on management’s current views and assumptions and involve risks and uncertainties that could significantly affect expected results.

FNB United wishes to caution the reader that factors, such as those listed below, in some cases have affected and could affect FNB United’s actual results, causing actual results to differ materially from those in any forward-looking statement.  These factors include, without limitation:  (i) the expected cost savings from FNB United’s acquisitions described in the discussion of our business in Item 1 of this Annual Report on 10-K may not materialize or may not fully materialize within the expected time frame, (ii) revenues following the acquisitions may not meet expectations, (iii) costs or difficulties related to the integration of the businesses of FNB United and those of the acquired banks may be greater than anticipated; (iv) competitive pressure in the banking industry or in FNB United’s markets may increase significantly; (v) inflation, interest rate, market and monetary fluctuations; (vi) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, credit quality deterioration or a reduced demand for credit or other services; (vii) the effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; (viii) adverse changes in the securities markets; (ix) changes may occur in banking and other applicable legislation and regulation; (x) changes in accounting principles and standards; (xi) adverse changes in financial performance or condition of FNB United’s borrowers, which could affect repayment of such borrowers’ outstanding loans; (xii) changes in general business conditions; (xiii) competitors of FNB United may have greater financial resources and develop products that enable them to compete more successfully than FNB United; and (xiv) FNB United’s success at managing the risks involved in the foregoing.  FNB United cautions that this list of factors is not exclusive.  Our forward-looking statements may also be subject to other risks and uncertainties, including those discussed elsewhere in this report, such as in Item 1A, “Risk Factors,” and in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, or in our other filings with the Securities and Exchange Commission.

All forward-looking statements speak only as of the date on which such statements are made, and FNB United undertakes no obligation to update any statement, 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.

PART I

Item 1. Business

General

FNB United Corp. (“FNB United”), formerly known as FNB Corp. prior to April 28, 2006, is a bank holding company incorporated under the laws of the State of North Carolina in 1984.  On July 2, 1985, through an exchange of stock, FNB United acquired a wholly owned bank subsidiary, CommunityONE Bank, National Association (the “Bank”), a national banking association founded in 1907 and formerly known as First National Bank and Trust Company.  First National Bank and Trust Company changed its name to CommunityONE Bank, National Association as of June 4, 2007.  The Bank has two operating subsidiaries, Dover Mortgage Company (“Dover”) and First National Investor Services, Inc.; and an inactive subsidiary, Premier Investment Services, Inc., acquired through its merger with Alamance Bank.  On November 4, 2005, FNB United acquired, through its merger with United Financial, Inc. (“United”), another wholly owned bank subsidiary, Alamance Bank, a North Carolina-chartered bank organized in 1998 as a national bank.  Alamance Bank was merged into the Bank effective February 1, 2006.  On April 28, 2006, FNB United acquired through its merger with Integrity Financial Corporation (“Integrity”), an additional bank subsidiary, First Gaston Bank of North Carolina, including its divisions Catawba Valley Bank and Northwestern Bank.  On August 1, 2006, First Gaston Bank was merged into the Bank.  FNB United is parent to FNB United Statutory Trust I, FNB United Statutory Trust II, and Catawba Valley Capital Trust II, the latter trust formerly being an Integrity subsidiary.  FNB United and its subsidiaries are collectively referred to as the “Company.”

The Bank, which is a full-service bank, currently conducts all of its operations in Alamance, Alexander, Ashe, Catawba, Chatham, Gaston, Guilford, Iredell, Mecklenburg, Montgomery, Moore, Orange, Randolph, Richmond, Rowan, Scotland, Watauga and Wilkes counties in North Carolina.  The Bank has forty-six offices, including the headquarters office in the City of Asheboro.  Some of the major banking services offered include regular checking accounts, interest checking accounts (including package account versions that offer a variety of products and services), money market accounts, savings accounts, certificates of deposit, individual retirement accounts, debit cards, credit cards (offered through an agent relationship), and loans -- both secured and unsecured -- for business, agricultural and personal use.  Other services offered include internet banking, cash management, investment management and trust services.  The Bank also has automated teller machines and is a member of Plus, a national automated teller machine network, and Star, a regional network.

Dover, acquired by FNB United in 2003, originates, underwrites and closes mortgage loans for sale into the secondary market.  Dover has a retail origination network based in Charlotte and also conducts wholesale operations in North Carolina, South Carolina, Georgia, Tennessee, Virginia and Maine.

First National Investor Services, Inc., which does business as Marketplace Finance, is engaged in servicing loans purchased by the Bank from automobile dealers.

As noted above, on November 4, 2005, FNB United completed a merger for the acquisition of United Financial, Inc, holding company for Alamance Bank, headquartered in Graham, North Carolina.

As also noted above, on April 28, 2006, the Company completed a merger for the acquisition of Integrity Financial Corporation, headquartered in Hickory, North Carolina and the holding company for First Gaston Bank of North Carolina, including its divisions Catawba Valley Bank and Northwestern Bank.  The merger transaction has been accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Integrity were recorded based on estimated fair values as of April 28, 2006, with the estimate of goodwill being subject to possible adjustment during the one-year period from that date.  The net of all such adjustments during that one-year period amounted to a $76,000 reduction in goodwill.  The consolidated financial statements include the results of operations of Integrity since April 28, 2006.  The primary reasons for the merger were:

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· To create a banking organization, approximately two-thirds larger in total assets than FNB United prior to the merger, that could offer an expanded array of services, including the ability to provide larger loans and professional wealth management services in a community banking setting;

· To expand the footprint of the company from 10 central-North Carolina counties to 17 counties with 42 community offices, stretching from the Central and Southern Piedmont to the Foothills and Mountains of Western North Carolina, including areas of the state that possessed faster income and population growth characteristics than many existing FNB United franchise areas;

· And to create shareholder value based upon the opportunities set out above.

In the 2006 fourth quarter, FNB United and the Bank significantly expanded their headquarters facilities in Asheboro, North Carolina, adding a separate facility for certain executive and administrative functions and an operating center for loan and deposit operations.

In November 2005 and April 2006, FNB United formed FNB United Statutory Trust I and FNB United Statutory Trust II, respectively, to facilitate the issuance of trust preferred securities.  FNB United Statutory Trust I is a statutory business trust formed under the laws of the State of Connecticut.  FNB United Statutory Trust II is a statutory business trust formed under the laws of the State of Delaware.  All common securities of the trusts are owned by FNB United.  Similar trust arrangements, Catawba Valley Capital Trust I and Catawba Valley Capital Trust II, were acquired by FNB United on April 28, 2006 through its merger with Integrity. FNB United caused the redemption of the securities issued by Catawba Valley Trust I as of December 30, 2007, and that trust was subsequently dissolved.

Competition

The banking industry within the Bank’s marketing area is extremely competitive.  The Bank faces direct competition in Alamance, Alexander, Ashe, Catawba, Chatham, Gaston, Guilford, Iredell, Mecklenburg, Montgomery, Moore, Orange, Randolph, Richmond, Rowan, Scotland, Watauga and Wilkes counties from approximately 90 different financial institutions, including commercial banks, savings institutions and credit unions.  Although no one of these entities is dominant, the Bank considers itself to be one of the significant financial institutions in the area in terms of total assets and deposits.  Further competition is provided by banks located in adjoining counties, as well as other types of financial institutions, such as insurance companies, finance companies, pension funds and brokerage houses and other money funds.  The principal methods of competing in the commercial banking industry are improving customer service through the quality and range of services provided, improving cost efficiencies and pricing services competitively.

Dover faces competition within its market area from other mortgage banking companies and from all types of financial institutions engaged in the mortgage loan business.  The principal methods of competing in the mortgage banking business are offering competitively priced mortgage loan products and providing prompt and efficient customer service.

Regulation and Supervision

The following discussion sets forth material elements of the regulatory framework applicable to bank holding companies and their subsidiaries.  It also provides certain specific information relevant to FNB United.  This regulatory framework is intended primarily for the protection of customers and depositors and the deposit insurance funds that insure deposits of banks and savings institutions, and not for the protection of security holders.  To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to those provisions.  A change in the statutes, regulations or regulatory policies applicable to FNB United or its subsidiaries may have a material effect on the business of the Company.  Additional information related to regulatory matters is

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contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

General

As a bank holding company, FNB United is subject to regulation under the Bank Holding Company Act of 1956, as amended, and to inspection, examination and supervision by the Federal Reserve Board.  Under the Bank Holding Company Act, bank holding companies, such as FNB United, that have not elected to become financial holding companies under the Gramm-Leach-Bliley Act generally may not acquire ownership or control of more than 5% of the voting shares or substantially all the assets of any company, including a bank, without the Federal Reserve Board's prior approval.  With limited exceptions, bank holding companies may engage only in the business of banking or managing or controlling banks or furnishing services to or performing services for their subsidiary banks.  A significant exception is that a bank holding company may own shares in a company whose activities the Federal Reserve Board has determined to be closely related to banking or managing or controlling banks.

As a national banking association, the Bank is subject to regulation and examination primarily by the Office of the Comptroller of the Currency (“OCC”).  It is also regulated by the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board.  The Bank’s deposits are insured by the FDIC through the Deposit Insurance Fund.  The OCC and the FDIC impose various requirements and restrictions on the Bank, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged on loans, limitations on the types of investments that may be made and the types of services that may be offered, and requirements governing capital adequacy, liquidity, earnings, dividends, management practices and branching.  As a member of the Federal Reserve System, the Bank is subject to the applicable provisions of the Federal Reserve Act, which imposes restrictions on loans by subsidiary banks to a holding company and its other subsidiaries and on the use of stock or securities as collateral security for loans.

Dover, as an operating subsidiary of the Bank, is regulated by the OCC.  Because Dover underwrites mortgages guaranteed by the government, it is subject to other audits and examinations as required by the government agencies or the investors who purchase the mortgages.

Various consumer laws and regulations also affect the operations of the Company.  In addition to the impact of regulation, financial institutions may be significantly affected by legislation, which can change the statutes affecting them in substantial and unpredictable ways, and by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability to influence the economy.  The instruments of monetary policy used by the Federal Reserve Board include its open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements on member bank deposits.  The actions of the Federal Reserve Board influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans or paid on deposits.

In view of changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Company.

Liability for Bank Subsidiaries

Under current Federal Reserve Board policy, a bank holding company is expected to act as a source of financial and managerial strength to its subsidiary banks and to maintain resources adequate to support each subsidiary bank.  This support may be required at times when the bank holding company may not have the resources to provide it.  Similarly, the cross-guaranty provisions of the Federal Deposit Insurance Act provide that if the FDIC suffers or anticipates a loss as a result of a default by a banking subsidiary or by providing assistance to a subsidiary in danger of default, then any other bank subsidiaries may be assessed for the FDIC’s loss.  Federal law authorizes the OCC to order an assessment of FNB

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United if the capital of the Bank were to become impaired.  If the assessment were not paid within three months, the OCC could order the sale of FNB United’s stock in the Bank to cover the deficiency.

Any capital loans by a bank holding company to any of its bank subsidiaries are subordinate in right of payment to deposits and to certain other indebtedness of such bank subsidiaries.  In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Transactions with Affiliates

There are certain restrictions on the ability of FNB United and certain of its nonbank affiliates to borrow from, and engage in other transactions with, its bank subsidiary and on the ability of its bank subsidiary to pay dividends to FNB United.  In general, these restrictions require that any extensions of credit must be secured by designated amounts of specified collateral and are limited, as to any one of FNB United or a nonbank affiliate, to 10% of the lending bank’s capital stock and surplus, and, as to FNB United and all such nonbank affiliates in the aggregate, to 20% of such lending bank’s capital stock and surplus.  These restrictions, other than the 10% of capital limit on covered transactions with any one affiliate, are also applied to transactions between national banks and their financial subsidiaries.  In addition, certain transactions with affiliates must be on terms and conditions, including credit standards, that are substantially the same, or at least as favorable to the institution, as those prevailing at the time for comparable transactions involving other nonaffiliated companies or, in the absence of comparable transactions, on terms and conditions, including credit standards, that in good faith would be offered to, or would apply to, nonaffiliated companies.

Unsafe and Unsound Practices

The OCC has authority under the Financial Institutions Advisory Act to prohibit national banks from engaging in any activity that, in the OCC’s opinion, constitutes an unsafe or unsound practice in conducting their businesses.  The Federal Reserve Board has similar authority with respect to FNB United and its nonbank subsidiaries.

Capital Requirements

FNB United and the Bank are required to comply with federal regulations on capital adequacy. There are two measures of capital adequacy: a risk-based measure and a leverage measure.  All capital standards must be satisfied for an institution to be considered in compliance.  The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets.  Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights.  The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.  For additional information, see “Capital Adequacy” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

Dividend Restrictions

FNB United is a legal entity separate and distinct from its bank and other subsidiaries.  Because the principal source of FNB United’s revenues is dividends from the subsidiary bank, the ability of FNB United to pay dividends to its shareholders and to pay service on its own debt depends largely upon the amount of dividends its subsidiaries may pay to FNB United.  There are statutory and regulatory limitations on the payment of dividends by the Bank to FNB United, as well as by FNB United to its shareholders.

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The Bank must obtain the prior approval of the OCC to pay dividends if the total of all dividends declared by the Bank in any calendar year will exceed the sum of its net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus.  Federal law also prohibits the Bank from paying dividends that in the aggregate would be greater than its undivided profits after deducting statutory bad debts in excess of its loan loss allowance.

FNB United and the Bank are also subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums.  If, in the opinion of the appropriate federal regulatory authority, a bank under its jurisdiction is engaged in or is about to be engaged in an unsafe or unsound practice, the authority may require that the bank cease and desist from such practice.   The Federal Reserve Board, the OCC and the FDIC have indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice.  Under the FDICIA, an insured bank may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized.  Further, the Federal Reserve Board, OCC and FDIC have each indicated that banking institutions should generally pay dividends only out of current operating earnings.

FDIC Insurance Assessments

The deposits of the Bank are insured by the Deposit Insurance Fund (DIF) of the FDIC up to the limits set forth under applicable law and are subject to the deposit insurance premium assessments of the DIF. The FDIC imposes a risk-based deposit premium assessment system, which was amended pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”).  Under this system, as amended, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities.  To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. In addition, in the case of those institutions in the lowest risk category, the FDIC further determines its assessment rate based on certain specified financial ratios or, if applicable, its long-term debt ratings.  On December 16, 2008, the FDIC adopted a final rule increasing risk-based assessment rates uniformly by seven basis points, on an annual basis, for the first quarter of 2009.  Under this final rule, risk-based rates will range between 12 and 50 basis points (annualized) for the first quarter 2009 assessment, depending on the insured institution’s risk category as described above.  Absent this first-quarter 2009 increase, banks would pay between 5 and 43 basis points per $100 of assessable deposits.  On February 27, 2009, the FDIC issued another final rule to take effect on April 1, 2009, to change the way the assessment system differentiates for risk, to make corresponding changes to assessment rates beginning with the second quarter of 2009, and to make certain other changes to the assessment rules.  The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. Under the current system, premiums are assessed quarterly.  The FDIC has published guidelines under the Reform Act on the adjustment of assessment rates for certain institutions.  The Reform Act also provides for a one-time premium assessment credit for eligible insured depository institutions, including those institutions in existence and paying deposit insurance premiums on December 31, 1996, or certain successors to any such institution. The assessment credit is determined based on the eligible institution’s deposits at December 31, 1996 and is applied automatically to reduce the institution’s quarterly premium assessments to the maximum extent allowed, until the credit is exhausted. In addition, insured depository institutions have been required to pay a pro rata portion of the interest due on the obligations issued by the Financing Corporation (FICO) to fund the closing and disposal of failed thrift institutions by the Resolution Trust Corporation.

On February 27, 2009, the FDIC adopted an interim rule, with request for comment, that would institute a one-time special assessment of 20 cents per $100 of deposits on FDIC-insured institutions.  If approved, FNB United estimates that the assessment would total approximately $2.9 million. The assessment would be payable on September 30, 2009 and have a significant impact on the results of operations of the Company for 2009.

Under the Federal Deposit Insurance Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound

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condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by a bank’s federal regulatory agency.

Community Reinvestment Act

The Bank is subject to the provisions of the Community Reinvestment Act of 1977, as amended (CRA).  Under the CRA, all financial institutions have a continuing and affirmative obligation consistent with their safe and sound operation to help meet the credit needs for their entire communities, including low- and moderate-income neighborhoods.  The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA.

The CRA requires the appropriate federal bank regulatory agency, in connection with its examination of the bank, to assess the bank's record in meeting the credit needs of the community served by the bank, including low- and moderate-income neighborhoods.  The regulatory agency's assessment of the bank's record is made available to the public.  Should the Company fail to serve the community adequately, potential penalties are regulatory denials to expand branches, relocate, add subsidiaries and affiliates, expand into new financial activities and merge with or purchase other financial institutions.

Interstate Banking and Branching

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Banking Act”) permits interstate acquisitions of banks by bank holding companies.  FNB United and any other bank holding company located in North Carolina may acquire a bank located in any other state, and any bank holding company located outside North Carolina may lawfully acquire any North Carolina-based bank, regardless of state law to the contrary, in either case subject to certain deposit-percentage limitations, aging requirements and other restrictions.  The Interstate Banking Act also generally provides that national and state-chartered banks may branch interstate through acquisitions of banks in other states.  It allowed, however, any state to elect prior to June 1, 1997 either to “opt in” and accelerate the date after which interstate branching was permissible or to “opt out” and prohibit interstate branching altogether.  North Carolina enacted “opt in” legislation permitting interstate branching.  The Interstate Banking Act may have the effect of increasing competition within the markets in which FNB United operates.

Depositor Preference Statute

Under federal law, depositors and certain claims for administrative expenses and employee compensation against an insured depository institution would be afforded a priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the “liquidation or other resolution” of such an institution by any receiver.

Gramm-Leach-Bliley Act

The Gramm-Leach-Bliley Act allows bank holding companies to engage in a wider range of nonbanking activities, including greater authority to engage in the securities and insurance businesses.  Under the Gramm-Leach-Bliley Act, a bank holding company that elects to become a financial holding company may engage in any activity that is financial in nature, is incidental to financial activity or complements financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally.  Activities cited by the law as being “financial in nature” include securities underwriting, dealing in securities and market making, insurance underwriting and agency, providing financial, investment or economic advisory services, and activities that the Federal Reserve Board has determined to be closely related to banking.  FNB United has not elected to become a financial holding company.

Subject to certain limitations on investment, a national bank or its financial subsidiary may also engage in activities that are financial in nature, other than insurance underwriting, insurance company portfolio

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investment, real estate development and real estate investment, so long as the bank is well-capitalized, well-managed and has at least a satisfactory Community Reinvestment Act rating.  Subsidiary banks of a financial holding company or national banks with financial subsidiaries must continue to be well-capitalized and well-managed to continue to engage in activities that are financial in nature.  In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has at least a satisfactory Community Reinvestment Act rating.

Privacy

The Gramm-Leach-Bliley Act also modified other financial laws, including laws related to financial privacy.  Under the act, federal banking regulators adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties.  The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties.  The Fair Credit Reporting Act restricts information sharing among affiliates and was amended in December 2003 to restrict further affiliate sharing of information for marketing purposes.

International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001

The USA Patriot Act of 2001 contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the “IMLAFA”).  The IMLAFA substantially broadens existing anti-money laundering legislation and the extraterritorial jurisdiction of the United States, imposes new compliance and due diligence obligations, creates new crimes and penalties, compels the production of documents located both inside and outside the United States, including those of foreign institutions that have a correspondent relationship in the United States, and clarifies the safe harbor from civil liability to customers.  The U.S. Treasury Department has issued a number of regulations implementing the USA Patriot Act that apply certain of its requirements to financial institutions such as our bank subsidiary.  The regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers.

Pursuant to the IMLAFA, the Company established anti-money laundering compliance and due diligence programs.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation and enhanced and timely disclosure of corporate information.  The act is intended to allow shareholders to monitor more easily and efficiently the performance of public companies and their directors.

Emergency Economic Stabilization Act of 2008

In response to recent unprecedented market turmoil, the Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted on October 3, 2008.  EESA established the Troubled Asset Relief Program (“TARP”), which authorizes the Secretary of the Treasury to purchase or guarantee up to $700 billion in troubled assets from financial institutions.  Pursuant to authority granted under EESA and as part of the TARP, the Secretary has created the Capital Purchase Program (“CPP”) under which the Treasury Department will invest up to $250 billion in senior preferred stock of U.S. banks and savings associations or their holding companies.  Qualifying financial institutions may issue senior preferred stock with a value equal to not less than 1% of risk-weighted assets and not more than the lesser of $25 billion or 3% of risk-weighted assets.

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Institutions participating in the TARP or CPP are required to issue warrants for common or preferred stock or senior debt to the Secretary.  If an institution participates in the CPP or if the Secretary acquires a meaningful equity or debt position in the institution as a result of TARP participation, the institution is required to meet certain standards for executive compensation and corporate governance, including a prohibition against incentives to take unnecessary and excessive risks, recovery of bonuses paid to senior executives based on materially inaccurate earnings or other statements and prohibition against the payment of golden parachutes.  Additional and modified standards with respect to executive compensation and corporate governance for institutions that have participated or will participate in the TARP (including the CPP) were enacted as part of the American Recovery and Reinvestment Act of 2009 (“ARRA”), described below.

CPP Participation

On February 13, 2009, FNB United entered into a Letter Agreement (the “Purchase Agreement”) with the Treasury Department under the CPP, pursuant to which FNB United agreed to issue 51,500 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Preferred Stock”), having a liquidation amount per share equal to $1,000, for a total price of $51.5 million. The Preferred Stock is to pay cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. FNB United may not redeem the Preferred Stock during the first three years except with the proceeds from a “qualified equity offering” (as defined in FNB United’s articles of incorporation). However, under the ARRA, FNB United may redeem the Preferred Stock without a “qualified equity offering,” subject to the approval of its primary federal regulator. After three years, FNB United may, at its option, redeem the Preferred Stock at par value plus accrued and unpaid dividends. The Preferred Stock is generally non-voting, but does have the right to vote as a class on the issuance of any preferred stock ranking senior, any change in its terms or any merger, exchange or similar transaction that would adversely affect its rights. The holder(s) of Preferred Stock also have the right to elect two directors if dividends have not been paid for six periods.

As part of its purchase of the Preferred Stock, the Treasury Department received a warrant (the “Warrant”) to purchase 2,207,143 shares of FNB United’s common stock at an initial per share exercise price of $3.50. The Warrant provides for the adjustment of the exercise price and the number of shares of FNB United’s common stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of FNB United’s common stock, and upon certain issuances of FNB United’s common stock at or below a specified price relative to the initial exercise price. The Warrant expires ten years from the issuance date. If, on or prior to December 31, 2009, FNB United receives aggregate gross cash proceeds of not less than $51.5 million from “qualified equity offerings” announced after October 13, 2008, the number of shares of common stock issuable pursuant to the Treasury Department’s exercise of the Warrant will be reduced by one-half of the original number of shares, taking into account all adjustments, underlying the Warrant. Pursuant to the Purchase Agreement, the Treasury Department has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant. Under the ARRA, the Warrant would be liquidated upon the redemption by FNB United of the Preferred Stock.

Both the Preferred Stock and the Warrant will be accounted for as components of Tier 1 capital.

Prior to February 13, 2012, unless FNB United has redeemed the Preferred Stock or the Treasury Department has transferred the Preferred Stock to a third party, the consent of the Treasury Department will be required for FNB United to (1) declare or pay any dividend or make any distribution on its common stock (other than regular quarterly cash dividends of not more than $0.10 per share of common stock) or (2) redeem, purchase or acquire any shares of its common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the Purchase Agreement.

American Recovery and Reinvestment Act of 2009

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The ARRA was enacted on February 17, 2009. The ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, the ARRA amends the EESA and imposes certain new executive compensation and corporate governance obligations on all current and future TARP recipients, including FNB United, until the institution has redeemed the preferred stock, which TARP recipients are now permitted to do under the ARRA without regard to the three-year holding period and without the need to raise new capital, subject to approval of its primary federal regulator. The executive compensation restrictions under the ARRA (described below) are more stringent than those currently in effect under the CPP, but it is yet unclear how these executive compensation standards will relate to the similar standards recently announced by the Treasury Department, or whether the standards will be considered effective immediately or only after implementing regulations are issued by the Treasury Department.

The ARRA amends Section 111 of the EESA to require the Secretary to adopt additional standards with respect to executive compensation and corporate governance for TARP recipients (including FNB United). The standards required to be established by the Secretary include, in part, (1) prohibitions on making golden parachute payments to senior executive officers and the next five most highly compensated employees during such time as any obligation arising from financial assistance provided under the TARP remains outstanding (the “Restricted Period”), (2) prohibitions on paying or accruing bonuses or other incentive awards for certain senior executive officers and employees, except for awards of long-term restricted stock with a value equal to no greater than one-third of the subject employee’s annual compensation that do not fully vest during the Restricted Period or unless such compensation is pursuant to a valid written employment contract prior to February 11, 2009, (3) requirements that TARP CPP participants provide for the recovery of any bonus or incentive compensation paid to senior executive officers and the next 20 most highly-compensated employees based on statements of earnings, revenues, gains or other criteria later found to be materially inaccurate, with the Secretary having authority to negotiate for reimbursement, and (4) a review by the Secretary of all bonuses and other compensation paid by TARP participants to senior executive employees and the next 20 most highly-compensated employees before the date of enactment of the ARRA to determine whether such payments were inconsistent with the purposes of the Act.

The ARRA also sets forth additional corporate governance obligations for TARP recipients, including requirements for the Secretary to establish standards that provide for semi-annual meetings of compensation committees of the board of directors to discuss and evaluate employee compensation plans in light of an assessment of any risk posed from such compensation plans. TARP recipients are further required by the ARRA to have in place company-wide policies regarding excessive or luxury expenditures and to include non-binding shareholder “say-on-pay” proposals in proxy materials.  The chief executive officer and chief financial officer are required to provide written certifications with respect to compliance. The Secretary is required to promulgate regulations to implement the executive compensation and certain corporate governance provisions detailed in the ARRA.

Federal Deposit Insurance Corporation

Pursuant to the EESA, the maximum deposit insurance amount per depositor has been increased from $100,000 to $250,000 until December 31, 2009. Additionally, on October 14, 2008, after receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, the Secretary of the Treasury signed the systemic risk exception to the FDIC Act, enabling the FDIC to establish its Temporary Liquidity Guarantee Program (“TLGP”). Under the transaction account guarantee program of the TLGP, the FDIC will fully guarantee, until the end of 2009, all non-interest-bearing transaction accounts, including NOW accounts with interest rates of 0.5 percent or less and IOLTAs (lawyer trust accounts). The TLGP also guarantees all senior unsecured debt of insured depository institutions or their qualified holding companies issued between October 14, 2008 and June 30, 2009 with a stated maturity greater than 30 days. All eligible institutions were permitted to participate in both of the components of the TLGP without cost for the first 30 days of the program. Following the initial 30 day grace period, institutions were assessed at the rate of ten basis points for transaction account balances in excess of $250,000 for the transaction account guarantee program and at the rate of either 50, 75, or 100

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basis points of the amount of debt issued, depending on the maturity date of the guaranteed debt, for the debt guarantee program. Institutions were required to opt-out of the TLGP if they did not wish to participate.  FNB United did not choose to opt out of either the transaction account guarantee program or debt guarantee program components of the TGLP.

Future Legislation

Changes to the laws and regulations in the United States and North Carolina can affect the Company’s operating environment in substantial and unpredictable ways.  FNB United cannot predict whether those changes in laws and regulations will occur, and, if those changes occur, the ultimate effect they would have upon the financial condition or results of operations of the Company.  With the recent enactments of the EESA and the ARRA, the nature and extent of future legislative, regulatory or other changes affecting financial institutions is highly unpredictable at this time.

Employees

As of December 31, 2008, FNB United had four officers, all of whom were also officers of the Bank.  On that same date, the Bank had 451 full-time employees and 41 part-time employees and Dover had 50 full-time employees and one part-time employee.  The Bank and Dover each considers its relationship with its employees to be excellent.  The Company provides employee benefit programs, including a matching retirement/savings (“401(k)”) plan, group life, health and dental insurance, paid vacations, and sick leave.

The Company’s employee benefit programs formerly included a noncontributory defined benefit pension plan and healthcare and life insurance benefits for retired employees.  In September 2006, the Board of Directors of FNB United approved a modified freeze to the pension plan.  Effective December 31, 2006, no new employees were eligible to enter the plan.  Participants who were at least age 40, had earned 10 years of vesting service as an employee of FNB United and remain an active employee as of December 31, 2006 qualified for continued benefits under a grandfathering provision.  Under that provision, the grandfathered participant will continue to accrue benefits under the plan through December 31, 2011.  Additionally, the plan’s definition of final average compensation was changed from a 10-year averaging period to a 5-year averaging period as of January 1, 2007.  All other eligible participants in the plan had their retirement benefit frozen as of December 31, 2006.   Effective January 1, 2007, the 401(k) plan was enhanced and became the primary retirement benefit plan.

In conjunction with the modified freeze of the pension plan, the postretirement medical and life insurance plan was also amended.  Effective December 31, 2006, no new employees were eligible to enter the plan.  Participants who were at least age 40, had earned 10 years of vesting service as an employee of the Company and remained an active employee as of December 31, 2006 qualified under a grandfathering provision.  Under the grandfathering provision, the participant will continue to accrue benefits under the plan through December 31, 2011.

Available Information

The Company makes its annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to those reports, available free of charge on its internet website at www.MyYesBank.com, as soon as reasonably practicable after the reports are electronically filed or furnished with the Securities and Exchange Commission. Any materials that the Company files with the SEC may be read or copied or both at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. These filings are also accessible on the SEC’s website at www.sec.gov.  FNB United will provide without charge a copy of its annual report on Form 10-K to any shareholder by mail.  Requests should be sent to FNB United Corp., Attention: Secretary, 150 South Fayetteville Street (27203), P.O. Box 1328, Asheboro, North Carolina 27204.

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Additionally, the Company’s corporate governance policies, including the charters of the Audit, Compensation, and Corporate Governance and Nominating Committees; and the Company’s Code of Business Ethics may also be found through the “Investor Relations” link on the Company’s website.

Item 1A. Risk Factors

The Company is subject to certain risks and an investment in the Company’s securities may involve risks due to the nature of the Company’s business and activities related to that business. In addition to the factors discussed below, please see the discussion under “Item 7A. Quantitative and Qualitative Disclosure about Market Risk.” These factors, along with the other information in this Annual Report on Form 10-K, should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements.

FNB United Is Vulnerable to the Economic Conditions within the Relatively Small Region in Which It Operates

FNB United’s overall success is dependent in part on the general economic conditions within its market area, which extends from the central and southern Piedmont and Sandhills of North Carolina to the foothills and mountains of western North Carolina.  An economic downturn in this fairly small geographic region that negatively affects FNB United’s customers could adversely affect FNB United. For example, an increase in unemployment, a decrease in real estate values or increases in interest rates, as well as other factors, could weaken the economy of the region and depress the Company’s earnings and financial condition.

The United States is currently in a recession. Overall, during 2008, the North Carolina business environment has been adverse for many households and businesses and continues to deteriorate. It is expected that the business environment will continue to deteriorate for the foreseeable future. There can be no assurance that these conditions will improve in the near term. Such conditions could adversely affect the credit quality of the Company’s loans, the value of the Company’s investment securities, and its overall results of operation and financial condition.

Weaknesses in the Markets for Residential or Commercial Real Estate Could Reduce FNB United’s Net Income and Profitability.

Real estate lending (including commercial, construction, land development, and residential) is a large portion of the Bank’s loan portfolio. These categories constitute $1.4 billion, or approximately 86%, of the Bank’s total loan portfolio. These categories are generally affected by changes in economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax and other laws and acts of nature. A downturn in the real estate markets in which the Company originates, purchases, and services mortgage and other loans could hurt its business because these loans are secured by real estate.

Changes in Interest Rates May Have an Adverse Effect on FNB United’s Profitability

FNB United’s earnings and financial condition are dependent to a large degree upon net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings.  The narrowing of the margin between interest rates earned on loans and investments and the interest rates paid on deposits and borrowings could adversely affect FNB United’s earnings and financial condition.  FNB United can neither predict with certainty nor control changes in interest rates.  These changes can occur at any time and are affected by many factors, including national, regional and local economic conditions and monetary policies of the Federal Reserve Board.  FNB United has ongoing policies and procedures designed to manage the risks associated with changes in market interest rates.  Notwithstanding these policies and procedures, changes in interest rates may have an adverse effect on FNB United’s profitability.  For example, high interest rates could adversely affect FNB United’s mortgage banking business because higher interest rates could cause customers to apply for fewer mortgages or mortgage refinancings.

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FNB United Faces Significant Operational Risk

FNB United processes large volumes of transactions on a daily basis, exposing the Company to numerous types of operational risk.  Operational risk includes the risk of fraud or theft by employees or persons outside FNB United, unauthorized transactions by employees or operational errors, including clerical or recordkeeping errors or those resulting from faulty or disabled computer or telecommunications systems, and breaches of the internal control system and compliance requirements.  Negative public opinion can result from FNB United’s actual or alleged conduct in a variety of areas, including lending practices, corporate governance and acquisitions and from actions taken by government regulators and community organizations in response to those activities.  Negative public opinion can adversely affect FNB United’s ability to attract and retain customers and can expose it to litigation and regulatory action.  Operational risk also includes potential legal actions that could arise from an operational deficiency or a as a result of noncompliance with applicable regulatory standards.

Because the nature of the banking business involves a high volume of transactions, certain errors may be repeated or compounded before they are found and corrected.    FNB United’s necessary reliance upon automated systems to record and process its transactions may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect.  FNB United may also be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control (e.g., computer viruses or electrical or telecommunications outages), which may give rise to disruption of service to customers and to financial loss or liability.

FNB United May Experience Significant Competition in its Market Area, Which May Adversely Affect its Business

The banking industry within FNB United’s marketing area is extremely competitive.  In addition, FNB United competes with other providers of financial services, such as savings and loan associations, credit unions, insurance companies, finance companies, pension funds and brokerage houses and other money funds.  Some of FNB United’s larger competitors include several large interstate financial holding companies that are among the largest in the nation and are headquartered in North Carolina.  These companies have a significant presence in FNB United’s market area, have greater resources than FNB United, may have higher lending limits and may offer products and services not offered by FNB United.  These institutions may be able to offer the same products and services at more competitive rates and prices.

FNB United May Experience Additional Goodwill Impairment

As required by generally accepted accounting principles, FNB United periodically reviews its goodwill, intangible assets and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. For the year ended December 31, 2008, FNB United recorded impairment charges of $57.8 million to write down a portion of goodwill. Approximately $52 million in goodwill continues to be carried as an asset on FNB United’s consolidated balance sheet as of December 31, 2008.

One potential indicator of goodwill impairment is whether FNB United’s fair value, as measured by market capitalization, has remained below net book value for a significant period of time. The average closing price of FNB United common stock for the three months ended December 31, 2008 was $5.02, which corresponds to a market capitalization of $57.4 million, as compared to the net book value of $147.9 million as of December 31, 2008. Whether FNB United’s market capitalization triggers an additional impairment charge will depend on the underlying reasons for the decline in stock price, the significance of the decline, and the length of time the stock price has been depressed. FNB United reviews goodwill in accordance with SFAS No. 142, “Goodwill and Other Intangibles,” and will continue to conduct this review in future quarters.

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In the event that FNB United determines in a future quarter that an additional impairment exists for any reason, FNB United would record an additional impairment charge in the quarter such determination is made, which would adversely impact FNB United’s financial position and results of operations.

FNB United Faces Systems Failure Risks as well as Security Risks, Including “Hacking” and “Identity Theft”

The computer systems and network infrastructure used by FNB United could be vulnerable to unforeseen problems. The Company’s operations are dependent upon its ability to protect computer equipment against damage from fire, power loss, or telecommunications failure. Any failure that causes an interruption in the Company’s operations could adversely affect FNB United’s business and financial results. In addition, the Company’s computer systems and network infrastructure present security risks, and could be susceptible to hacking or identity theft.

FNB United’s Business Could Suffer If It Fails to Attract and Retain Skilled People

FNB United’s success depends, in large part, on its ability to attract and retain competent, experienced people. As a result of FNB United’s participation in the CPP, the Company is required to meet certain standards for executive compensation as set forth under the EESA, and related interim regulations. The imposition of compensation limits resulting from the Treasury Department’s investment in FNB United, in addition to other competitive pressures, may have an adverse effect on the ability of FNB United to attract and retain skilled personnel.

Changes in Laws and Regulations and the Regulatory Environment Could Have a Material Adverse Effect on FNB United

FNB United is extensively regulated under federal and state banking laws and regulations that are intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole. In addition, the Company is subject to changes in federal and state laws as well as changes in banking and credit regulations, and governmental economic and monetary policies. FNB United cannot predict whether any of these changes may adversely and materially affect the Company. The current regulatory environment for financial institutions entails significant potential increases in compliance requirements and associated costs, including those related to consumer credit, with a focus on mortgage lending. Federal and state banking regulators possess broad powers to take supervisory actions as they deem appropriate. These actions may result in higher capital requirements, higher insurance premiums and limitations on FNB United’s activities that could have a material adverse effect on the Company’s business and profitability.

In addition, there have been numerous recent actions undertaken by the Treasury Department, Federal Reserve Board, Congress, the FDIC, the SEC and others in efforts to address the current liquidity and credit crisis in the financial industry. (See discussion of EESA, TARP, and ARRA in “Item 1. Business – Regulation and Supervision.”)  Among other things, these measures include homeowner relief that encourages loan restructuring and modification; the establishment of significant liquidity and credit facilities for financial institutions and investment banks; the lowering of the federal funds rate; emergency action against short selling practices; a temporary guaranty program for money market funds; the establishment of a commercial paper funding facility to provide back-stop liquidity to commercial paper issuers; and coordinated international efforts to address illiquidity and other weaknesses in the banking sector. The purpose of these legislative and regulatory actions is to help stabilize the U.S. banking system. However, any current or future legislative initiatives may not have their desired effect and could materially and adversely affect FNB United’s financial condition, results of operation, liquidity, or stock price.

There Is a Limited Market for FNB United Common Stock

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Although FNB United common stock is traded on The NASDAQ Global Select Market, the volume of trading has historically been limited, averaging a few thousand shares per day.  Therefore, there can be no assurance that a holder of FNB United common stock who wishes to sell his or her shares would be able to do so immediately or at an acceptable price.

Certain Provisions of FNB United’s Articles of Incorporation and Bylaws May Discourage Takeovers

FNB United’s articles of incorporation and bylaws contain certain anti-takeover provisions that may discourage or may make more difficult or expensive a tender offer, change in control or takeover attempt that is opposed by FNB United’s board of directors.  In particular, FNB United’s articles of incorporation and bylaws:

— classify its board of directors into three classes, so that shareholders elect only one-third of its board of directors each year.

— permit FNB United’s board of directors to issue, without shareholder approval unless otherwise required by law, voting preferred stock with such terms as the board may determine, and

— require the affirmative vote of the holders of at least 75% of FNB United’s voting shares to approve major corporate transactions unless the transaction is approved by three-fourths of FNB United’s “disinterested” directors.

These provisions of FNB United’s articles of incorporation and bylaws could discourage potential acquisition proposals and could delay or prevent a change in control, even though a majority of FNB United’s shareholders may consider such proposal desirable.  Such provisions could also make it more difficult for third parties to remove and replace the members of FNB United’s board of directors.  They may also inhibit increases in the trading price of FNB United’s common stock that could result from takeover attempts.

FNB United May Not Be Able to Successfully Integrate Bank or Nonbank Mergers and Acquisitions

Difficulties may arise in the integration of the business and operations of bank holding companies, banks and other non-bank entities FNB United acquires and, as a result, FNB United may not be able to achieve the cost savings and synergies that it expects will result from such transactions. Achieving cost savings is dependent on consolidating certain operational and functional areas, eliminating duplicative positions and terminating certain agreements for outside services. Additional operational savings are dependent upon the integration of the acquired or merged entity’s businesses with FNB United or one of its subsidiaries, the conversion of core operating systems, data systems and products and the standardization of business practices. Complications or difficulties in the conversion of the core operating systems, data systems and products may result in the loss of customers, damage to FNB United’s reputation within the financial services industry, operational problems, one-time costs currently not anticipated or reduced cost savings resulting from such mergers or acquisitions. Annual cost savings in each such transaction may be materially less than anticipated if the holding company, bank merger or nonbank merger or acquisition is delayed unexpectedly, the integration of operations is delayed beyond what is anticipated or the conversion to a single data system is not accomplished on a timely basis.

Difficulty in integrating an acquired company may cause FNB United not to realize expected revenue increases, cost savings, increases in geographic or product presence and/or other projected benefits from the acquisition. The integration could result in higher than expected deposit attrition (run-off), loss of key employees, disruption of FNB United’s businesses or the businesses of the acquired company, or otherwise adversely affect FNB United’s ability to maintain relationships with customers and employees or achieve the anticipated benefits of the acquisition.

The Treasury Department’s Investment in FNB United Imposes Restrictions and Obligations Limiting FNB United’s Ability to Increase Dividends, Repurchase Common Stock or Preferred Stock and Access the Equity Capital Markets

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In February 2009, FNB United issued preferred stock and a warrant to purchase common stock to the Treasury Department under the CPP. Prior to February 13, 2012, unless FNB United has redeemed all of the preferred stock, or the Treasury Department has transferred all of the preferred stock to a third party, the consent of the Treasury Department will be required for FNB United to, among other things, increase common stock dividends or effect repurchases of common stock or other equity or capital securities (with certain exceptions, including the repurchase of FNB United Corp. common stock to offset share dilution from equity-based employee compensation awards). FNB United’s ability to declare or pay dividends or repurchase its common stock or other equity or capital securities is also subject to restrictions in the event that FNB United fails to declare and pay full dividends (or declare and set aside a sum sufficient for payment thereof) on the preferred stock held by the Treasury Department.

Other Risks

There are risks and uncertainties relating to an investment in FNB United common stock or to economic conditions and regulatory matters generally that should affect other financial institutions in similar ways.  These aspects are discussed under “Cautionary Statement Regarding Forward-Looking Statements” and “Regulation and Supervision” elsewhere in this Annual Report on Form 10-K.

Item 1B. Unresolved Staff Comments

None

Item 2.  Properties

The principal executive and administrative offices of FNB United and the Bank are located in an office building at 150 South Fayetteville Street, Asheboro, North Carolina.  The Bank also has six other facilities in Asheboro containing three community banking operations and various administrative and operational functions.  The Bank has other community banking offices in Archdale (two offices), Belmont, Biscoe, Boone, Burlington, China Grove, Cornelius, Dallas, Ellerbe, Gastonia, Graham, Greensboro (two offices), Hickory (three offices), Hillsborough, Kannapolis, Laurinburg, Millers Creek, Mooresville, Mt. Holly, Newton, Pinehurst, Ramseur, Randleman, Rockingham (two offices), Salisbury (two offices), Seagrove, Siler City, Seven Lakes, Southern Pines, Stanley, Statesville, Taylorsville, Trinity, West Jefferson, and Wilkesboro (two offices), North Carolina.  Ten of the community banking offices are leased facilities, and four such offices are situated on land that is leased.  Two of the facilities housing operational functions in Asheboro are leased.

Dover operates out of a leased office located in Charlotte, North Carolina.

Item 3. Legal Proceedings

In the ordinary course of operations, the Company and the Bank are party to various legal proceedings.  Neither the Company nor the Bank is involved in, nor have they terminated during the fourth quarter of 2008, any pending legal proceedings other than routine, nonmaterial proceedings occurring in the ordinary course of business.

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

There were no matters submitted to a vote of the security holders of the Company during the fourth quarter of the Company’s fiscal year ended December 31, 2008.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Market Prices and Dividend Policies

FNB United’s common stock is traded on The NASDAQ Global Select Market under the symbol “FNBN.”  The following table shows the high and low sale prices of FNB United common stock on The NASDAQ Global Select Market, based on published financial sources, for each of the last two fiscal years. The table also reflects the per share amount of cash dividends paid for each share during the fiscal quarter for each of the last two fiscal years. Only one cash dividend was paid during each of the fiscal quarters listed.

					Dividends
Calendar Period	High		Low		Paid
Quarter ended March 31, 2007	$	18.48	$	16.53	$	0.15
Quarter ended June 30, 2007		17.07		15.40		0.15
Quarter ended September 30, 2007		16.42		14.94		0.15
Quarter ended December 31, 2007		15.95		12.00		0.15
Quarter ended March 31, 2008	$	12.50	$	10.50	$	0.15
Quarter ended June 30, 2008		11.54		7.70		0.10
Quarter ended September 30, 2008		8.74		6.35		0.10
Quarter ended December 31, 2008		7.49		2.55		0.10

As of March 13, 2009, there were 6,610 record holders of FNB United’s common stock.  For a discussion as to any restrictions on or the ability of FNB United or the Bank to pay dividends, reference Item 1 – Regulation and Supervision. See also Note 14 in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.

Recent Sales of Unregistered Securities

FNB United did not sell any of its securities in the three fiscal years ended December 31, 2008, which were not registered under the Securities Act of 1933, as amended.

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FIVE-YEAR STOCK PERFORMANCE TABLE

Performance Graph

The following graph and table are furnished with this Annual Report on Form 10-K and compare the cumulative total shareholder return of FNB United common stock for the five-year period ended December 31, 2008 with the SNL Southeast Bank Index and the Russell 3000 Stock Index, assuming an investment of $100 at the beginning of the period and the reinvestment of dividends.

FNB United Corp.

			Period Ending
Index	12/31/03		12/31/04		12/31/05		12/31/06		12/31/07		12/31/08
FNB United Corp.		100.00		93.21		95.52		95.29		65.77		18.16
SNL Southeast Bank Index		100.00		118.59		121.39		142.34		107.23		43.41
Russell 3000		100.00		111.95		118.80		137.47		144.54		90.61

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Item 6. Selected Financial Data

The annual selected historical financial data presented in the accompanying table is derived from the audited consolidated financial statements for FNB United Corp. and Subsidiary. As this information is only a summary, you should read it in conjunction with the historical financial statements (and related notes) of the Company and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein.

(dollars in thousands)	As of and for the Year Ended December 31,
	2008			2007			2006			2005			2004
Income Statement Data
Net interest income	$	60,017		$	63,612		$	56,214		$	34,365		$	28,034
Provision for loan losses		27,759			5,514			2,526			2,842			4,030
Noninterest income		22,918			21,593			19,215			14,926			13,673
Noninterest expense		118,103			61,044			53,441			31,678			28,755
Net (loss) / income before impairment charges		(2,009	)		12,719			13,812			9,937			6,598
Net (loss) / income		(59,809	)		12,361			12,187			9,937			6,598
Balance Sheet Data
Assets	$	2,044,434		$	1,906,506		$	1,814,905		$	1,102,085		$	862,891
Loans held for sale		36,138			17,586			20,862			17,615			11,648
Loans held for investment (1)		1,585,195			1,446,116			1,301,840			795,051			653,106
Allowance for loan losses		34,720			17,381			15,943			9,945			7,293
Goodwill		52,395			110,195			110,956			31,381			16,335
Deposits		1,514,747			1,441,042			1,421,013			841,609			659,544
Borrowings		365,757			231,125			167,018			146,567			113,647
Shareholder's equity		147,917			216,256			207,668			102,315			82,147
Per Common Share Data
Net (loss)/income before impairment charges	$	(0.18	)	$	1.12		$	1.44		$	1.73		$	1.17
Net (loss)/income, basic		(5.24	)		1.09			1.27			1.73			1.17
Net (loss)/income, diluted (2)		(5.24	)		1.09			1.25			1.69			1.13
Cash dividends declared		0.45			0.60			0.62			0.62			0.60
Book value		12.94			18.93			18.39			16.06			14.66
Tangible book value		8.36			9.28			8.56			11.13			11.74
Performance Ratios
Return of average assets before impairment charges		(0.10	) %		0.68	%		0.88	%		1.06	%		0.77	%
Return on average assets		(2.93	)		0.66			0.77			1.06			0.77
Return on average tangible assets		(3.11	)		0.71			0.82			1.09			0.82
Return of average equity before impairment charges		(0.93	)		5.98			7.93			11.25			7.00
Return on average equity		(27.74	)		5.81			7.00			11.25			7.00
Return on average tangible equity		(59.78	)		12.99			14.75			14.58			14.75
Net interest margin (tax equivalent)		3.40			4.01			4.18			4.16			4.20
Dividend payout		(8.60	)		55.21			51.17			36.32			51.17
Asset Quality Ratios
Allowance for loan losses to period end loans held for investment		2.19	%		1.20	%		1.22	%		1.25	%		1.12	%
Nonperforming loans to period end allowance for loan losses		276.57			107.63			69.84			60.79			71.67
Net chargeoffs to average loans		0.67			0.27			0.17			0.22			0.47
Nonperforming assets to period end loans held for investment and foreclosed property (3)		6.45			1.50			1.13			0.89			0.89
Capital and Liquidity Ratios
Average equity to average assets		10.57	%		11.43	%		11.05	%		9.46	%		9.99	%
Leverage capital		6.3			7.5			7.2			8.8			7.7
Tier 1 risk based capital		7.0			8.0			8.4			10.2			9.1
Total risk based capital		10.4			10.4			11.5			11.5			10.1
Average loans to average deposits		106.29			95.58			93.79			99.26			98.03
Average loans to average deposits and borrowings		87.30			84.82			82.51			84.99			83.14

(1) Loans held for investment, net of unearned income, before allowance for loan losses.

(2) Assumes the exercise of outstanding dilutive options to acquire common stock. See Note 15 to FNB United's consolidated financial statements.

(3) Nonperforming loans and nonperforming assets include loans past due 90 days or more that are still accruing interest.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following presents management’s discussion and analysis of our financial condition and results of operations and should be read in conjunction with the financial statements and related notes included elsewhere in this Annual Report on Form 10-K. 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 FNB United.

Executive Overview

Description of Operations

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

The Bank has a mortgage banking subsidiary, Dover Mortgage Company, that originates, underwrites and closes loans for sale into the secondary market.  Dover has a retail origination network based in Charlotte and conducts current wholesale operations in North Carolina, South Carolina, Georgia, Tennessee, Virginia, and Maine.

Acquisitions

On November 4, 2005, FNB United completed a merger for the acquisition of United Financial, Inc. (“United”), holding company for Alamance Bank, headquartered in Graham, North Carolina.  The merger transaction was accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of United were recorded based on estimated fair values as of November 4, 2005, with the estimate of goodwill being subject to possible adjustment during the one-year period from that date.  The adjustments recorded during that one-year period, including the purchase price adjustment noted above, resulted in a net $264,000 reduction in the amount initially recorded for goodwill.

On April 28, 2006, FNB United completed a merger for the acquisition of Integrity Financial Corporation (“Integrity”), headquartered in Hickory, North Carolina and the holding company for First Gaston Bank of North Carolina, including its divisions Catawba Valley Bank and Northwestern Bank.  At the date of the merger, First Gaston Bank operated 17 offices and, based on estimated fair values, had approximately $728.7 million in total assets, $475.3 million in net loans and $563.3 million in deposits.  On August 1, 2006, First Gaston Bank was merged into the Bank.  Each share of Integrity common stock was converted in the merger into 0.8743 shares of FNB United common stock and $5.20 in cash.  The aggregate purchase price was $127.2 million, consisting of $27.7 million in cash payments to Integrity shareholders, 4,654,504 shares of FNB United common stock valued at $94.8 million, outstanding Integrity stock options valued at $3.3 million and transaction costs of $1.4 million.  The merger transaction has been accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Integrity were recorded based on estimated fair values as of April 28, 2006, with the estimate of goodwill being subject to possible adjustment during the one-year period from that date. The net of all such adjustments during the one-year period amounted to a $76,000 reduction in goodwill.  The consolidated financial statements include the results of operations of Integrity since April 28, 2006.

Primary Financial Data for 2008

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FNB United experienced a loss of $59.8 million in 2008, a 584% decrease from net income of $12.4 million in 2007.  Basic and diluted earnings (loss) per share decreased 581% from $1.09 in 2007 to $(5.24) in 2008. Total assets were $2.04 billion at December 31, 2008, up 7% from year-end 2007.  Loans amounted to $1.59 billion at December 31, 2008, increasing 10% from the prior year.  Total deposits grew $73.7 million, to $1.51 billion in 2008. As noted above, First Gaston Bank and Alamance Bank were acquired through mergers effective April 28, 2006 and November 4, 2005, respectively, impacting both net income and the calculation of earnings per share since the acquisition dates and the comparability of operating results on a year-to-year basis for years between 2008 and 2004. The First Gaston Bank acquisition added $728.7 million or approximately 66% to total assets at the time of acquisition, while the earlier Alamance Bank acquisition added $163.7 million or approximately 18% to total assets at the time of acquisition.

Significant Factors Affecting Earnings in 2008

2008 presented challenges for FNB United as well as for the entire banking industry. The strains in the local and national financial and housing markets presented a challenging environment during 2008, particularly in the fourth quarter. This difficult environment required a significant increase in FNB United’s loan loss provision, which depressed operating results but was a necessary response to increased non-performing loans. FNB United has not originated any subprime real estate loans or loans outside its market areas.

The provision for loan losses was $27.8 million in 2008, compared to $5.5 million in 2007, an increase of 403%. This increase resulted primarily from deteriorating asset quality. Nonperforming assets increased 372%, to $102.6 million during 2008 from $21.8 million at the close of 2007. Net loan charge-offs increased to $10.4 million in 2008, compared to $3.8 million in 2007.  The provision also grew slightly as a result of growth in the loan portfolio. Loans held for investment grew $139.1 million during 2008, accounting for approximately $1.7 million of the increased provision.  The allowance for loan losses was increased to 2.19% of loans held for investment at December 31, 2008. The allowance was 1.20% at December 31, 2007 and 1.22% at December 31, 2006.

Net interest income was impacted by measures utilized by the Federal Reserve for monetary policy purposes addressing the current recession.  Net interest income has declined due in part to interest-bearing assets repricing down faster than interest-bearing liabilities as the Federal Reserve reduced the Fed funds target rate from 4.25% to 0.25% in 2008. See “Net Interest Income” for additional discussion on interest rate changes. Net interest income decreased $3.6 million, or 5.6%, in 2008 compared to 2007, reflecting the effect of a decrease in the net interest margin, stated on a taxable equivalent basis, from 4.01% in 2007, to 3.40% in 2008. This decrease was partially offset by an 11% increase in the level of average earning assets.

Noninterest income increased 6.1% to $22.9 million, compared to $21.6 million in 2007. Of this increase, $1.2 million resulted from adopting SAB 109 in the first quarter of 2008. Cardholder and merchant services income increased $517,000 due to increased interchange fees and surcharge fees. Other income decreased $1.4 million in 2008 due to the credit card portfolio sold in 2007 for a net gain of $1.3 million. Noninterest income was also significantly affected in 2007 by the recovery of $300,000 on the sale of previously charged-off loans partially offset by a mortgage servicing rights impairment charge of $271,000.

Noninterest expense was significantly impacted in 2008 and 2007 by goodwill impairment charges of $57.8 million and $358,000, respectively, as discussed in Note 3 to the Consolidated Financial Statements. Excluding the goodwill impairment charges, noninterest expense was $60.3 million, compared to $60.7 million in 2007. The company undertook a major noninterest expense improvement project during the second half of 2008, including consolidation of operational functions, strong vendor management and tighter staffing models. In addition, due to higher costs in 2007 associated with rebranding initiatives, marketing expenses declined by $545,000 in 2008.

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Earnings Review

FNB United’s net loss of $59.8 million in 2008 compared to net income of $12.4 million in 2007 is primarily a result of $3.6 million of reduced interest margin, increased provision for loan losses of $22.2 million, and higher goodwill impairment charges of $57.4 million. These losses were partially offset by $9.4 million in lower income taxes.  Certain factors specifically affecting the elements of income and expense and the comparability of operating results on a year-to-date basis between 2008 and 2007 are discussed in the “Overview - Significant Factors Affecting Earnings in 2008.”

FNB United’s net income in 2007 was $12.4 million compared to $12.2 million in 2006.  Earnings were positively impacted in 2007 by increases of $7.4 million, or 13%, in net interest income and $2.4 million in noninterest income, which were more than offset by a $3.0 million increase in the provision for loan losses and a $7.6 million increase in noninterest expense.

Return on average assets was (2.93)% in 2008, compared to 0.66% in 2007 and 0.77% in 2006.  Return on average shareholders’ equity decreased from 7.00% in 2006 to 5.81% in 2007 and (27.74)% in 2008.  In 2008, return on tangible assets and equity (calculated by deducting average goodwill and core deposit premiums from average assets and from average equity) amounted to (3.11)% and (59.78)%, respectively, compared to 0.71% and 12.99% in 2007 and 0.82% and 14.75% in 2006.

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.

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Table 1

Average Balance Sheet and Net Interest/Dividend Income Analysis

Fully Taxable Equivalent Basis

	Year Ended December 31,
(dollars in thousands)			2008							2007							2006
					Average							Average							Average
	Average		Income /		Yield /			Average		Income /		Yield /			Average		Income /		Yield /
	Balance (3)		Expense		Rate			Balance (3)		Expense		Rate			Balance (3)		Expense		Rate
Interest earning assets:
Loans (1)(2)	$	1,577,038	$	103,567		6.57	%	$	1,376,883	$	115,101		8.36	%	$	1,142,350	$	92,746		8.12	%
Taxable investment securities		152,436		7,820		5.13			149,153		7,613		5.10			130,147		6,334		4.87
Tax-exempt investment securities (1)		52,454		3,138		5.98			55,527		3,225		5.81			54,831		3,202		5.84
Other earning assets		21,044		810		3.85			37,611		2,051		5.45			49,093		2,389		4.87
Total earning assets		1,802,972		115,335		6.40			1,619,174		127,990		7.90			1,376,421		104,671		7.60
Non-earning assets:
Cash and due from banks		29,121							33,316							27,864
Goodwill and core deposit premium		115,520							117,691							91,495
Other assets, net		92,591							92,421							79,527
Total assets	$	2,040,204						$	1,862,602						$	1,575,307
Interest-bearing liabilities:
Interest-bearing demand deposits		168,395		2,007		1.19			164,032		2,643		1.61			156,837		2,592		1.65
Savings deposits		40,803		113		0.28			47,189		130		0.28			52,827		182		0.34
Money market deposits		274,818		6,389		2.32			256,841		10,395		4.05			180,513		6,766		3.75
Time deposits		841,741		33,702		4.00			813,337		39,426		4.85			685,270		29,025		4.24
Retail repurchase agreements		29,954		651		2.17			28,783		1,317		4.58			21,134		923		4.37
Federal Home Loan Bank advances		204,877		7,223		3.53			80,111		3,468		4.33			80,410		3,387		4.21
Federal funds purchased		21,310		501		2.35			3,102		162		5.22			696		40		5.75
Other borrowed funds		66,502		3,432		5.16			76,794		5,487		7.15			64,266		4,240		6.60
Total interest-bearing liabilities		1,648,400		54,018		3.28			1,470,189		63,028		4.29			1,241,953		47,155		3.80
Other liabilities and shareholders' equity:
Noninterest-bearing demand deposits		157,992							159,205							142,624
Other liabilities		18,241							20,367							16,595
Shareholders' equity		215,571							212,841							174,135
Total liabilities and equity	$	2,040,204						$	1,862,602						$	1,575,307
Net interest income and net yield on earning assets (4)			$	61,317		3.40	%			$	64,962		4.01	%			$	57,516		4.18	%
Interest rate spread (5)						3.12	%						3.62	%						3.81	%

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

(2) The average loan balances include nonaccruing loans.

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

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

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

Table 1 sets forth for the periods indicated information with respect to FNB United’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.

Net interest income was $60.0 million in 2008, compared to $63.6 million in 2007.  The decrease of $3.6 million, or 5.7%, resulted primarily from a decline in the net yield on earning assets, or net interest margin, from 4.01% in 2007 to 3.40% in 2008 partially offset by an 11% increase in the level of average earning assets. In 2007, the increase in net interest income of $7.4 million, or 13%, resulted primarily from an 18% increase in the level of average earning assets offset by a decline in the net yield on earning assets, or net interest margin, from 4.18% in 2006 to 4.01% in 2007. On a taxable equivalent basis, the changes in net interest income in 2008 and 2007 were $3.6 million $7.4 million, respectively reflecting changes in the relative mix of taxable and non-taxable earning assets in each year.

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The 2008 and 2007 changes in net interest income on a taxable equivalent basis, as measured by volume and rate variances, are analyzed in Table 2.  Volume refers to the average dollar level of earning assets and interest-bearing liabilities.

Table 2

Volume and Rate Variance Analysis

Years Ended December 31, 2008 and 2007

(dollars in thousands)	2008 vs 2007									2007 vs 2006
	Volume			Rate			Total			Volume			Rate			Total
	Variance			Variance			Variance			Variance			Variance			Variance
Interest income:
Loans, net	$	16,732		$	(28,267	)	$	(11,535	)	$	19,041		$	3,314		$	22,355
Taxable investment securities		168			39			207			925			354			1,279
Tax exempt investment securities		(178	)		92			(86	)		41			(18	)		23
Other earning assets		(903	)		(338	)		(1,241	)		(559	)		221			(338	)
Total interest income		15,819			(28,474	)		(12,655	)		19,448			3,871			23,319
Interest expense:
Interest-bearing demand deposits		70			(706	)		(636	)		119			(68	)		51
Savings deposits		(18	)		1			(17	)		(19	)		(33	)		(52	)
Money market deposits		728			(4,734	)		(4,006	)		2,861			768			3,629
Time deposits		1,377			(7,101	)		(5,724	)		5,424			4,977			10,401
Retail repurchase agreements		54			(664	)		(610	)		334			60			394
Federal Home Loan Bank advances		5,401			(1,639	)		3,762			(13	)		94			81
Federal funds purchased		951			(668	)		283			138			(16	)		122
Other borrowed funds		(735	)		(1,327	)		(2,062	)		827			420			1,247
Total interest expense		7,828			(16,838	)		(9,010	)		9,671			6,202			15,873
Increase (decrease) in net interest income	$	7,991		$	(11,636	)	$	(3,645	)	$	9,777		$	(2,331	)	$	7,446

In 2008, the net interest spread decreased by 50 basis points from 3.62% in 2007, to 3.12% in 2008, reflecting the net effect of decreases in both the average total yield on earning assets and the average rate paid on interest-bearing liabilities, or cost of funds.  The yield on earning assets decreased by 150 basis points, from 7.90% in 2007 to 6.40% in 2008, while the cost of funds decreased by 101 basis points, from 4.29% to 3.28%.  In 2007, the 19 basis points decrease in net interest spread resulted from a 30 basis points increase in the yield on earning assets, which was more than offset by a 49 basis points increase in the cost of funds.

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.

As a result, interest-bearing assets repriced downward faster than interest-bearing liabilities. Due to concern about increasing inflationary pressures, the Federal Reserve took action by raising the level of interest rates during 2006, by 25 basis points in each of the first six months of 2006. Interest rates remained constant for more than a year until the Federal Reserve, responding to recessionary concerns, exacerbated by the subprime mortgage crisis, cut the target fed funds rate by 50 basis points in September 2007. This action was followed by two additional cuts of 25 basis points each in October and December 2007, to 4.00% at December 31, 2007. Regular cuts to the target federal funds rate continued throughout 2008 with year-end rates at 0.25%.

Provision for Loan Losses

This provision is the charge against earnings to provide an allowance for probable losses inherent in the loan portfolio.  The amount of each year’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.  The provision for loan losses was $27.8 million in 2008, $5.5 million in 2007 and $2.5 million in 2006.  This increase in the level of the provision for loan losses is discussed and analyzed in detail as part of the discussions in the “Overview – Significant

26

Factors Affecting Earnings in 2008”, and “Asset Quality” sections.

Noninterest Income

Noninterest income increased $1.3 million, or 6%, in 2008, due primarily to $1.2 million recognized from the adoption of SAB 109 as well as $0.5 million of increased interchange fees and surcharge fees in 2008 offset by the $1.3 million sale of the credit card portfolio in 2007. Additional information concerning factors which specifically affected noninterest income in 2008 is discussed in the “Overview - SignificantFactors Affecting Earnings in 2008.”

Noninterest income increased $2.4 million, or 12%, in 2007, due primarily to the recognition of a $1.3 million gain on the sale of the credit card portfolio in the third quarter 2007 and the loss of $559,000 on the sale of securities in the third quarter 2006.

Noninterest Expense

Noninterest expense was $57.1 million, or 93%, higher in 2008 due primarily to $57.8 million of goodwill impairment charges.  FNB United undertook a major noninterest expense improvement project during the second half of 2008, including consolidation of operational functions, strong vendor management and tighter staffing models.  Excluding the goodwill impairment charges, noninterest expense was $383,000 lower in 2008 than in 2007.

Noninterest expense was $7.6 million, or 14%, higher in 2007.  The major components of the increase from 2006 to 2007 were a $5.1 million increase in personnel expense, a $1.5 million increase in net occupancy expense, an $0.8 million increase in furniture and equipment expense, a $1.1 million increase in other expenses and an $0.5 million decrease in data processing costs. The increases versus 2006 were largely driven by the fact that noninterest expense for 2007 included Integrity for the entire year, compared to only eight months in 2006.

As a result of the imposition by the FDIC of a proposed special assessment as a part of their Deposit Insurance Fund restoration plan, the Bank may be required to pay an emergency special assessment of 20 basis points. Based on average deposits for the fourth quarter of 2008, this assessment would approximate $2.9 million.  This may significantly impact noninterest expense and the results of operations of the Company for 2009.

Provision for Income Taxes

The effective income tax rate decreased from 33.7% in 2007 to 4.95% in 2008 due principally to lower net interest income and the higher level of nondeductible expenses in 2008.  Nondeductible expenses included a goodwill impairment charge of $57.8 million in 2008 compared to $0.4 million in 2007.  The effective income tax rate decreased from 37.4% in 2006 to 33.7% in 2007 due principally to a lower level of nondeductible expenses in 2007, including a goodwill impairment charge of $0.4 million in 2007 compared to $1.6 million in 2006. FNB United’s federal income tax rate was 35% in 2008 and 35% in 2007 and 2006.

Liquidity

Liquidity for the 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 FNB United 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.

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Consistent with the general approach to liquidity, loans and other assets of the Bank are based primarily on a core of local deposits and the Bank’s capital position.  To date, the steady increase in deposits, supplemented by Federal Home Loan Bank advances, federal funds purchased, and a modest amount of brokered deposits, has been adequate to fund loan demand in the 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 refers to its continuing ability to fund mortgage loan commitments and pay operating expenses.  Liquidity is principally available from a line of credit with the Bank, established in 2007. Prior to that date, the line of credit was with a large national bank.

Contractual Obligations

Under existing contractual obligations, FNB United will be required to make payments in future periods.  Table 3 presents aggregated information about the payments due under such contractual obligations at December 31, 2008.  Transaction deposit accounts with indeterminate maturities have been classified as having payments according to an expected decay rate.  Benefit plan payments cover estimated amounts due through 2018.

Table 3

Contractual Obligations

(dollars in thousands)	Payments Due by Period at December 31, 2008
	One year or less		One to Three Years		Three to Five Years		Over Five Years		Total
Deposits	$	800,781	$	250,651	$	122,871	$	340,444	$	1,514,747
Retail repurchase agreements		18,145		-		-		-		18,145
Federal Home Loan Bank advances		81,500		28,930		45,000		83,480		238,910
Federal funds purchased		37,000		-		-		-		37,000
Subordinated debt		-		-		-		15,000		15,000
Trust preferred securities		-		-		-		56,702		56,702
Lease obligations		1,424		2,415		2,146		11,094		17,079
Estimated benefit plan payments:
Pension		512		1,117		1,216		3,832		6,677
Other		150		385		466		1,824		2,825
Total contractual cash obligations	$	939,512	$	283,498	$	171,699	$	512,376	$	1,907,085

Commitments, Contingencies and Off-Balance Sheet Risk

Information about FNB United’s off-balance sheet risk exposure is presented in Note 16 to the accompanying consolidated financial statements.

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 monthly basis, earnings projections based on a range of interest rate scenarios in order to more accurately measure interest rate risk.

Table 4 presents information about the periods in which the interest-sensitive assets and liabilities at December 31, 2008 will mature, prepay, or be subject to repricing in accordance with market rates, and

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the resulting interest-sensitivity gaps.  This table shows the sensitivity of the balance sheet at one point in time and is not necessarily indicative of what the sensitivity will be on other dates.  As a simplifying assumption concerning repricing behavior, 50% of the interest-bearing demand, savings and money market deposits are assumed to reprice immediately and 50% are assumed to reprice beyond one year.

Table 4

Interest Rate Sensitivity Analysis

	December 31, 2008
(dollars in thousands)	Rate Maturity in Days
		1-90			91-180			181-365		Beyond One Year			Total
Earning Assets
Loans	$	1,115,920			46,459			87,587			335,229		$	1,585,195
Loans held for sale		36,138			-			-			-			36,138
Investment securities (1)		10,367			2,597			13,565			207,337			233,866
Interest-bearing bank balances		404			-			-			-			404
Federal funds sold		206			-			-			-			206
Other earning assets		19,825			-			-			-			19,825
Total earning assets		1,182,860			49,056			101,152			542,566			1,875,634
Interest-Bearing Liabilities
Interest-bearing deposits:
Demand deposits		87,016			-			-			87,015			174,031
Savings deposits		19,057			-			-			19,056			38,113
Money market deposits		133,748			-			-			133,748			267,496
Time deposits of $100,000 or more		115,367			93,293			138,828			60,051			407,539
Other time deposits		83,188			98,310			215,317			80,480			477,295
Retail repurchase agreements		18,145			-			-			-			18,145
Federal Home Loan Bank advances		66,000			5,000			10,500			157,410			238,910
Federal funds purchased		37,000			-			-			-			37,000
Subordinated debt		15,000			-			-			-			15,000
Trust preferred securities		56,702			-			-			-			56,702
Total interest-bearing liabilities		631,223			196,603			364,645			537,760			1,730,231
Interest Sensitivity Gap	$	551,637		$	(147,547	)	$	(263,493	)	$	4,806		$	145,403
Cumulative gap	$	551,637		$	404,090		$	140,597		$	145,403		$	145,403
Ratio of interest-sensitive assets to interest-sensitive liabilities		187	%		25	%		28	%		101	%		108	%

(1)  Securities are based on amortized cost.

FNB United’s balance sheet was asset-sensitive at December 31, 2008. An asset sensitive positive means that in a declining rate environment, FNB United’s assets will reprice down faster than liabilities, resulting in a reduction in net interest income. Conversely, when interest rates rise, FNB United’s earnings position should improve. 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.

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.

FNB United’s market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities.  The structure of FNB United’s loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net market values and net interest income.  FNB United does not maintain a trading account nor is FNB United subject to currency exchange risk or commodity price risk.

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Interest rate risk is monitored as part of FNB United’s asset/liability management function, which is discussed in “Asset/Liability Management and Interest Rate Sensitivity” above.  The use of interest rate swaps in conjunction with asset/liability management objectives is discussed in Note 1 to the Consolidated Financial statements.

Table 5 presents information about the contractual maturities, average interest rates and estimated values at current rates of financial instruments considered market risk sensitive at December 31, 2008.

Table 5

Market Risk Analysis of Financial Instruments

(dollars in thousands)	Contractual Maturities at December 31, 2008
	2009		2010		2011		2012		2013		Beyond Five Years		Total		Average Interest Rate (1)			Estimated Value at Current Rates
Financial Assets
Debt securities (2):
Fixed rate	$	18,900	$	4,067	$	15,341	$	21,198	$	9,190	$	157,541	$	226,237		5.41	%	$	230,525
Variable rate		-		-		-		-		-		4,962		4,962		3.04	%		652
Equity securities (2)		2,667		-		-		-		-		-		2,667		15.17	%		1,829
Loans (3):
Fixed rate		90,086		46,347		53,003		53,812		59,015		171,417		473,680		7.36	%		488,993
Variable rate		401,947		177,622		115,950		66,650		55,871		293,475		1,111,515		4.53	%		1,085,894
Held for sale		36,138		-		-		-		-		-		36,138		4.44	%		36,138
Interest-bearing bank balances		404		-		-		-		-		-		404		0.15	%		404
Federal funds sold		206		-		-		-		-		-		206		0.05	%		206
Other earning assets		19,825		-		-		-		-		-		19,825		4.25	%		19,825
Total	$	570,173	$	228,036	$	184,294	$	141,660	$	124,076	$	627,395	$	1,875,634		5.16	%	$	1,864,466
Financial Liabilities
Interest-bearing demand deposits	$	-	$	-	$	-	$	-	$	-	$	-	$	174,031		0.96	%	$	166,111
Savings deposits		-		-		-		-		-		-		38,113		0.25	%		36,818
Money market deposits		-		-		-		-		-		-		267,496		1.88	%		269,262
Time deposits:
Fixed rate		734,205		106,762		24,538		3,352		1,478		497		870,832		3.42	%		882,199
Variable rate		10,100		3,843		59		-		-		-		14,002		5.12	%		14,002
Retail repurchase agreements		-		-		-		-		-		-		18,145		0.63	%		18,145
Federal Home Loan Bank advances
Fixed rate		23,431		9,000		20,000		25,000		20,000		83,479		180,910		3.46	%		190,930
Variable rate		58,000		-		-		-		-		-		58,000		0.46	%		58,000
Federal funds purchased		37,000		-		-		-		-		-		37,000		0.47	%		37,000
Subordinated debt		-		-		-		-		-		15,000		15,000		4.96	%		14,173
Trust preferred securities		-		-		-		-		-		56,702		56,702		3.25	%		35,603
Total	$	862,736	$	119,605	$	44,597	$	28,352	$	21,478	$	155,678	$	1,730,231		2.65	%	$	1,722,243

(1) The average interest rate related to debt securities is stated on a fully taxable equivalent basis, assuming a 35% federal income tax rate.

(2)  Contractual maturities of debt and equity securities are based on amortized cost.

(3) Nonaccrual loans are included in the balance of loans. The allowance for loan losses is excluded.

For a further discussion on market risk and how FNB United addresses this risk, see Item 7A of this Annual Report on Form 10-K.

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 and Tier 2, 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 perpetual preferred stock and qualifying 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

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securities and the allowance for loan losses. Total capital, for risk-based purposes, consists of the sum of Tier 1 and Tier 2 capital.  Under current requirements, the minimum total capital ratio is 8.00% and the minimum Tier 1 capital ratio is 4.00%. At December 31, 2008, FNB United and the Bank had total capital ratios of 10.4% and 10.3%, respectively, and Tier 1 capital ratios of 6.9% and 8.1%, respectively.

Table 6

Regulatory Capital

(dollars in thousands)	For year ended December 31,
	2008				2007				2006
Total capital to risk-weighted assets
Consolidated	$	185,312	10.4	%	$	172,893	10.4	%	$	166,442	11.5	%
Subsidiary Bank		182,084	10.2			172,061	10.4			161,592	11.3
Tier 1 capital to risk-weighted assets
Consolidated		123,796	6.9			133,114	8.0			120,705	8.4
Subsidiary Bank		144,654	8.1			154,098	9.3			144,965	10.1
Tier 1 capital to average assets
Consolidated		123,796	6.1			133,114	7.5			120,705	7.2
Subsidiary Bank		144,654	7.2			154,098	8.8			144,965	8.7

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 December 31, 2008, FNB United and the Bank had leverage capital ratios of 6.1% and 7.2%, respectively.

The 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, the Bank met all of those ratio requirements at December 31, 2008 and, accordingly, is well-capitalized under the regulatory framework for prompt corrective action.

Balance Sheet Review

Total assets increased $137.9 million, or 7%, in 2008 and $90.9 million, or 5%, in 2007.  By similar comparison, deposits increased $73.7 million, or 5%, and $20.0 million, or 1%, respectively. The level of total assets was also affected in 2008 by net additional advances of $107.1 million from the Federal Home Loan Bank that were obtained primarily to help fund loan growth. The average asset growth rates were 10% in 2008 and 18% in 2007.  The corresponding average deposit growth rates were 3% and 18%.

As discussed in the “Overview,” the growth in total assets in 2006 largely reflected the acquisition of First Gaston Bank on April 28, 2006, while the growth in 2005 reflected the acquisition of Alamance Bank on November 4, 2005.  Significant estimated fair values initially recorded for First Gaston Bank included total assets of $728.7 million, investment securities of $84.4 million, gross loans of $481.3 million, deposits of $563.3 million and Federal Home Loan Bank advances of $18.6 million.  Significant estimated fair values initially recorded for Alamance Bank included total assets of $163.7 million, investment securities of $34.7 million, gross loans of $96.6 million, deposits of $113.0 million and Federal Home Loan Bank advances of $21.9 million.  Total assets increased $712.8 million or 65% in 2006 and $239.2 million or 28% in 2005.  By similar comparison, deposits increased $579.4 million or 69% and $182.1 million or 28%.  The average asset growth rates were 69% in 2006 and 13% in 2005.  The corresponding average deposit growth rates were 70% and 15%.

Investment Securities

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Investments are carried on the consolidated balance sheet at estimated fair value for available-for-sale securities and at amortized cost for held-to-maturity securities.  Table 7 presents information, on the basis of selected maturities, about the composition of the investment securities portfolio for each of the last three years.

Table 7

Investment Securities Portfolio Analysis

(dollars in thousands)	December 31, 2008							December 31, 2007
	Amortized Cost		Estimated Fair Value		Yield (1)			Amortized Cost		Estimated Fair Value		Yield (1)
Available-for-Sale
U.S. Government agencies and corporations
Due in one year or less	$	11,957	$	12,147		4.14	%	$	24,994	$	25,122		5.07	%
Due after one one year through five years		32,379		33,253		4.17			54,313		54,997		5.07
Due after five years through 10 years		47,740		49,063		4.91			1,973		1,955		5.03
Total		92,076		94,463		4.55			81,280		82,074		5.07
Mortgage-backed securities		66,583		68,118		5.32			20,047		20,230		5.31
State, county and municipal
Due in one year or less		1,716		1,727		6.86			3,631		3,639		5.87
Due after one one year through five years		11,286		11,559		6.83			10,446		10,536		6.89
Due after five years through 10 years		13,308		13,594		6.78			14,861		15,341		6.86
Due after 10 years		12,026		12,034		9.37			8,466		8,534		6.29
Total		38,336		38,914		7.61			37,404		38,050		6.64
Other debt securities
Due in one year or less		1,448		1,450		6.93			-		-		-
Due after 10 years		4,962		652		3.05			5,000		4,710		6.45
Total		6,410		2,102		3.93			5,000		4,710		6.45
Total debt securities		203,405		203,597		5.36			143,731		145,064		5.56
Equity securities		2,667		1,829		15.17			2,512		2,085		5.23
Total available-for-sale securities	$	206,072	$	205,426		5.48		$	146,243	$	147,149		5.43
Held-to-Maturity
U.S. Government agencies and corporations
Due in one year or less	$	2,008	$	2,047		3.85		$	3,036	$	3,017		2.88
Due after one one year through five years		-		-		-			9,020		8,970		3.97
Total		2,008		2,047		3.85			12,056		11,987		3.70
Mortgage-backed securities		8,420		8,536		6.10			4,091		4,076		5.48
State, county and municipal
Due in one year or less		1,770		1,776		3.66			2,011		2,001		3.23
Due after one one year through five years		5,134		5,164		4.52			5,805		5,708		4.18
Due after five years through 10 years		6,768		6,771		5.66			7,074		7,035		5.52
Due after 10 years		2,694		2,574		6.18			3,613		3,558		6.08
Total		16,366		16,285		5.17			18,503		18,302		4.96
Other debt securities
Due after one one year through five years		1,000		712		4.70			1,000		886		4.70
Total held-to-maturity securities	$	27,794	$	27,580		5.34		$	35,650	$	35,251		4.59

(1) Yields are based upon amortized cost and are stated on a fully-taxable equivalent basis, assuming a 35% federal income tax rate.

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.

Loans

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FNB United’s primary source of revenue and largest component of earning assets is the loan portfolio.  In 2008, loans increased $139.1 million, or 10%, due entirely to internal loan generation. In 2007, loans increased $144.3 million, or 10%, also due to internal loan generation. In 2006, loans increased $510.0 million, or 63%, due primarily to the addition of $481.3 million in loans from the First Gaston Bank acquisition on April 28, 2006, as discussed in the “Balance Sheet Review.”  Similarly in 2005, loans increased $147.9 million or 22%, due largely to the addition of $96.6 million in loans from the Alamance Bank acquisition on November 4, 2005.  Excluding the amount of loans added by the merger acquisitions, loans increased $28.7 million or 3.5% in 2006 and $51.3 million or 7.7% in 2005.  The level of loans was further impacted in 2006 by the sale in the fourth quarter of $10.4 million of nonperforming and higher risk loans.

Table 8 sets forth the major categories of loans for each of the last five years.  The maturity distribution and interest rate sensitivity of selected loan categories at December 31, 2008 are presented in Table 9.

Table 8

Loan Portfolio Composition

(dollars in thousands)	December 31,
	2008				2007				2006				2005				2004
Loans held for sale	$	36,138			$	17,586			$	20,862			$	17,615			$	11,648
Loans held for investment:
Commercial and agricultural	$	184,909	11.7	%	$	182,713	12.6	%	$	315,184	24.2	%	$	176,286	22.2	%	$	196,895	30.1	%
Real estate-construction		453,668	28.6			373,401	25.8			278,124	21.4			142,096	17.9			83,433	12.8
Real estate-mortgage:
1-4 family residential		369,948	23.3			331,194	22.9			319,182	24.5			231,071	29.1			197,855	30.3
Commercial		540,192	34.1			522,737	36.2			350,261	26.9			221,457	27.8			154,024	23.6
Consumer		36,478	2.3			36,071	2.5			39,089	3.0			24,141	3.0			20,899	3.2
Total	$	1,585,195	100.0	%	$	1,446,116	100.0	%	$	1,301,840	100.0	%	$	795,051	100.0	%	$	653,106	100.0	%

In 2008, loans held for sale increased over 105%. This increase is a result of higher mortgage originations due to heavy refinancing activity as rates fell throughout 2008. Held for sale loans do not include any reclassifications from the held for investment portfolio.  The held for investment portfolio experienced small composition changes primarily with a 2.8% increase in real estate construction loans offset by a 2% decrease in commercial real estate mortgages.

In 2007 some categories of loans reflected increases over the prior year while other categories experienced a decline. This shift resulted, in large measure, from the evaluation in 2007 of the classification of loans acquired through the mergers of United and Integrity and the reassignment of these loans to the proper loan categories. The portfolios related to construction loans and commercial and other real estate loans experienced significant gains, while the commercial and agricultural loan portfolio declined. The balance of the 1-4 family residential mortgage loan portfolio considered “held for investment” experienced modest growth, due primarily to home equity lines of credit.

Table 9

Selected Loan Maturities

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(dollars in thousands)	December 31, 2008
	One Year or Less		One to Five Years		Over Five Years		Total
Commercial and agricultural	$	86,674	$	41,475	$	56,760	$	184,909
Real estate construction		211,326		125,331		117,011		453,668
Total	$	298,000	$	166,806	$	173,771	$	638,577
Sensitivity to rate changes:
Fixed interest rates	$	20,554	$	27,956	$	36,904	$	85,414
Variable interest rates		277,446		138,850		136,867		553,163
Total	$	298,000	$	166,806	$	173,771	$	638,577

Asset Quality

Management considers the asset quality of the 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 has been employed to review the underwriting documentation and risk grading analysis.  Beginning in 2009, the formal loan review function will be brought in-house in order to provide more timely response.  This function will be managed by credit administration.

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 the 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, the Office of the Comptroller of the Currency (OCC), a federal regulatory agency, as an integral part of their examination process, periodically reviews the Bank’s allowance for loan losses.  The OCC may require the 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 December 31, 2008, the Company had impaired loans totaling $116.1 million.  Of the $116.1 million, $94.8 million had an allowance for loan losses of $15.4 million and $21.3 million had no specifically allocated allowance for loan losses.  At December 31, 2007, the Company had impaired loans which totaled $15.6 million.  Of the $15.6 million, $4.9 million had an allowance for loan losses of $1.4 million and $10.7 million had no specifically allocated allowance for loan losses.  The average carrying value of impaired loans was $38.1 million in 2008 and $12.5 million in 2007.

The allowance for loan losses, as a percentage of loans held for investment, amounted to 2.19% at December 31, 2008 compared to 1.20% at December 31, 2007. The level of nonperforming loans increased significantly from $18.7 million at December 31, 2007 to $96.0 million at December 31, 2008. Net charge-offs also significantly increased in 2008. A substantial portion of 2008 charge-offs were related to impaired loans, and consisted of loans considered wholly impaired and loans with partial impairment. During 2008, net charge-offs totaled $10.4 million, which exceeded the combined net charge-offs for the prior three years. The provision for loan losses recorded in 2008 also exceeded the combined provision recorded in the prior three years. As discussed previously, the increased levels of nonperforming assets and charge-offs resulted largely from loan quality issues driven by worsening macro and micro economic conditions, including strains in housing and real estate markets. Management

34

continually performs thorough analyses of the loan portfolio. As a result of these analyses, certain loans have migrated to higher, more adverse risk grades and an aggressive posture towards the timely charge-off of identified impairment has also continued. Actual past due loans and loan charge-offs have remained at manageable levels and management continues to diligently work to improve asset quality. Management believes the allowance for loan losses of $34.7 million at December 31, 2008 is adequate to cover probable losses inherent in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires considerable judgment.

Table 10 presents an analysis of the changes in the allowance for loan losses and of the level of nonperforming assets for each of the last five years.

Table 10

Summary of Allowance for Loan Losses

(dollars in thousands)	2008			2007			2006			2005			2004
Balance, beginning of year	$	17,381		$	15,943		$	9,945		$	7,293		$	6,172
Chargeoffs:
Commercial and agricultural		6,479			1,262			1,817			747			2,007
Real estate - construction		2,000			459			499			-			-
Real estate - mortgage		414			941			210			449			943
Consumer		3,532			2,831			2,104			1,420			211
Leases		-			-			-			-			106
Total chargeoffs		12,425			5,493			4,630			2,616			3,267
Recoveries:
Commercial and agricultural		292			415			1,123			427			158
Real estate - construction		-			42			120			-			1
Real estate - mortgage		197			171			268			7			36
Consumer		1,516			1,091			1,231			522			94
Leases		-			-			3			65			114
Total recoveries		2,005			1,719			2,745			1,021			403
Net chargeoffs		10,420			3,774			1,885			1,595			2,864
Provision charged to operations		27,759			5,514			2,526			2,842			4,030
Purchase accounting acquisition		-			-			6,038			1,405			-
Adjustment for reserve for unfunded commitments		-			-			(677	)		-			-
Allowance adjustment for loans sold		-			(302	)		(4	)		-			(45	)
Balance, end of year	$	34,720		$	17,381		$	15,943		$	9,945		$	7,293
Nonperforming assets:
Nonaccrual loans	$	95,173		$	16,022		$	8,282		$	5,398		$	3,952
Past due 90 days or more and still accruing interest		853			2,686			2,852			648			1,275
Total nonperforming loans		96,026			18,708			11,134			6,046			5,227
Other real estate owned		6,509			2,862			3,361			929			543
Foreclosed assets		92			181			196			108			77
Total nonperforming assets	$	102,627		$	21,751		$	14,691		$	7,083		$	5,847
Asset quality ratios:
Net loan chargeoffs to average loans		0.67	%		0.27	%		0.16	%		0.22	%		0.47	%
Net loan chargeoffs to allowance for loan losses		30.01			21.71			11.82			16.04			39.27
Allowance for loan losses to loans held for investment		2.19			1.20			1.22			1.25			1.12
Total nonperforming loans to loans held for investment		6.06			1.29			0.86			0.76			0.80

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

35

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 the 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 the fair value of the collateral dependent loans.  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.

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 FNB United.

Information about management's allocation of the allowance for loan losses by loan category is presented in Table 11.

Table 11

Allocations of Allowance for Loan Losses

(dollars in thousands)	December 31,
	2008		2007		2006		2005		2004
Commercial and agricultural	$	4,146	$	2,777	$	4,474	$	3,165	$	2,953
Real estate - construction		15,238		5,254		3,829		1,939		1,015
Real estate - mortgage		8,853		6,599		5,745		3,892		2,401
Consumer		3,474		2,751		1,895		707		592
Unallocated		3,009		-		-		242		332
Total allowance for loan losses	$	34,720	$	17,381	$	15,943	$	9,945	$	7,293

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.

In 2008, deposits increased $73.7 million, or 5%, and the mix of deposits changed. Noninterest-bearing demand deposits decreased while there were increases in all types of interest-bearing accounts (demand, savings, money-market, and time deposits). Certificates of deposit increased 8% to $885 million, from $818 million in 2007 while other deposits increased 1% to $630 million compared to $623 million in 2007. Brokered certificates of deposit were $90.1 million, or 5.95% of total deposits.

In 2007, deposits increased $20.0 million, or 1%.  Although the total balance of deposits changed minimally from 2006 to 2007, the mix of the various deposit categories reflects some shifts among categories.  Transactional accounts, including noninterest-bearing demand deposits, remained flat from 2006 to 2007. The increase over 2006 was in the category of time deposits.

Table 12 shows the year-end and average deposit balances for the years 2008, 2007 and 2006 and the changes in 2008 and 2007.

36

Table 12

Analysis of Deposits

	2008								2007								2006
(dollars in thousands)			Change from Prior Year								Change from Prior Year
	Balance		Amount			%			Balance		Amount			%			Balance
Year End Balances
Interest-bearing deposits:
Demand deposits	$	174,031	$	10,756			6.6		$	163,275	$	(14,223	)		(8.0	)	$	177,498
Savings deposits		38,113		(3,036	)		(7.4	)		41,149		(9,368	)		(18.5	)		50,517
Money market deposits		267,496		7,189			2.8			260,307		24,967			10.6			235,340
Total		479,640		14,909			3.2			464,731		1,376			0.3			463,355
Time deposits		884,834		67,087			8.2			817,747		19,027			2.4			798,720
Total interest-bearing deposits		1,364,474		81,996			6.4			1,282,478		20,403			1.6			1,262,075
Noninterest-bearing demand deposits		150,273		(8,291	)		(5.2	)		158,564		(374	)		(0.2	)		158,938
Total deposits	$	1,514,747	$	73,705			5.1		$	1,441,042	$	20,029			1.4		$	1,421,013
Average Balances
Interest-bearing deposits:
Demand deposits	$	168,395	$	4,363			2.7		$	164,032	$	7,195			4.6		$	156,837
Savings deposits		40,803		(6,386	)		(13.5	)		47,189		(5,638	)		(10.7	)		52,827
Money market deposits		274,818		17,977			7.0			256,841		76,328			42.3			180,513
Total		484,016		15,954			3.4			468,062		77,885			20.0			390,177
Time deposits		841,741		28,404			3.5			813,337		128,067			18.7			685,270
Total interest-bearing deposits		1,325,757		44,358			3.5			1,281,399		205,952			19.2			1,075,447
Noninterest-bearing demand deposits		157,992		(1,213	)		(0.8	)		159,205		16,581			11.6			142,624
Total deposits	$	1,483,749	$	43,145			3.0		$	1,440,604	$	222,533			18.3		$	1,218,071

Recent Accounting and Reporting Developments

See Note 1 of the Consolidated Financial Statements for a discussion of recently issued or proposed accounting pronouncements.

Effects of Inflation

Inflation affects financial institutions in ways that are different from most commercial and industrial companies, which have significant investments in fixed assets and inventories.  The effect of inflation on interest rates can materially impact bank operations, which rely on net interest margins as a major source of earnings.  Noninterest expense, such as salaries and wages, occupancy and equipment cost, are also negatively affected by inflation.

37

Non-GAAP Measures

This Annual Report on Form 10-K contains financial information determined by methods other than in accordance with generally accepted accounting principles (“GAAP”).  FNB United’s management uses these non-GAAP measures in their analysis of FNB United’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 FNB United’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.

Application of Critical Accounting Policies

FNB United'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. FNB United'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.  FNB United’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

FNB United has developed procedures to test goodwill for impairment.  This analysis is done annually.  However, in 2008, testing occurred in the second quarter for Dover as noted below.  On account of the analysis performed on Dover, an analysis was also performed on FNB United as of September 30, 2008.

The testing procedures involved 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 FNB United: (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

38

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. As of the most recent quarter, the Bank was carrying goodwill.

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 is equal to the excess of carrying value over fair value.

During the second quarter of 2008, FNB United commenced an impairment evaluation of the Dover goodwill as a result of changes in the Dover business model, which included the closing of certain offices and loss of personnel at those locations. As a result, the impairment evaluation determined the carrying value exceeded fair value. FNB United made the decision to take a goodwill impairment charge for the entire remaining value of $1.8 million (pre-tax and after-tax), and this non-cash charge was recorded as a component of noninterest expense in the second quarter.

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the goodwill impairment analysis of Dover as of June 30, 2008 necessitated an impairment analysis of the entity-wide goodwill.  This analysis has been performed as of September 30, 2008 and the fair value of the reporting unit exceeded its carrying amount as of June 30 and September 30, 2008.

Additionally, as of December 31, 2008, management performed the first step of the impairment analysis and determined that the carrying amount of the Company exceeded its fair value.  Once this was determined, a second test of overall goodwill impairment was conducted. This testing revealed that the carrying value of the Company’s goodwill exceeded the implied fair value by $56.0 million (pre-tax and after-tax), and this non-cash charge was recorded as a component of non-interest expense in the fourth quarter. See also Note 3 to the Financial Statements.

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 as 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 FNB United’s assets reported on the balance sheet as well as its net earnings.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

The objective of the Bank’s asset/liability management function is to maintain consistent growth in net interest income within Bank guidelines.  This objective is accomplished through management of the Bank’s balance sheet composition, liquidity, and interest rate risk exposures arising from changing economic conditions, interest rates and customer preferences.

The goal of liquidity management is to provide adequate funds to meet changes in loan demand or unexpected deposit withdrawals.  This is accomplished by maintaining liquid assets in the form of investment securities, maintaining sufficient unused borrowing capacity and achieving consistent growth in core deposits.

Management considers interest rate risk the Bank’s most significant market risk.  Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates.  Consistency of the Bank’s net interest income is largely dependent upon the effective management of interest rate risk.

39

To identify and manage its interest rate risk, the Bank employs an earnings simulation model to analyze net interest income sensitivity to changing interest rates.  The model is based on actual cash flows and repricing characteristics and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities.  The model also includes management projections for activity levels in each of the product lines offered by the Bank.  Assumptions are inherently uncertain and the measurement of net interest income or the impact of rate fluctuations on net interest income cannot be precisely predicted.  Actual results may differ from simulated results due to timing, magnitude, and frequency of interest changes as well as changes in market conditions and management strategies.

The Bank’s Asset/Liability Management Committee (“ALCO”), which includes senior management representatives and reports to the Bank’s Board of Directors, monitors and manages interest rate risk.  The Bank’s current interest rate risk position is determined by measuring the anticipated change in net interest income over a 24-month horizon assuming a ramped increase or decrease in all interest rates equally over the 24 month time horizon.

The following table shows the Bank’s estimated net interest income profile for the 12-month period beginning December 31, 2008:

Changes in Interest Rates	Percentage Change in Net
(basis points)	Interest Income – 12 months
+200	+5.11%
+100	+2.85%
-100	-0.35%
-200	-1.53%

ALCO also monitors the sensitivity of the Bank’s economic value of equity (“EVE”) due to sudden and sustained changes in market rates.  The EVE ratio, measured on a static basis at the current period end, is calculated by dividing the economic value of equity by the economic value of total assets.  The ALCO also monitors the change in EVE on a percentage change basis.

The following table estimates changes in EVE for given changes in interest rates as of December 31, 2008:

Change in Interest Rates	Percentage
(basis points)	Change in EVE
+200	7.24%
+100	3.31%
-100	-4.65%
-200	-8.23%

Due to the current low level of market interest rates, further decreases in interest rates are limited. Therefore, ALCO believes that market risk at the Bank is low and well within acceptable levels.

40

Item 8. Financial Statements and Supplementary Data

QUARTERLY FINANCIAL INFORMATION

The following table sets forth, for the periods indicated, certain of our consolidated quarterly financial information. This information is derived from our unaudited financial statements, which include, in the opinion of management, all normal recurring adjustments which management considers necessary for a fair presentation of the results for such periods. This information should be read in conjunction with our consolidated financial statements included elsewhere in this report. The results for any quarter are not necessarily indicative of results for any future period.

(dollars in thousands, except per share data)
	2008
	4th Qtr			3rd Qtr			2nd Qtr		1st Qtr
Interest income	$	26,644		$	28,856		$	28,325	$	30,210
Interest expense		12,607			13,255			13,376		14,780
Net interest income		14,037			15,601			14,949		15,430
Provision for loan losses		15,492			9,370			1,383		1,514
Net interest income after provision
for loan losses		(1,455	)		6,231			13,566		13,916
Noninterest income		7,231			5,920			4,743		5,024
Noninterest expense		69,818			15,432			17,318		15,535
Income before income taxes		(64,042	)		(3,281	)		991		3,405
Provision for income taxes		(3,481	)		(1,570	)		851		1,082
Net income (loss)	$	(60,561	)	$	(1,711	)	$	140	$	2,323
Net income (loss) per common share:
Basic	$	(5.30	)	$	(0.15	)	$	0.01	$	0.20
Diluted	$	(5.30	)	$	(0.15	)	$	0.01	$	0.20
	2007
	4th Qtr			3rd Qtr			2nd Qtr		1st Qtr
Interest income	$	31,856		$	32,173		$	31,714	$	30,897
Interest expense		16,126			16,175			15,655		15,072
Net interest income		15,730			15,998			16,059		15,825
Provision for loan losses		3,044			1,470			476		524
Net interest income after provision
for loan losses		12,686			14,528			15,583		15,301
Noninterest income		4,552			6,642			5,426		4,973
Noninterest expense		15,443			15,620			15,369		14,612
Income before income taxes		1,795			5,550			5,640		5,662
Provision for income taxes		543			1,884			1,949		1,910
Net income	$	1,252		$	3,666		$	3,691	$	3,752
Net income per common share:
Basic	$	0.11		$	0.32		$	0.33	$	0.33
Diluted	$	0.11		$	0.32		$	0.33	$	0.33

41

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

FNB United Corp. and Subsidiary

Asheboro, North Carolina

We have audited the accompanying consolidated balance sheets of FNB United Corp. and Subsidiary as of December 31, 2008 and 2007, and the related consolidated statements of income, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2008.  These consolidated financial statements are the responsibility of the Corporation’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FNB United Corp. and Subsidiary at December 31, 2008 and 2007 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.

As disclosed in Note 1 to the consolidated financial statements, the Corporation adopted the provisions of both Staff Accounting Bulletin No. 109, "Written Loan Commitments Recorded at Fair Value through Earnings," and Emerging Issues Task Force EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”, effective January 1, 2008.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), FNB United Corp.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 16, 2009 expressed an adverse opinion on the effectiveness of the Corporation’s internal control over financial reporting.

Raleigh, North Carolina

March 16, 2009

42

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

FNB United Corp. and Subsidiary

We have audited FNB United Corp. and Subsidiary (the “Corporation”)’s internal control overfinancial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  The Corporation’s management is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internal control overfinancial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting.  Our responsibility is to express an opinion on the Corporation's internal control overfinancial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audit also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Because management’s assessment and our audit were conducted to also meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management’s assessment and our audit of the Corporation’s internal control over financial reporting included controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (form FR Y-9 C). A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Corporation’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. As of December 31, 2008, the Corporation did not have adequate staffing and segregation of duties in its Accounting Department.  This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2008 consolidated financial statements, and this report does not affect our report dated March 16, 2009 on those consolidated financial statements.

43

In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, FNB United Corp. and Subsidiary has not maintained effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of FNB United Corp. and Subsidiary as of and for the year ended December, 31, 2008, and our report dated March 16, 2009, expressed an unqualified opinion on those consolidated financial statements.

We do not express an opinion or any other form of assurance on management’s statement referring to compliance with designated laws and regulations related to safety and soundness.

Raleigh, North Carolina

March 16, 2009

44

FNB United Corp. and Subsidiary

Consolidated Balance Sheets

(dollars in thousands, except share and per share data)	December 31,
	2008			2007
Assets
Cash and due from banks	$	28,743		$	37,739
Interest-bearing bank balances		404			836
Federal funds sold		206			542
Investment securities:
Available for sale, at estimated fair value (amortized cost of $206,072 in 2008 and $146,243 in 2007)		205,426			147,149
Held to maturity (estimated fair value of $27,580 in 2008 and $35,251 in 2007)		27,794			35,650
Loans held for sale		36,138			17,586
Loans held for investment		1,585,195			1,446,116
Less:  Allowance for loan losses		(34,720	)		(17,381	)
Net loans held for investment		1,550,475			1,428,735
Premises and equipment, net		50,947			46,614
Goodwill		52,395			110,195
Core deposit premiums		5,762			6,564
Other assets		86,144			74,896
Total Assets	$	2,044,434		$	1,906,506
Liabilities
Deposits:
Noninterest-bearing demand deposits	$	150,273		$	158,564
Interest-bearing deposits:
Demand, savings and money market deposits		479,640			464,731
Time deposits of $100,000 or more		407,539			375,419
Other time deposits		477,295			442,328
Total deposits		1,514,747			1,441,042
Retail repurchase agreements		18,145			29,133
Federal Home Loan Bank advances		238,910			131,790
Federal funds purchased		37,000			13,500
Subordinated debt		15,000			-
Junior subordinated debentures		56,702			56,702
Other liabilities		16,013			18,083
Total Liabilities		1,896,517			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 11,428,003 shares in 2008 and 11,426,902 shares in 2007		28,570			28,567
Surplus		114,772			114,119
Retained earnings		8,904			74,199
Accumulated other comprehensive loss		(4,329	)		(629	)
Total Shareholders' Equity		147,917			216,256
Total Liabilities and Shareholders' Equity	$	2,044,434		$	1,906,506

See accompanying notes to consolidated financial statements.

45

FNB United Corp. and Subsidiary

Consolidated Statements of Income

(dollars in thousands, except share and per share data)
	Years Ended December 31,
	2008			2007		2006
Interest Income
Interest and fees on loans	$	103,365		$	114,880	$	92,565
Interest and dividends on investment securities:
Taxable income		7,820			7,613		6,334
Non-taxable income		2,040			2,096		2,081
Other interest income		810			2,051		2,389
Total interest income		114,035			126,640		103,369
Interest Expense
Deposits		42,211			52,594		38,565
Retail repurchase agreements		651			1,317		923
Federal Home Loan Bank advances		7,223			3,468		3,387
Federal funds purchased		501			162		40
Other borrowed funds		3,432			5,487		4,240
Total interest expense		54,018			63,028		47,155
Net Interest Income		60,017			63,612		56,214
Provision for loan losses		27,759			5,514		2,526
Net Interest Income After Provision for Loan Losses		32,258			58,098		53,688
Noninterest Income
Service charges on deposit accounts		9,167			9,012		8,214
Mortgage loan sales		6,340			4,543		4,841
Cardholder and merchant services income		2,395			1,878		1,908
Trust and investment services		1,827			1,686		1,529
Bank owned life insurance		983			945		1,226
Other service charges, commissions and fees		796			998		987
Gain (loss) on sale of securities, net		646			-		(559	)
Factoring operations		-			134		334
Gain on sale of credit card portfolio		-			1,302		-
Other income		764			1,095		735
Total noninterest income		22,918			21,593		19,215
Noninterest Expense
Personnel expense		33,081			33,169		28,078
Occupancy expense		5,343			5,303		3,774
Furniture and equipment expense		3,794			4,641		3,832
Data processing services		2,911			1,915		2,432
Goodwill impairment		57,800			358		1,625
Professional fees		2,552			1,872		1,624
Stationery, printing and supplies		1,174			1,266		1,430
Advertising and marketing		1,371			1,924		1,144
Other expense		10,077			10,596		9,502
Total noninterest expense		118,103			61,044		53,441
Loss before income taxes		(62,927	)		18,647		19,462
Income taxes		(3,118	)		6,286		7,275
Net (Loss) / Income	$	(59,809	)	$	12,361	$	12,187
Net (loss) / income per common share:
Basic	$	(5.24	)	$	1.09	$	1.27
Diluted	$	(5.24	)	$	1.09	$	1.25
Weighted average number of common shares outstanding:
Basic		11,407,616			11,321,908		9,619,870
Diluted		11,407,616			11,336,321		9,715,585
See accompanying notes to consolidated financial statements.

46

FNB United Corp. and Subsidiary

Consolidated Statements of Shareholders’ Equity and Comprehensive Income

													Accumulated
(in thousands, except share and per share data)													Other
	Common Stock									Retained			Comprehensive
	Shares			Amount			Surplus			Earnings			Income (Loss)			Total
Balance, December 31, 2005		6,370,486		$	15,926		$	23,542		$	62,711		$	136		$	102,315
Comprehensive income:
Net income		-			-			-			12,187			-			12,187
Other comprehensive income, net of taxes:
Net losses arising during period		-			-			-			-			(123	)		(123	)
Reclassification adjustment for net realized losses		-			-			-			-			338			338
Total comprehensive income																	12,402
Cash dividends declared, $0.62 per share		-			-			-			(6,236	)		-			(6,236	)
Merger acquisition of subsidiary companies:
Common stock issued		4,654,504			11,636			82,964			-			-			94,600
Fair value of stock options assumed		-			-			3,311			-			-			3,311
Stock options:
Proceeds from options exercised		214,502			536			1,581			-			-			2,117
Compensation expense recognized		-			-			510			-			-			510
Net tax benefit related to option exercises		-			-			279			-			-			279
Restricted stock:
Shares issued, subject to restriction		53,875			135			(135	)		-			-			-
Compensation expense recognized		-			-			151			-			-			151
Other compensatory stock issued		625			2			10			-			-			12
Adjustment to initially apply SFAS No. 158		-			-			-			-			(1,793	)		(1,793	)
Balance, December 31, 2006		11,293,992			28,235			112,213			68,662			(1,442	)		207,668
Comprehensive income:
Net income		-			-			-			12,361			-			12,361
Other comprehensive income, net of taxes:
Unrealized securities gains		-			-			-			-			198			198
Pension and post-retirement liability		-			-			-			-			615			615
Total comprehensive income																	13,174
Cash dividends declared, $0.60 per share		-			-			-			(6,824	)		-			(6,824	)
Stock options:
Proceeds from options exercised		135,581			339			963			-			-			1,302
Compensation expense recognized		-			-			494			-			-			494
Net tax benefit related to option exercises		-			-			167			-			-			167
Restricted stock:
Shares terminated, subject to restriction		(3,103	)		(8	)		(31	)		-			-			(39	)
Compensation expense recognized		-			-			306			-			-			306
Other compensatory stock issued		432			1			7			-			-			8
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		-			-			-			(344	)		-			(344	)
Comprehensive income (loss):
Net loss		-			-			-			(59,809	)		-			(59,809	)
Other comprehensive income, net of taxes:
Unrealized holding (losses) arising during the period on securities available-for-sale net of tax		-			-			-			-			(781	)		(781	)
Reclassification adjustment for (gains)on securities available-for-sale included in net income, net of tax		-			-			-			-			(139	)		(139	)
Change in unrealized (losses) on securities, net of tax		-			-			-			-			(920	)		(920	)
Interest rate swap		-			-			-			-			(300	)		(300	)
Pension and post-retirement liability		-			-			-			-			(2,480	)		(2,480	)
Total comprehensive loss																	(63,509	)
Cash dividends declared, $0.45 per share		-			-			-			(5,142	)		-			(5,142	)
Stock options:
Proceeds from options exercised		150			1			1			-			-			2
Compensation expense recognized		-			-			429			-			-			429
Restricted stock:
Shares issued, subject to restriction		951			2			(75	)		-			-			(73	)
Compensation expense recognized		-			-			298			-			-			298
Balance, December 31, 2008		11,428,003		$	28,570		$	114,772		$	8,904		$	(4,329	)	$	147,917
See accompanying notes to consolidated financial statements.

47

 FNB United Corp. and Subsidiary

 CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)	Year Ended December 31,
	2008			2007			2006
Operating Activities
Net (loss) income	$	(59,809	)	$	12,361		$	12,187
Adjustments to reconcile net income (loss) to cash provided by operatings activities:
Depreciation and amortization of premises and equipment		3,453			3,584			2,855
Provision for loan losses		27,759			5,514			2,526
Deferred income taxes		(5,056	)		623			1,735
Deferred loan fees and costs, net		(503	)		1,085			694
Premium amortization and discount accretion of investment securities, net		(422	)		(254	)		339
(Gain) loss on sale of investment securities		(646	)		-			559
Amortization of core deposit premiums		802			814			604
Stock compensation expense		727			769			673
Income from bank owned life insurance		(983	)		(945	)		(1,226	)
Mortgage loans held for sale:
Origination of mortgage loans held for sale		(260,964	)		(351,398	)		(368,632	)
Proceeds from sale of mortgage loans held for sale		248,330			359,217			370,226
Gain on mortgage loan sales		(6,340	)		(4,543	)		(4,841	)
Gain on other loan sales		-			(1,302	)		(118	)
Mortgage servicing rights capitalized		(1,182	)		(1,094	)		(701	)
Mortgage servicing rights amortization and impairment		38			667			637
Goodwill impairment		57,800			358			1,625
Changes in assets and liabilities:
Decrease (increase) in interest receivable		2,435			(664	)		(297	)
Decrease in other assets		937			7,551			2,400
(Increase) decrease in accrued interest and other liabilities		364			(1,264	)		(2,779	)
Net cash provided by operating activities		6,740			31,079			18,466
Investing Activities
Available-for-sale securities:
Proceeds from sales		28,165			-			119,490
Proceeds from maturities and calls		105,382			87,965			37,712
Purchases		(197,395	)		(117,747	)		(90,746	)
Held-to-maturity securities:
Proceeds from maturities and calls		12,285			7,114			7,562
Purchases		(4,487	)		-			(1,730	)
Net increase in loans held for investment		(154,105	)		(155,140	)		(41,520	)
Proceeds from sales of loans		-			4,999			10,443
Purchases of premises and equipment		(8,751	)		(5,265	)		(6,293	)
Net cash received (paid) in merger transactions		-			-			10,256
Purchases of SBIC investments		(75	)		(475	)		(1,050	)
Net change in other investments		-			-			396
Net cash (used in) provided by investing activities		(218,981	)		(178,549	)		44,520
Financing Activities
Net increase in deposits		73,705			20,062			16,435
(Decrease) increase in retail repurchase agreements		(10,988	)		5,972			(1,735	)
Increase in Federal Home Loan Bank advances		106,970			65,720			(39,018	)
Increase in federal funds purchased		23,500			13,500			-
Increase (decrease) in other borrowings		15,000			(21,441	)		27,789
Proceeds from exercise of stock options		2			1,302			2,117
Tax benefit from exercise of stock options		-			167			279
Cash dividends paid		(5,712	)		(7,035	)		(5,392	)
Net cash provided by financing activities		202,477			78,247			475
Net (Decrease) Increase in Cash and Cash Equivalents		(9,764	)		(69,223	)		63,461
Cash and Cash Equivalents at Beginning of Period		39,117			108,340			44,879
Cash and Cash Equivalents at End of Period	$	29,353		$	39,117		$	108,340
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	54,564		$	63,092		$	44,844
Income taxes, net of refunds		2,352			3,815			5,836
Noncash transactions:
Foreclosed loans transferred to other real estate		6,934			3,708			3,393
Unrealized securities (losses) gains, net of income taxes (benefit)/expense		(939	)		198			215
Application of SFAS No. 158 to employee benefit plan costs, net of income taxes		(2,480	)		615			(1,793	)
Interest rate swap		(300	)		-			-
Adoption of EITF Issue 06-4		(344	)		-			-
Merger acquisition of subsidiary company:
Fair value of assets acquired		-			-			728,722
Fair value of common stock issued		-			-			98,123
Cash paid		-			-			27,717
Liabilities assumed		-			-			602,882
See accompanying notes to consolidated financial statements.

48

FNB United Corp. and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2008, 2007, and 2006

Note 1 – Summary of significant accounting policies

Nature of Operations/Consolidation

FNB United Corp. (“FNB United”), formerly known as FNB Corp., is a bank holding company whose wholly owned subsidiary is CommunityONE Bank, National Association (“the Bank”).  The Bank has three wholly owned subsidiaries, Dover Mortgage Company (“Dover”), First National Investor Services, Inc., and Premier Investment Services, Inc (an inactive subsidiary acquired as part of the United Financial, Inc. transaction).  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.  The Bank has offices in Alamance, Alexander, Ashe, Catawba, Chatham, Gaston, Guilford, Iredell, Mecklenburg, Montgomery, Moore, Orange, Randolph, Richmond, Rowan, Scotland, Watauga and Wilkes counties in North Carolina.  Dover has a retail origination network based in Charlotte with current wholesale operations in North Carolina, South Carolina, Georgia, Tennessee, Virginia and Maine.

The consolidated financial statements include the accounts of FNB United and its subsidiaries (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 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.

Business Segments

The Company reports business segments in accordance with Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). Business segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. SFAS No. 131 requires that a public enterprise report a measure of segment profit or loss, certain specific revenue and expense items, segment assets, information about the way that the business segments were determined and other items. Prior to 2007, the Company had two reportable business segments, the full service subsidiary bank, CommunityOne Bank, and the mortgage banking subsidiary, Dover Mortgage Company. The determination was made in 2007 that there was only one business segment and that Dover no longer is a business segment.

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158 (“SFAS No. 158”), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (an

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amendment of FASB Statements No. 87, 88, 106, and 132R).”  SFAS No. 158 requires an employer to: (a) recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status; (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions); and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur.  Those changes will be reported in comprehensive income of a business entity and in changes in net assets of a not-for-profit organization.  The requirement by SFAS No. 158 to recognize the funded status of a benefit plan and the disclosure requirements of SFAS No. 158 are effective as of the end of the fiscal year ending after December 15, 2006 for entities with publicly traded equity securities. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008.  Effective December 31, 2006, the Company adopted the provisions of SFAS No. 158 that require recognition of the funded status of a benefit plan and related disclosures. Effective December 31, 2008, the Company has adopted all remaining provisions of SFAS No. 158 as discussed below in Note 11.

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. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the impact of adoption of SFAS No. 157 on nonfinancial assets and liabilities and has adopted the provisions of SFAS No. 157 for financial assets and financial liabilities effective January 1, 2008. Refer to Note 17 for additional disclosures. In October 2008, the FASB issued Staff Position (FSP) 157-3, Determining the Fair Value of a Financial Asset when the Market for That Asset Is Not Active. This FSP clarifies the application of SFAS No. 157 in a market that is not active. The impact of adoption was not material.

In July 2006, the FASB issued Financial Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,” which is a change in accounting for income taxes. FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the balance sheet; and provides transition and interim period guidance, among other provisions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not have a material effect on its consolidated financial position or results of operations. The Company classifies interest and penalties related to income tax assessments, if any, in income tax expense in the consolidated statement of operations. Fiscal years ending on or after December 31, 2004 are subject to examination by federal and state tax authorities.

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

50

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 arrangement with the employee.  If the employer 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 cumulative effect of adopting the provisions of EITF Issue 06-4 was a $344,000 adjustment to retained earnings in 2008.

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159), which allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. Subsequent changes in fair value of these financial assets and liabilities would be recognized in earnings when they occur. SFAS 159 further establishes certain additional disclosure requirements. SFAS 159 is effective for the Company’s financial statements for the year beginning on January 1, 2008, with earlier adoption permitted. The Company adopted SFAS 159, but did not apply it to any financial assets or liabilities. See Note 17 for additional disclosures.

The Company adopted the provisions of SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments,” effective January 1, 2007. The adoption of the provisions of SFAS No. 155 had no material effect on financial position or results of operations.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No.140” (SFAS 156), which permits, but does not require, an entity to account for one or more classes of servicing rights (i.e., mortgage servicing rights, or MSRs) at fair value, with the changes in fair value recorded in the Consolidated Statement of Income. The adoption of the provisions of SFAS No. 156 was effective beginning January 1, 2007 and had no material effect on financial position or results of operations. For additional information on MSRs, see Note 3 of the Consolidated Financial Statements.

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.  The effective date of this statement is the same as that of the related SFAS No. 160.

SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” This statement  improves the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same way—as equity in the consolidated financial statements.  Moreover, SFAS No. 160 eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  Earlier adoption is prohibited.  The effective date of this statement is the same as that of the related SFAS No. 141(R).  This statement shall be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented.

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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, has resulted in recognition of $1.2 million 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.

Staff Accounting Bulletin No. 110.  SAB 110 expresses the views of the staff regarding the use of a "simplified" method, as discussed in SAB No. 107, in developing an estimate of expected term of "plain vanilla" share options in accordance with SFAS No. 123 (R), Share-Based Payment.  This simplified method will continue to be accepted by the staff provided certain conditions are met whereby the company’s historical share option exercise experience does not provide a reasonable basis upon which to estimate the expected term of the plain vanilla option.  In addition, the SAB contains certain disclosure requirements in situations where a company uses the simplified method.

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.

Business Combinations

For all business combination transactions initiated after June 30, 2001, the purchase method of accounting has been used, and accordingly, the assets and liabilities of the acquired company have been recorded at their estimated fair values as of the merger date.  The fair values are subject to adjustment as information relative to the fair values as of the acquisition date becomes available.  The Company uses an allocation period, not to exceed one year, to identify and quantify the fair value of the assets acquired and liabilities assumed in business combinations accounted for as purchases.  The consolidated financial statements include the results of operations of any acquired company since the acquisition date.

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.

Investment Securities

Investment securities are categorized and accounted for as follows:

· Held-to-maturity securities - Debt securities that the Company has the positive intent and ability to hold to maturity are reported at amortized cost.

· Available-for-sale securities - Debt and equity securities not classified as either held-to-maturity securities or trading securities are reported at fair value, with unrealized gains and losses, net of related tax effect, included as an item of accumulated other comprehensive income and reported as a separate component of shareholders' equity.

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The Company intends to hold its securities classified as available-for-sale securities for an indefinite period of time but may sell them prior to maturity.  All other securities, which the Company has the positive intent and ability to hold to maturity, are classified as held-to-maturity securities.

A decline, which is deemed to be other than temporary, in the market value of any available-for-sale or held-to-maturity security to a level below cost results in a reduction in carrying amount to fair value.  The impairment is charged to earnings and a new cost basis for the security is established.

Interest income on debt securities is adjusted using the level yield method for the amortization of premiums and accretion of discounts.  The adjusted cost of the specific security is used to compute gains or losses on the disposition of securities.

Loans

Interest income on loans is generally calculated by using the constant yield method based on the daily outstanding balance.  The recognition of interest income is discontinued 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.  The past due status of loans is based on the contractual payment terms.

A loan is considered impaired when, based on current information or events, it is probable that a borrower will be unable to pay amounts due in accordance to the contractual terms of the loan agreement.  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.  When the ultimate collectibility of the impaired loan’s principal is doubtful, all cash receipts are applied to principal.  Once the recorded principal balance has been reduced to zero, future cash receipts are first recorded as recoveries of any amounts previously charged-off and are then applied to interest income, to the extent that any interest has been foregone.

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.  The premium or discount on purchased loans is amortized over the expected life of the loans and is included in interest and fees on loans.

Residential mortgage loans held for sale are valued at the lower of cost or market as determined by outstanding commitments from investors or current investor yield requirements, calculated on the aggregate loan basis.

The Company accounts for loans acquired in a transfer that are subject to the scope of American Institute of Certified Public Accountants (AICPA) Statement of Position 03-3, “Accounting for Certain Loans and Debt Securities Acquired in a Transfer” (“SOP 03-3”) at fair value, which is the net present value of all cash flows expected to be collected over the life of the loan. These cash flows are determined on the date of transfer. At December 31, 2008 and 2007, there were no loans subject to SOP 03-3.

Allowance for Loan Losses

The allowance for loan losses represents an amount considered adequate to absorb probable loan losses inherent in the portfolio.  Management's evaluation of the adequacy of the allowance is based on a review of individual loans, historical loan loss experience, the value and adequacy of collateral, and economic conditions in the 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.  Losses are charged and recoveries are credited to the allowance for loan losses.  This evaluation is inherently subjective as it requires material estimates, including the

53

amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.

In addition, the Office of the Comptroller of the Currency (OCC), a federal regulatory agency, as an integral part of its examination process, periodically reviews the Bank’s allowance for loan losses.  The OCC may require the Bank to recognize adjustments to the allowance based on its judgment about information available to it at the time of its examination.

Other Real Estate

Other real estate, which is included in other assets on the consolidated balance sheet, represents properties acquired through foreclosure or deed in lieu thereof.  In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the property is classified as held for sale when the sale is probable and expected to occur within one year.  The property is initially carried at fair value based on recent appraisals, less estimated costs to sell.  Declines in the fair value of properties included in other real estate below carrying value are recognized by a charge to income.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation and amortization.  Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows:  buildings and improvements, 10 to 50 years, and furniture and equipment, 3 to 10 years.  Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated life of the improvement or the term of the lease.

Intangible Assets

Intangible assets include goodwill and other identifiable assets, such as core deposit premiums, resulting from acquisitions.  Core deposit premiums are amortized primarily on a straight-line basis over a ten-year life based upon historical studies of core deposits.  Goodwill is not amortized but is tested annually for impairment or at any time an event occurs or circumstances change that may trigger a decline in the value of the reporting unit.  Examples of such events or circumstances include adverse changes in legal factors, business climate, unanticipated competition, change in regulatory environment, or loss of key personnel.

The Company tests for impairment in accordance with SFAS No. 142.  Potential impairment of goodwill exists when the carrying amount of a reporting unit exceeds its fair value.  The Company utilizes an independent third party to assist management in performing the goodwill impairment test. This firm first estimates the fair value of the reporting unit under a business combination using the median of three approaches. The Comparable Transaction Approach utilizes a regional transaction group.   For this group, median pricing ratios are applied to provide a range of values along with a median of these values. The Competitive Analysis utilizes acquisition assumptions and break-even purchase pricing to provide a range of values along with a median of these values. The Internal Rate of Return Analysis utilizes projected earnings, cost savings and terminal values over a five year period to provide a range of values with a median of these values.  A summary of these three approaches incorporates the range of values and median for each approach, along with a median of all three approaches.  This combined median is further discounted if warranted by the current market conditions.

To the extent a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired, and a second step of impairment testing will be performed.  In the second step, the implied fair value of the reporting unit’s goodwill is determined by allocating the reporting unit’s fair value to all of its assets (recognized and unrecognized) and liabilities as if the reporting unit had been acquired in a business combination as of the  date of the impairment test.  If the implied fair value of reporting unit goodwill is lower than its carrying amount, goodwill is impaired and is written down to its implied fair value.  The loss recognized is limited to the carrying amount of

54

goodwill.  Once an impairment loss is recognized, future increases in fair value will not result in the reversal of previously recognized losses.

Mortgage Servicing Rights (MSRs)

The rights to service mortgage loans for others are included in other assets on the consolidated balance sheet.  MSRs are recorded at fair value on an ongoing basis, with changes in fair value recorded in the results of operations.  A fair value analysis of MSRs is performed on a quarterly basis.

Income Taxes

Income tax expense includes both a current provision based on the amounts computed for income tax return purposes and a deferred provision that results from application of the asset and liability method of accounting for deferred taxes.  Under the asset and liability method, deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Earnings per Share (EPS)

As required for entities with complex capital structures, a dual presentation of basic and diluted EPS is included on the face of the income statement, and a reconciliation is provided in a footnote of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation.

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 December 31, 2008 include unrealized gains (losses) on investment securities classified as available-for-sale, the effect of the application of SFAS No. 158 to defined benefit pension and other postretirement plans for employees, and the changes in the value of the interest rate swap on one issue of trust preferred securities.  SFAS No. 158 was initially applied at its adoption date of December 31, 2006.

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

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	For Year Ended December 31,
(dollars in thousands)	2008			2007			2006
Income tax expense (benefit) related to other comprehensive income (loss)
Unrealized securities gains (losses):
Arising during the period	$	612		$	130		$	(81	)
Reclassification adjustment for net realized losses		-			-			220
Change in interest rate swap		155			-			-
Application of SFAS No. 158 to employee benefit plans		1,618			401			-
Total	$	2,385		$	531		$	139
Accumulated other comprehensive income (loss):
Unrealized securities gains	$	(371	)	$	549		$	351
Interest rate swap		(300	)		-			-
Pension and post-retirement liability		(3,658	)		(1,178	)		(1,793	)
Total	$	(4,329	)	$	(629	)	$	(1,442	)

Employee Benefit Plans

The Company has a defined benefit pension plan covering substantially all full-time employees.  Pension costs, which are actuarially determined using the projected unit credit method, are charged to current operations.  Annual funding contributions are made up to the maximum amounts allowable for Federal income tax purposes.

In September 2006, the Board of Directors of FNB United approved a modified freeze to the pension plan.  Effective December 31, 2006, no new employees are eligible to enter the plan.  Participants who were at least age 40, had earned 10 years of vesting service as an employee of FNB United and remained an active employee as of December 31, 2006 qualified for a grandfathering provision.  Under the grandfathering provision, the participant will continue to accrue benefits under the plan through December 31, 2011.  Additionally, the plan’s definition of final average compensation was improved from a 10-year averaging period to a 5-year averaging period as of January 1, 2007.  All other eligible participants in the plan had their retirement benefit frozen as of December 31, 2006.   Effective January 1, 2007, the 401K plan was enhanced and became the primary retirement benefit plan.

The Company has a noncontributory, nonqualified supplemental executive retirement plan (the “SERP”) covering certain executive employees.  Annual benefits payable under the SERP are based on factors similar to those for the pension plan, with offsets related to amounts payable under the pension plan and social security benefits.  SERP costs, which are actuarially determined using the projected unit credit method and recorded on an unfunded basis, are charged to current operations and credited to a liability account on the consolidated balance sheet.

Medical and life insurance benefits are provided by the Company on a postretirement basis under defined benefit plans covering substantially all full-time employees.  Postretirement benefit costs, which are actuarially determined using the attribution method and recorded on an unfunded basis, are charged to current operations and credited to a liability account on the consolidated balance sheet.

In conjunction with the modified freeze of the pension plan, the postretirement medical and life insurance plan was also amended.  Effective December 31, 2006, no new employees are eligible to enter the plan.  Participants who were at least age 40, has earned 10 years of vesting service as an employee of the Company and remained an active employee as of December 31, 2006 qualified for a grandfathering provision.  Under the grandfathering provision, the participant will continue to accrue benefits under the plan through December 31, 2011.

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, 149 and 155, establishes

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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 Company 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 Company makes and the fixed rate interest payments received is currently reported in earnings. This interest rate swap matures on January 26, 2009.

For the twelve months ended December 31, the interest rate swap resulted in net decreases of approximately $7,000 in 2008 and net increases of approximately $132,000 in 2007, in the interest expense that would otherwise have been reported for the FHLB advance.  The fair value of the swap at December 31, 2008 was recorded on the consolidated balance sheet as a liability in the amount of approximately $1,000, offset by a valuation adjustment in the same amount to the FHLB advance.

On March 14, 2008, FNB United entered into an interest rate swap to convert the floating rate cash flows on a $20 million trust preferred security to a fixed rate cash flow. As structured, the pay-fixed, receive-floating swap is evaluated, using the long-haul method, as being a cash flow hedge in which the ineffectiveness would be determined by any difference in valuation. Therefore no ineffectiveness is not assumed. Consequently, the difference in cash flows in each period between the fixed rate interest payments that the Company makes and the variable interest payments received is currently reported in earnings while gains and losses on the value of the swap instrument are recorded in shareholder’s equity.

For the twelve months ended December 31, 2008, the interest rate swap resulted in a net decrease of $18,292 in the interest expense that would otherwise have been reported. The fair value of the swap at December 31, 2008 was recorded on the consolidated balance sheet as a liability in the amount of $455,414 offset by other comprehensive loss of $300,573, net of $154,841 deferred taxes.  Changes in fair value will remain in other comprehensive income until the swap maturity date of December 15, 2010, which corresponds to the initial call date of the related trust preferred security.

The Company has also identified the following derivative instruments that were recorded on the consolidated balance sheet at December 31, 2008:  commitments to originate residential mortgage loans and forward sales commitments.

Dover originates certain 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 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 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.

See Note 17 for additional information related to derivatives and financial instruments.

Other Than Temporary Impairment of Investment Securities

Our policy regarding other than temporary impairment of investment securities requires continuous monitoring.

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The evaluation includes an assessment of both qualitative and quantitative measures to determine whether, in management’s judgment, the investment is likely to recover its original value. If the evaluation concludes that the investment is not likely to recover its original value, the unrealized loss is reported as an other than temporary impairment, and the loss is recorded as a securities transaction on the Consolidated Statement of Income. If the evaluation indicates a loss of asset value, management may elect to record an other than temporary impairment immediately.

See Note 4 for additional information related to impairment testing.

Reclassification

Certain items for 2007 and 2006 have been reclassified to conform to the 2008 presentation.  Such reclassifications had no effect on net income or shareholders’ equity as previously reported.

Note 2 – Merger Information

Integrity Financial Corporation

On April 28, 2006, the Company completed a merger for the acquisition of Integrity Financial Corporation (“Integrity”), headquartered in Hickory, North Carolina and the holding company for First Gaston Bank of North Carolina, including its divisions Catawba Valley Bank and Northwestern Bank.  At the date of the merger, First Gaston Bank operated seventeen offices and, based on estimated fair values, had approximately $728.7 million in total assets, $475.3 million in net loans and $563.3 million in deposits.  On August 1, 2006, First Gaston Bank was merged into the Bank.  The primary reasons for the merger were:

· To create a banking organization, approximately two-thirds larger in total assets than FNB United prior to the merger, that could offer an expanded array of services including the ability to provide larger loans and professional wealth management services in a community banking setting;

· To expand the reach of the company from ten central-North Carolina counties to seventeen counties with forty-two community offices, stretching from the Central and Southern Piedmont to the Foothills and Mountains of Western North Carolina, including areas of the state which possessed faster income and population growth characteristics than many existing FNB United franchise areas; and

· To create shareholder value based upon the opportunities set out above.

Pursuant to the terms of the merger, each share of Integrity common stock was converted into 0.8743 shares of FNB United common stock and $5.20 in cash.  The aggregate purchase price was $127.2 million, consisting of $27.7 million in cash payments to Integrity shareholders, 4,654,504 shares of FNB United common stock valued at $94.8 million, outstanding Integrity stock options valued at $3.3 million and transaction costs of $1.4 million.

The merger transaction was accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of Integrity were recorded based on estimated fair values as of April 28, 2006, with the estimate of goodwill being subject to possible adjustment during the one-year period from that date. The adjustments recorded during that one-year period, including the purchase price adjustment noted above, resulted in a net $76,000 reduction in the amount initially recorded for goodwill.  The consolidated financial statements include the results of operations of Integrity since April 28, 2006.

United Financial, Inc.

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On November 4, 2005, the Company 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 $163.7 million in total assets, $95.2 million in net loans and $113.0 million in deposits.  On February 1, 2006, Alamance Bank was merged into the 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 $22.5 million, consisting of $8.2 million of cash payments and 728,625 shares of FNB United common stock valued at $14.5 million.

The merger transaction has been accounted for using the purchase method of accounting for business combinations, and accordingly, the assets and liabilities of United were recorded based on estimated fair values as of November 4, 2005, with the estimate of goodwill being subject to possible adjustment during the one-year period from that date.  The adjustments recorded during that one-year period, including the purchase price adjustment noted above, resulted in a net $264,000 reduction in the amount initially recorded for goodwill.  The consolidated financial statements include the results of operations of United since November 4, 2005.

Note 3 – Intangible Assets

Business Combinations

For intangible assets related to business combinations, the following is a summary of the gross carrying amount and accumulated amortization of amortized intangible assets and the carrying amount of unamortized intangible assets:

(dollars in thousands)	December 31,
	2008		2007
Amortized intangible assets:
Core deposit premium related to whole bank acquisitions:
Carrying amount	$	8,202	$	8,202
Accumulated amortization		2,440		1,638
Net core deposit premium	$	5,762	$	6,564
Unamortized intangible assets:
Goodwill	$	52,395	$	110,195

Amortization of intangibles totaled approximately $802,000 for core deposit premiums in 2008, $814,000 in 2007 and $604,000 in 2006.  The estimated amortization expense for core deposit premiums is approximately $795,000 per year for years ending December 31, 2009 through 2013.

The changes in the carrying amount of goodwill in 2008 were as follows:

(dollars in thousands)
Balance, December 31, 2007	$	110,195
Recognition of goodwill impairment charge for the Bank	$	(56,000	)
Recognition of goodwill impairment charge for Dover Mortgage Company		(1,800	)
Balance, December 31, 2008	$	52,395

Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” requires goodwill to be tested for impairment on an annual basis, or more frequently if circumstances indicate that an asset might be impaired, by comparing the fair value of such goodwill to its recorded or carrying

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amount. If the carrying amount of goodwill exceeds the fair value, an impairment charge must be recorded in an amount equal to the excess. The Company typically tests goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment.

During the second quarter of 2008, FNB United commenced an impairment evaluation of Dover goodwill as a result of changes in the Dover business model, which included the closing of certain offices and loss of personnel at those locations. As a result, the impairment evaluation determined the Dover goodwill carrying value exceeded its fair value. The Company made the decision to take a goodwill impairment charge for the entire remaining carrying value of $1.8 million (pre-tax and after-tax), and this non-cash charge was recorded as a component of noninterest expense for the second quarter.

The deteriorating economic conditions in the United States have significantly impacted the banking industry during 2008 and has impacted the Company’s financial results. The market price of the Company’s common stock has declined from an average closing price of $13.94 during the fourth quarter of 2007 to $5.02 during the fourth quarter of 2008, a 64% decrease. The closing market value of the Company’s stock on December 31, 2008 was $3.14. Our book value per share at December 31, 2008, prior to the goodwill impairment charge, was $17.84 per share. The substantial decline in stock price below book value led to an evaluation for potential goodwill impairment.

The first step, used to identify potential impairment, involves determining and comparing the fair value of the Company, with its carrying value, or shareholder’s equity. If the fair value of the Company exceeds its carrying value, goodwill is not impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to determine the amount of impairment, if any. The second step compares the book value of the Company to the aggregate fair values of its individual assets, liabilities, and indentified intangibles. The methodology utilized to determine fair value in the first step is discussed in “Note 1 – summary of significant accounting policies.” At December 31, 2008, management performed the first step and determined that it was probable the book value of the Company exceeded the fair value of the Company as a whole. Therefore a second step test was required to determine if there was goodwill impairment and the amount of goodwill that might be impaired.

The second step impairment test was commenced in the fourth quarter of 2008 and as a result of this test an impairment charge of $56.0 million was taken. We have recorded this charge within the accompanying financial statements.

Mortgage Servicing Rights

Mortgage loans serviced for others are not included in the consolidated balance sheet.  The unpaid principal balance of mortgage loans serviced for others amounted to $353.9 million, $287.2 million and $231.7 million at December 31, 2008, 2007 and 2006, respectively.

The following is an analysis of mortgage servicing rights included in other assets on the consolidated balance sheet:

(dollars in thousands)	Years Ended December 31,
	2008			2007			2006
Balance at beginning of year	$	2,900		$	2,473		$	2,409
Servicing rights capitalized		1,182			1,094			701
Amortization expense		(616	)		(461	)		(387	)
Change in valuation allowance		577			(206	)		(250	)
Balance at end of year	$	4,043		$	2,900		$	2,473

The estimated amortization expense for mortgage servicing rights for the years ending December 31 is as follows:  $611,204 in 2009, $535,957 in 2010, $462,250 in 2011, $395,927 in 2012, $337,464 in 2013, and $1,700,428 combined for all subsequent years.  The estimated amortization expense is based on

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current information regarding loan payments and prepayments.  Amortization expense could change in future periods based on changes in the volume of prepayments and economic factors.

Note 4 – Investment securities

Summaries of the amortized cost and estimated fair value of investment securities and the related gross unrealized gains and losses are presented below:

(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available For Sale
December 31, 2008
U.S. Government agencies and corporations	$	92,076	$	2,616	$	229	$	94,463
Mortgage-backed securities		66,583		1,546		11		68,118
State, county and municipal		38,336		921		343		38,914
Other debt securities		6,410		2		4,310		2,102
Equity securities		2,667		-		838		1,829
Total	$	206,072	$	5,085	$	5,731	$	205,426
December 31, 2007
U.S. Government agencies and corporations	$	81,280	$	854	$	60	$	82,074
Mortgage-backed securities		20,047		183		-		20,230
State, county and municipal		37,404		685		39		38,050
Other debt securities		5,000		-		290		4,710
Equity securities		2,512		9		436		2,085
Total	$	146,243	$	1,731	$	825	$	147,149
Held to Maturity
December 31, 2008
U.S. Government agencies and corporations	$	2,008	$	39	$	-	$	2,047
Mortgage-backed securities		8,420		117		1		8,536
State, county and municipal		16,366		171		252		16,285
Other debt securities		1,000		-		288		712
Total	$	27,794	$	327	$	541	$	27,580
December 31, 2007
U.S. Government agencies and corporations	$	12,056	$	3	$	72	$	11,987
Mortgage-backed securities		4,091		29		44		4,076
State, county and municipal		18,503		112		313		18,302
Other debt securities		1,000		-		114		886
Total	$	35,650	$	144	$	543	$	35,251

The amortized cost and estimated fair value of investment securities at December 31, 2008, by contractual maturity, are shown in the accompanying table.  Actual maturities may differ from contractual maturities because issuers may have the right to prepay obligations with or without prepayment penalties.

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	Available for Sale				Held to Maturity
(dollars in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	15,121	$	15,324	$	3,778	$	3,823
Due after one one year through five years		43,665		44,812		6,134		5,876
Due after five years through 10 years		61,048		62,657		6,768		6,771
Due after 10 years		16,988		12,686		2,694		2,574
Total		136,822		135,479		19,374		19,044
Mortgage-backed securities		66,583		68,118		8,420		8,536
Equity securities		2,667		1,829		-		-
Total	$	206,072	$	205,426	$	27,794	$	27,580

Debt securities with an estimated fair value of $104.6 million at December 31, 2008 and $102.2 million at December 31, 2007 were pledged to secure public funds and trust funds on deposit.  Debt securities with an estimated fair value of $27.7 million at December 31, 2008 and $30.9 million at December 31, 2007 were pledged to secure retail repurchase agreements.  Debt securities with an estimated fair value of $49.4 million at December 31, 2008 and $400,000 at December 31, 2007 were pledged to secure advances from the Federal Home Loan Bank. Debt securities with an estimated fair value of $1.4 million at December 31, 2008 and $6.5 million at December 31, 2007 were pledged for other purposes.

Gross gains and losses recognized (by specific identification) on the sale of securities are summarized as follows:

(dollars in thousands)	Years ended December 31,
	2008			2007		2006
Gains on sales of investment securities available-for-sale	$	664		$	-	$	839
Losses on sales of investment securities available-for-sale		(18	)		-		(1,398	)
Total securities gains (losses)	$	646		$	-	$	(559	)

The Bank, as a member of the Federal Home Loan Bank (the “FHLB”) of Atlanta, is required to own capital stock in the FHLB of Atlanta based generally upon the balances of total assets and FHLB advances.  FHLB capital stock is pledged to secure FHLB advances.  This investment is carried at cost since no ready market exists for FHLB stock and there is no quoted market value.  However, redemption of this stock has historically been at par value.  At December 31, 2008 and 2007, the Bank owned a total of $14.2 million and $9.2 million, respectively, of FHLB stock.  Due to the redemption provisions of FHLB stock, the Company estimated that fair value was equal to cost and that this investment was not impaired at December 31, 2008.  FHLB stock is included in other assets at its original cost basis.

The Bank, as a member bank of the Federal Reserve Bank (the “FRB”) of Richmond, is required to own capital stock of the FRB of Richmond based upon a percentage of the Bank’s common stock and surplus.  This investment is carried at cost since no ready market exists for FRB stock and there is no quoted market value.  At December 31, 2008 and 2007, the Bank owned a total of $5.3 million and $5.2 million, respectively of FRB stock.  Due to the nature of this investment in an entity of the U.S. Government, the Company estimated that fair value was equal to cost and that this investment was not impaired at December 31, 2008.  FRB stock is included in other assets at its original cost basis.

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(dollars in thousands)	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
December 31, 2008
Available For Sale
U.S. Government agencies and corporations	$	19,941	$	221	$	1,289	$	8	$	21,230	$	229
Mortgage-backed securities		4,475		11		-		-		4,475		11
State, county and municipal		6,348		343		-		-		6,348		343
Other debt securities		-		-		644		4,310		644		4,310
Equity securities		52		11		2,615		827		2,667		838
Total	$	30,816	$	586	$	4,548	$	5,145	$	35,364	$	5,731
Held to Maturity
U.S. Government agencies and corporations	$	-	$	-	$	-	$	-	$	-	$	-
Mortgage-backed securities		4,488		1		227		1		4,715		2
State, county and municipal		1,916		56		4,126		195		6,042		251
Other debt securities		-		-		712		288		712		288
Total	$	6,404	$	57	$	5,065	$	484	$	11,469	$	541
December 31, 2007
Available For Sale
U.S. Government agencies and corporations	$	825	$	1	$	4,652	$	59	$	5,477	$	60
Mortgage-backed securities		2,035		15		5,289		24		7,324		39
State, county and municipal		4,710		290		-		-		4,710		290
Other debt securities		16,745		436		-		-		16,745		436
Total	$	24,315	$	742	$	9,941	$	83	$	34,256	$	825
Held to Maturity
U.S. Government agencies and corporations	$	-	$	-	$	9,963	$	72	$	9,963	$	72
Mortgage-backed securities		-		-		2,613		44		2,613		44
State, county and municipal		-		-		9,550		313		9,550		313
Other debt securities		-		-		886		114		886		114
Total	$	-	$	-	$	23,012	$	543	$	23,012	$	543

Investment securities with an aggregate fair value of $9.6 million have had continuous unrealized losses of $5.6 million for more than twelve months as of December 31, 2008. These securities include U.S. Government, government agency and state, county and municipal securities, and equity securities. The unrealized losses relate to fixed-rate debt securities that have incurred fair value reductions due to higher market interest rates and for certain securities, increased credit risk since the respective purchase date. The unrealized losses are not likely to reverse unless and until market interest rates and credit risk decline to the levels that existed when the securities were purchased. Since none of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption obligations, and the Company has the intent and ability to hold until recovery, none of the securities are deemed to be other than temporarily impaired.

Unrealized losses for all investment securities are reviewed to determine whether the losses are “other-than-temporary.” Investment securities are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value below amortized cost is other-than-temporary. In conducting this assessment, the Company evaluates a number of factors including, but not limited to:

· How much fair value has declined below amortized cost;

· How long the decline in fair value has existed;

· The financial condition of the issuer;

· Contractual or estimated cash flows of the security;

· Underlying supporting collateral;

· Past events, current conditions, forecasts;

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· Significant rating agency changes on the issuer; and

· The Company’s intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

The Company analyzed its securities portfolio at December 31, 2008, paying particular attention to its trust preferred obligations, corporate bonds and municipal bonds. After considering ratings, fair value, cash flows and other factors, the Company does not believe securities to be other-than-temporarily impaired.

Note 5 – Loans

Major classifications of loans at December 31, are as follows:

(dollars in thousands)	2008		2007
Loans held for sale	$	36,138	$	17,586
Loans held for investment:
Commercial and agricultural		184,909		182,713
Real estate - construction		453,668		373,401
Real estate - mortgage:
1-4 family residential		369,948		331,194
Commercial and other		540,192		522,737
Consumer		36,478		36,071
Gross loans held for investment		1,585,195		1,446,116
Less:  allowance for loan losses		34,720		17,381
Loans held for investment, net of allowance	$	1,550,475	$	1,428,735

Loans as presented are reduced by net deferred loan fees of $2.4 million and $2.9 million at December 31, 2008 and 2007, respectively.  Accruing loans past due 90 days or more amounted to $0.9 million at December 31, 2008 and $2.7 million at December 31, 2007.  Nonaccrual loans amounted to $95.2 million at December 31, 2008 and $16.0 million at December 31, 2007.  Interest income that would have been recorded on nonaccrual loans for the years ended December 31, 2008, 2007 and 2006, had they performed in accordance with their original terms, amounted to approximately $6.0 million, $2.2 million and $1.2 million, respectively.  Interest income on all such loans included in the results of operations amounted to approximately $4.4 million in 2008, $0.8 million in 2007 and $0.6 million in 2006. Interest income on nonperforming loans is recorded when cash is actually received.

At December 31, 2008, the Company had impaired loans which totaled $116.1 million.  Of the $116.1 million, $94.8 million had an allowance for loan losses of $15.4 million and $21.3 million had no specifically allocated allowance for loan losses.  At December 31, 2007, the Company had impaired loans which totaled $15.6 million.  Of the $15.6 million, $4.9 million had an allowance for loan losses of $1.4 million and $10.7 million had no specifically allocated allowance for loan losses.  At December 31, 2006, the Company had impaired loans which totaled $9.3 million.  Of the $9.3 million, $1.6 million had an allowance for loan losses of $0.4 million and $7.7 million had no specifically allocated allowance for loan losses.  The average carrying value of impaired loans was $38.1 million in 2008 and $12.5 million in 2007.  Interest income recognized on impaired loans, exclusive of nonaccrual loans, amounted to approximately $1.3 million in 2008, $0.3 million in 2007, and $0.1 million in 2006.

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Loans with outstanding balances of $6.9 million in 2008 and $3.7 million in 2007 were transferred from loans to other real estate acquired through foreclosure.  Other real estate acquired through loan foreclosures amounted to $6.5 million at December 31, 2008 and $2.9 million at December 31, 2007 and is included in other assets on the consolidated balance sheet.

Loans held for investment are primarily made in the region of North Carolina that includes Alamance, Alexander, Ashe, Catawba, Chatham, Gaston, Guilford, Iredell, Mecklenburg, Montgomery, Moore, Orange, Randolph, Richmond, Rowan, Scotland, Watauga and Wilkes counties.  The real estate loan portfolio can be affected by the condition of the local real estate markets.

The Bank had loans outstanding to executive officers and directors and their affiliated companies during each of the past three years.  Such loans were made substantially on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other borrowers and do not involve more than the normal risks of collectibility.  The following table summarizes the transactions for the past two years.

(dollars in thousands)	2008			2007
Balance at beginning of year	$	12,924		$	12,488
Advances during year		23,551			27,214
Repayments during year		(26,173	)		(26,778	)
Balance at end of year	$	10,302		$	12,924

Note 6 – Allowance for loan losses

Changes in the allowance for loan losses for the years ended December 31 were as follows:

(dollars in thousands)	2008			2007			2006
Balance at beginning of year	$	17,381		$	15,943		$	9,945
Provision for losses charged to operations		27,759			5,514			2,526
Loans charged off		(12,425	)		(5,493	)		(4,630	)
Recoveries on loans previously charged off		2,005			1,719			2,745
Acquired in purchase transactions		-			-			6,038
Allowance adjustment for loans sold		-			(302	)		(4	)
Adjustment for reserve for unfunded commitments		-			-			(677	)
Balance at end of year	$	34,720		$	17,381		$	15,943

Note 7 – Premises and equipment

Premises and equipment at December 31 is summarized as follows:

(dollars in thousands)	2008		2007
Land	$	11,410	$	12,020
Building and improvements		38,567		31,206
Furniture and equipment		29,781		23,803
Leasehold improvements		1,848		1,627
Subtotal		81,606		68,656
Less:  accumulated depreciation and amortization		30,659		22,042
Balance at end of year	$	50,947	$	46,614

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Note 8 – Income taxes

The components of income tax expense for the years ended December 31 are as follows:

(dollars in thousands)	2008			2007		2006
Current:
Federal	$	1,695		$	4,873	$	4,618
State		243			790		922
Total current taxes		1,938			5,663		5,540
Deferred
Federal		(4,160	)		476		1,430
State		(896	)		147		305
Total deferred taxes		(5,056	)		623		1,735
Total income taxes	$	(3,118	)	$	6,286	$	7,275

A reconciliation of income tax expense computed at the statutory Federal income tax rate to actual income tax expense is presented in the following table:

(dollars in thousands)	2008			2007			2006
Amount of tax computed using Federal statutory tax rate of 35% in 2008, 2007 and 2006	$	(22,024	)	$	6,527		$	6,812
Increases (decreases) resulting from effects of:
Non-taxable income		(740	)		(746	)		(1,099	)
State income taxes, net of federal benefit		(425	)		609			798
Goodwill impairment		20,230			-			-
Other		(159	)		(104	)		764
Total	$	(3,118	)	$	6,286		$	7,275

The components of deferred tax assets and liabilities and the tax effect of each are as follows:

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(dollars in thousands)	2008		2007
Deferred tax assets:
Allowance for loan losses	$	13,981	$	7,012
Compensation and benefit plans		2,144		2,013
Fair value basis of loans		1,077		1,798
Contract termination costs		-		-
Pension and other post-retirement benefits		1,836		194
Interest rate swap		155		-
Net unrealized securities gains		430		-
Other		237		303
Total deferred tax assets		19,860		11,320
Deferred tax liabilities:
Core deposit intangible		2,275		2,592
Mortgage servicing rights		1,596		1,145
Depreciable basis of premises and equipment		1,561		1,195
Net deferred loan fees and costs		636		420
Net unrealized securities gains		-		358
SAB 109 valuation		487		-
Other		708		631
Total deferred tax liabilities		7,263		6,341
Net deferred tax assets	$	12,597	$	4,979

  Changes in net deferred tax asset were as follows:

(dollars in thousands)	2008		2007
Balance at beginning of year	$	4,979	$	6,399
Purchase accounting acquisition:
Integrity Financial Corporation		-		-
Income tax effect from change in unrealized losses (gains) on available-for-sale securities		788		(130	)
Adoption of SFAS No. 158		1,642		(401	)
Deferred income tax benefit (expense) on continuing operations		5,188		(889	)
Balance at end of year	$	12,597	$	4,979

Under accounting principles generally accepted in the United States of America, the Company is not required to provide a deferred tax liability for the tax effect of additions to the tax bad debt reserve through 1987, the base year.  Retained earnings at December 31, 2008 include approximately $2.7 million for which no provision for federal income tax has been made.  These amounts represent allocations of income to bad debt deductions for tax purposes only.  Reductions of such amounts for purposes other than bad debt losses could create income for tax purposes in certain remote instances, which would then be subject to the then current corporate income tax rate.

The Company has adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48").  There was no material impact from the adoption of FIN 48.  It is the Company's policy to recognize interest and penalties associated with uncertain tax positions as components of income taxes.  There were no interest or penalties accrued during the year.  The Company's federal and state income tax returns are subject to examination for the years 2005, 2006 and 2007.

Note 9 – Time Deposits

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The aggregate amount of jumbo certificates of deposit, each with a minimum denomination of $100,000, was approximately $408 million and $375 million in 2008 and 2007, respectively.  The accompanying table presents the scheduled maturities of time deposits at December 31, 2008.

(dollars in thousands)
Year ending December 31,
2009	$	744,304
2010		110,605
2011		24,597
2012		3,352
2013		1,478
Thereafter		498
Total time deposits	$	884,834

Interest expense on time deposits of $100,000 or more amounted to $15.5 million in 2008, $18.0 million in 2007 and $14.1 million in 2006.

Note 10 – Short-term borrowings and long-term debt

Retail Repurchase Agreements and Federal Funds Purchased

Funds are borrowed on an overnight basis through retail repurchase agreements with bank customers and federal funds purchased from other financial institutions.  Retail repurchase agreement borrowings are collateralized by securities of the U.S. Treasury and U.S. Government agencies and corporations.

Information concerning retail repurchase agreements and federal funds purchased is as follows:

	2008						2007						2006
(dollars in thousands)	Retail Repurchase Agreements			Federal Funds Purchased			Retail Repurchase Agreements			Federal Funds Purchased			Retail Repurchase Agreements			Federal Funds Purchased
Balance at December 31	$	18,145		$	37,000		$	29,133		$	13,500		$	23,161		$	-
Average balance during the year		29,954			21,310			28,783			3,102			21,134			696
Maximum monthend balance		35,815			62,400			33,354			13,500			27,786			2,000
Weighted average interest rate:
At December 31		0.63	%		0.47	%		4.20	%		4.25	%		4.67	%		-	%
During the year		2.36			2.09			4.58			5.22			4.37			5.71

Federal Home Loan Bank (FHLB) Advances

The Bank had a $325.1 million line of credit with the FHLB at December 31, 2008, secured by blanket collateral agreements on qualifying mortgage loans and, as required, by other qualifying collateral.  At December 31, 2008, FHLB advances under these lines amounted to $238.9 million and were at interest rates ranging from 0.46% to 6.15%.  At December 31, 2007, FHLB advances amounted to $131.8 million and were at interest rates ranging from 2.97% to 6.15%.

At December 31, 2008, the scheduled maturities of FHLB advances, certain of which are callable at the option of the FHLB before scheduled maturity, are as follows:

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(dollars in thousands)
Year ending December 31,
2009	$	81,430
2010		9,000
2011		20,000
2012		25,000
2013		20,000
2014 and thereafter		83,480
Total FHLB advances	$	238,910

Junior Subordinated Deferrable Interest Debentures

FNB United has Junior Subordinated Deferrable Interest Debentures (“Junior Subordinated Debentures”) outstanding.  Two issues of Junior Subordinated Debentures resulted from funds invested from the sale of trust preferred securities by FNB United Statutory Trust I (“FNB Trust I”) and by FNB United Statutory Trust II (“FNB Trust II”), which are owned by FNB United.  Two additional issues of Junior Subordinated Debentures were acquired on April 28, 2006 as a result of the merger with Integrity Financial Corporation.  These acquired issues resulted from funds invested from the sale of trust preferred securities by Catawba Valley Capital Trust I (“Catawba Trust I”) and by Catawba Valley Capital Trust II (“Catawba Trust II”), which were owned by Integrity and acquired by FNB United in the merger.  FNB United initiated the redemption of the securities issued by Catawba Valley Trust I as of December 30, 2007 and that trust was subsequently dissolved.

FNB United fully and unconditionally guarantees the preferred securities issued by each trust through the combined operation of the debentures and other related documents.  Obligations under these guarantees are unsecured and subordinate to senior and subordinated indebtedness of the Company.  The preferred securities qualify as Tier 1 and Tier 2 capital for regulatory capital purposes.

Information concerning the Junior Subordinated Debentures at December 31, 2008 and 2007 is as follows:

		Commencement
Stated		of Early	Principal Amount
Maturity		Redemption	(in thousands)
Issuer	Date	Period	12/31/08		12/31/07		Interest Rate
FNB Trust I	12/15/35	12/15/10	$	20,619	$	20,619	3 month LIBOR + 1.37% - 3.37% at 12/31/08
FNB Trust II	06/30/36	06/30/11		30,928		30,928	3 month LIBOR + 1.32% - 2.79% at 12/31/08
Catawba Trust II	12/30/32	12/30/07		5,155		5,155	3 month LIBOR + 3.35% - 5.53% at 12/31/08
Total Junior Subordinated Debentures			$	56,702	$	56,702

Note 11 – Employee benefit plans

Pension Plan

The Company has a noncontributory defined benefit pension plan covering substantially all full-time employees who qualify as to age and length of service.  Benefits are based on the employee's compensation, years of service and age at retirement.  The Company's funding policy is to contribute annually to the plan an amount which is not less than the minimum amount required by the Employee

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Retirement Income Security Act of 1974 and not more than the maximum amount deductible for income tax purposes.

In September 2006, the Board of Directors of the Company approved a modified freeze to the pension plan.  Effective December 31, 2006, no new employees are eligible to enter the plan.  Participants who were at least age 40, had earned 10 years of vesting service as an employee of the Company and remained an active employee as of December 31, 2006 qualified for a grandfathering provision.  Under the grandfathering provision, the participant will continue to accrue benefits under the plan through December 31, 2011.  Additionally, the plan’s definition of final average compensation was improved from a 10-year averaging period to a 5-year averaging period as of January 1, 2007.  All other eligible participants in the plan had their retirement benefit frozen as of December 31, 2006.

The following table sets forth the plan’s change in benefit obligation, plan assets and the funded status of the pension plan, using a December 31 measurement date, and amounts recognized in the consolidated statements as of December 31:

(dollars in thousands)	2008			2007
Change in Benefit Obligation
Benefit obligation at beginning of year	$	10,421		$	10,947
Service cost		213			267
Interest cost		665			627
Net actuarial (gain) loss		61			(993	)
Benefits paid		(492	)		(427	)
Curtailment		-			-
Benefit obligation at end of year	$	10,868		$	10,421
Change in Plan Assets
Fair value of plan assets at beginning of year	$	10,681		$	10,637
Actual return on plan assets		(3,021	)		422
Benefits paid		(492	)		(427	)
Other		-			49
Fair value of plan assets at December 31	$	7,168		$	10,681
Funded Status at End of Year	$	(3,700	)	$	260
Amounts Recognized in the Consolidated Balance Sheets
Other Assets	$	-		$	260
Other Liabilities		(3,700	)		-
Total (assets) liabilities recognized in consolidated balance sheets	$	(3,700	)	$	260
Amounts Recognized in Accumulated Other Comprehensive Income
Net actuarial loss	$	5,096		$	1,187
Prior service credit		5			8
Net amount recognized	$	5,101		$	1,195
Weighted-Average Allocation of Plan Assets at End of Year
Equity securities		39	%		67	%
Debt securities		52	%		26	%
Cash and cash equivalents		9	%		4	%
Fixed income funds		-			3	%
Total		100	%		100	%
Weighted-Average Plan Assumptions at End of Year
Discount rate		6.50	%		6.50	%
Expected long-term rate of return on plan assets		8.00	%		9.00	%
Rate of increase in compensation levels		5.50	%		6.00	%

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The expected long-term rate of return on plan assets considers the portfolio as a whole and not on the sum of the returns on individual asset categories.  The return is based exclusively on historical returns, without adjustments.

Components of net periodic pension cost (income) and other amounts recognized in other comprehensive income are as follows:

(dollars in thousands)	2008			2007			2006
Net Periodic Pension Cost (Income)
Service cost	$	212		$	267		$	835
Interest cost		665			627			656
Expected return on plan assets		(838	)		(944	)		(897	)
Amortization of prior service cost		4			4			23
Amortization of net actuarial loss		11			26			198
Net periodic pension cost (income)		54			(20	)		815
Effect of curtailment		-			-			93
Total pension cost (income)	$	54		$	(20	)	$	908
Other Changes in Plan Assets and Benefit Obligations
Recognized in Other Comprehensive Income:
Net actuarial (gain)/loss		3,910			(546	)
Prior service cost		-			-
Amortization of prior service credit		(4	)		(4	)
Total recognized in other comprehensive income		3,906			(550	)
Total Recognized in Net Periodic Pension Cost (Income)and Other Comprehensive Income	$	3,960		$	(570	)	$	908

The estimated net loss and prior service cost that will be amortized from accumulated other comprehensive income into net periodic pension cost over the next year are approximately $317,000 and $4,000 respectively.

The Company’s investment policies and strategies for the pension plan use a target allocation of 50% to 70% for equity securities and 30% to 50% for debt securities.  The investment goals attempt to maximize returns while remaining within specific risk management policies.  While the risk management policies permit investment in specific debt and equity securities, a significant percentage of total plan assets is maintained in mutual funds, approximately 14% at December 31, 2008, to assist in investment diversification.  Generally the investments are readily marketable and can be sold to fund benefit payment obligations as they become payable.

The Company does not expect to contribute any funds to its pension plan in 2009.

The estimated benefit payments for each year ending December 31 from 2009 through 2013 are as follows:  $512,000 in 2009, $543,000 in 2010, $574,000 in 2011, $594,000 in 2012 and $622,000 in 2013.  The estimated benefit payments to be paid in the aggregate for the five year period from 2014 through 2018 are $3,832,000.  The estimated benefit payments are based on the same assumptions used to measure the benefit obligation at December 31, 2008 and include estimated future employee service.

Supplemental Executive Retirement Plan

The Company has a noncontributory, nonqualified supplemental executive retirement plan (the “SERP”) covering certain executive employees.  Annual benefits payable under the SERP are based on factors similar to those for the pension plan, with offsets related to amounts payable under the pension plan and social security benefits.

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The following table sets forth the plan’s change in benefit obligation, plan assets and the funded status of the SERP plan, using a December 31 measurement date, and amounts recognized in the consolidated statements as of December 31:

(dollars in thousands)	2008			2007
Change in Benefit Obligation
Benefit obligation at beginning of year	$	2,269		$	2,248
Service cost		257			139
Interest cost		150			132
Amendments to plan		83			-
Net actuarial (gain) loss		(11	)		(206	)
Benefits paid		(71	)		(44	)
Benefit obligation at end of year	$	2,677		$	2,269
Change in Plan Assets
Fair value of plan assets at beginning of year	$	-		$	-
Actual return on plan assets		-			-
Employer contributions		71			44
Benefits paid		(71	)		(44	)
Fair value of plan assets at end of year	$	-		$	-
Funded Status at December 31	$	(2,677	)	$	(2,269	)
Amounts Recognized in the Consolidated Balance Sheets
Other Liabilities	$	2,677		$	2,269
Amounts Recognized in Accumulated Other
Comprehensive Income
Net actuarial loss	$	318		$	337
Prior service cost		330			325
Net amount recognized	$	648		$	662
Weighted-Average Plan Assumption at End of Year:
Discount rate		6.50	%		6.50	%

Components of net periodic SERP cost and other amounts recognized in other comprehensive income are as follows:

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(dollars in thousands)	2008			2007			2006
Net Periodic SERP Cost
Service cost	$	257		$	139		$	105
Interest cost		150			132			99
Expected return on plan assets		-			-			-
Amortization of prior service cost		78			70			56
Amortization of net actuarial loss		8			27			38
Net periodic SERP cost		493			368			298
Effect of special termination costs		-			-			174
Total SERP cost	$	493		$	368		$	472
Other Changes in Plan Assets and Benefit Obligations
Recognized in Other Comprehensive Income
Net actuarial gain		63			(234	)
Prior service cost		-			-
Amortization of prior service credit		(78	)		(70	)
Total recognized in other comprehensive income		(15	)		(304	)
Total Recognized in Net Periodic SERP Cost and Other Comprehensive Income	$	478		$	64		$	472

The estimated net loss and prior service cost that will be amortized from accumulated other comprehensive income into net periodic SERP cost over the next year are approximately $5,000 and $48,000 respectively.

The SERP is an unfunded plan.  Consequently, there are no plan assets or cash contribution requirements other than for the direct payment of benefits.

The estimated benefit payments for each year ending December 31 from 2009 through 2013 are as follows:  $71,000 in 2009, $102,000 in 2010, $101,000 in 2011, $121,000 in 2012 and $119,000 in 2013.  The estimated benefit payments to be paid in the aggregate for the five year period from 2014 through 2018 are $1,261,000.  The estimated benefit payments are based on the same assumptions used to measure the benefit obligation at December 31, 2008 and include estimated future employee service.

As a result of the merger with Integrity, the Bank assumed the obligations of a non-qualifying deferred compensation plan for the former president of Integrity.  Under the plan provisions, benefit payments began in 2006 and are payable for 10 years.  During 2008 and 2007, provisions of $2,000 and $34,000, respectively, were expensed for future benefits to be provided under this plan.  The total liability under this plan was $452,000 at December 31, 2008 and is included in other liabilities in the accompanying consolidated balance sheets.  Payments amounting to $57,000 in 2008 and $49,000 in 2007 were made under the provisions of the plan.

Other Postretirement Defined Benefit Plans

The Company has postretirement medical and life insurance plans covering substantially all full-time employees who qualify as to age and length of service.  The medical plan is contributory, with retiree contributions adjusted whenever medical insurance rates change.  The life insurance plan is noncontributory.

In conjunction with the modified freeze of the pension plan, the postretirement medical and life insurance plan was also amended.  Effective December 31, 2006, no new employees are eligible to enter the plan.  Participants who were at least age 40, had earned 10 years of vesting service as an employee of the Company and remained an active employee as of December 31, 2006 qualified for a grandfathering provision.  Under the grandfathering provision, the participant will continue to accrue benefits under the plan through December 31, 2011.

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The following table sets forth the plans change in benefit obligation, plan assets and the funded status of the postretirement plans, using a December 31 measurement date, and amounts recognized in the consolidated statements as of December 31:

(dollars in thousands)	2008			2007
Change in Benefit Obligation
Benefit obligation at beginning of year	$	1,139		$	1,257
Service cost		23			15
Interest cost		86			68
Net actuarial (gain)loss		225			(158	)
Plan participant contributions		55			49
Benefits paid		(93	)		(92	)
Curtailment		-			-
Benefit obligation at end of year	$	1,435		$	1,139
Change in Plan Assets
Fair value of plan assets at beginning of year	$	-		$	-
Actual return on plan assets		-			-
Employer contributions		38			43
Plan participant contributions		55			49
Benefits paid		(93	)		(92	)
Fair value of plan assets at end of year	$	-		$	-
Funded Status at December 31	$	(1,435	)	$	(1,139	)
Amounts Recognized in the Consolidated Balance Sheets
Other Liabilities	$	1,435		$	1,139
Amounts Recognized in Accumulated Other
Comprehensive Income
Net actuarial loss	$	333		$	131
Prior service credit		(38	)		(42	)
Net amount recognized	$	295		$	89
Weighted-Average Plan Assumption at End of Year:
Discount rate		6.50	%		6.50	%

Increasing or decreasing the assumed medical cost trend rate by one percentage point would not have a significant effect on either the postretirement benefit obligation at December 31, 2008 or the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 2008.

Components of net postretirement benefit cost and other amounts recognized in other comprehensive income are as follows:

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(dollars in thousands)	2008			2007			2006
Net Periodic Postretirement Benefit Cost (Income)
Service cost	$	23		$	15		$	67
Interest cost		86			68			82
Expected return on plan assets		-			-			-
Amortization of prior service cost (credit)		(4	)		(4	)		(24	)
Amortization of transition obligation		-			-			-
Amortization of net actuarial loss		23			8			35
Net periodic postretirement benefit cost		128			87			160
Effect of curtailment		-			-			(212	)
Total periodic postretirement benefit cost (income)	$	128		$	87		$	(52	)
Other Changes in Plan Assets and Benefit Obligations
Recognized in Other Comprehensive Income
Net actuarial (gain)loss		202			(166	)
Prior service cost		-			-
Amortization of prior service cost		4			4
Total recognized in other comprehensive income		206			(162	)
Total Recognized in Net Periodic Postretirement
Benefit Cost (Income) and Other Comprehensive Income	$	334		$	(75	)	$	(52	)

The estimated net loss and prior service credit that will be amortized from accumulated other comprehensive income into net periodic postretirement benefit cost over the next year are approximately $20,000 and $4,000, respectively.

The postretirement medical and life insurance plans are unfunded plans.  Consequently, there are no plan assets or cash contribution requirements other than for the direct payment of benefits.

The estimated benefit payments for each year ending December 31 from 2009 through 2013 are as follows:  $79,000 in 2009, $85,000 in 2010, $97,000 in 2011, $110,000 in 2012 and $116,000 in 2013.  The estimated benefit payments to be paid in the aggregate for the five year period from 2014 through 2018 are $563,000.  The estimated benefit payments are based on the same assumptions used to measure the benefit obligation at December 31, 2008 and include estimated future employee service.

SFAS 158 amends several existing pronouncements that address employers’ accounting and reporting for defined benefit pension and other postretirement plans and represents the initial phase of a comprehensive project on employers’ accounting for these plans. SFAS 158 requires an employer to recognize the overfunded or underfunded status of defined benefit pension and other postretirement plans, measured solely as the difference between the fair value of plan assets and the benefit obligation, as an asset or liability on the balance sheet. Unrecognized actuarial gains and losses and unrecognized prior service costs, which have previously been recorded as part of the postretirement asset or liability, are to be included as a component of accumulated other comprehensive income. Actuarial gains and losses and prior service costs and credits that arise during a period will be included in other comprehensive income to the extent they are not included in net periodic pension cost (a component of salaries and employee benefits expense for the Company). The Company adopted SFAS 158 on its effective date of December 31, 2006.

The following table summarizes the effect on retirement benefit-related amounts reported in the consolidated statements of condition.

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	Effect of Adopting SFAS 158
	as of December 31, 2006
(dollars in thousands)	Before Adoption		Adjustments			After Adoption
Other Assets
Prepaid pension cost	$	1,435	$	(1,435	)	$	-
Deferred tax asset		-		1,169			1,169
Other Liabilities
Benefit liability		2,288		1,527			3,815
Shareholders' Equity
Accumulated other comprehensive income		-		(1,793	)		(1,793	)

Matching Retirement/Savings Plan

The Company has a matching retirement/savings plan which permits eligible employees to make contributions to the plan up to a specified percentage of compensation as defined by the plan.  A portion of the employee contributions are matched by the Company based on the plan formula.  Additionally, commencing in 2007, the Company on a discretionary basis may make an annual contribution up to a specified percentage of compensation as defined by the plan to the account of each eligible employee.  The matching and discretionary contributions amounted to $1,161,000 in 2008, $1,749,000 in 2007, and $642,000 in 2006.

Note 12 – Lease commitments

Future obligations at December 31, 2008 for minimum rentals under non-cancelable operating lease commitments, primarily relating to premises, are as follows:

dollars in thousands
Year ending December 31,	2008
2009	$	1,424
2010		1,337
2011		1,078
2012		1,073
2013		1,073
Thereafter		11,094
Total lease commitments	$	17,079

Net rental expense for all operating leases amounted to $1,530,000, $1,538,000, and $1,149,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

The Company leases a two-story regional and retail office building in Salisbury, North Carolina, which originally had been leased from a company in which a director holds a 50% interest for approximately $296,000 per year.  The building was sold in November 2008, and a new lease was executed with the successor owner.

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Note 13 – FNB United Corp. (Parent Company)

The parent company’s principal asset is its investment in its bank subsidiary, CommunityONE Bank.  The principal source of income of the parent company is dividends received from the Bank.

(dollars in thousands)	2008			2007			2006
Condensed balance sheets
Assets:
Cash	$	3,712		$	3,061
Investment in wholly-owned subsidiary, the Bank		200,024			270,518
Other assets		2,377			1,704
Total assets	$	206,113		$	275,283
Liabilities and shareholders' equity:
Accrued liabilities	$	1,494		$	2,325
Borrowed funds		56,702			56,702
Shareholder's equity		147,917			216,256
Shareholders' equity and liabilities	$	206,113		$	275,283
Condensed statements of income
Dividends from subsidiary	$	9,525		$	10,900		$	5,930
Noninterest income		86			130			100
Interest expense		(2,903	)		(4,425	)		(3,393	)
Noninterest expense		(160	)		(321	)		(304	)
Income before tax benefit		6,548			6,284			2,333
Income tax benefit		(1,049	)		(1,616	)		(1,259	)
Income before equity in undistributed net income of subsidiary		7,597			7,900			3,592
Equity in undistributed net (loss) income of subsidiary		(67,406	)		4,463			8,595
Net (loss) income	$	(59,809	)	$	12,363		$	12,187
Condensed statements of cash flows
Cash flows from operating activities
Net (loss) income	$	(59,809	)	$	12,363		$	12,187
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net (income) loss of subsidiary		67,406			(4,463	)		(8,595	)
Other, net		(1,236	)		5,298			(2,290	)
Net cash provided by operating activities		6,361			13,198			1,302
Cash flows from investing activities
Net cash paid in merger acquisition of subsidiary company		-			-			(28,897	)
Other, net		-			-			53
Net cash (used in) investing activities		-			-			(28,844	)
Cash flows from financing activities
(Decrease) increase in borrowed funds		-			(5,000	)		30,000
Common stock issued		2			1,302			2,117
Common stock repurchased		-			-			-
Cash dividends paid		(5,712	)		(7,035	)		(5,392	)
Net cash (used in) provided by financing activities		(5,710	)		(10,733	)		26,725
Increase (decrease) in cash		651			2,465			(817	)
Cash at beginning of year		3,061			596			1,413
Cash at end of year	$	3,712		$	3,061		$	596

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Note 14 – Regulatory matters

FNB United and the Bank are required to comply with capital adequacy standards established by the Board of Governors of the Federal Reserve System.  In addition, the Bank is subject to various regulatory capital requirements administered by federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory – and possible additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the accompanying table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined).  Management believes, as of December 31, 2008, that the Bank meets all capital adequacy requirements to which they are subject.

The Bank is well-capitalized under the prompt corrective action provisions established by the Federal Deposit Insurance Corporation Improvement Act. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the accompanying table.

											To Be Well Capitalized
						For Capital					Under Prompt Corrective
(dollars in thousands)	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2008
Total Capital (to Risk Weighted Assets)
Consolidated	$	185,312		10.4	%	$	142,738		≥8.0	%	$	N/A
Bank		182,084		10.2			142,513	≥8.0				178,142		≥10.0	%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated		123,796		6.9			71,369	≥4.0				N/A
Bank		144,654		8.1			71,257	≥4.0				106,885	≥6.0		%
Tier 1 Capital (to Average Assets)
Consolidated		123,796		6.1			81,051	≥4.0				N/A
Bank		144,654		7.2			80,904	≥4.0				101,131	≥5.0		%
December 31, 2007
Total Capital (to Risk Weighted Assets)
Consolidated	$	172,893		10.4	%	$	132,614	≥8.0		%	$	N/A
Bank		172,061		10.4			132,517	≥8.0				165,646	≥10.0		%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated		133,114		8.0			66,307	≥4.0				N/A
Bank		154,098		9.3			66,258	≥4.0				99,388	≥6.0		%
Tier 1 Capital (to Average Assets)
Consolidated		133,114		7.5			70,651	≥4.0				N/A
Bank		154,098		8.8			70,451	≥4.0				88,063	≥5.0		%

Certain regulatory requirements restrict the lending of funds by the Bank to FNB United and the amount of dividends which can be paid to FNB United.  Beginning 2009, the Bank cannot declare dividends payable to FNB United, without the approval of the Comptroller of the Currency.

The Bank is required to maintain average reserve balances with the Federal Reserve Bank based on a percentage of deposits.  For the reserve maintenance period in effect at December 31, 2008, the average daily reserve requirement was $3,500,000.

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Note 15 – Shareholders’ Equity

Earnings per Share (“EPS”)

The following is a reconciliation of the numerator and denominator of basic common stock and diluted net income per share of common stock as required by SFAS No. 128:

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 Company’s potential common stock and contingently issuable shares, which consist of dilutive stock options and restricted stock, were exercised.  The numerator of the basic EPS computation is the same as the numerator of the diluted EPS computation for all periods presented.  A reconciliation of the denominators of the basic and diluted EPS computations is as follows:

	For the year ended December 31,
	2008			2007		2006
Basic:
Net income available to common shareholders	$	(59,809,000	)	$	12,361,000	$	12,187,000
Weighted average shares outstanding		11,407,616			11,321,908		9,619,870
Net income per share, basic	$	(5.24	)	$	1.09	$	1.27
Diluted:
Net income available to common shareholders	$	(59,809,000	)	$	12,361,000	$	12,187,000
Weighted average shares outstanding		11,407,616			11,321,908		9,619,870
Effect of dilutive equity-based awards		-			14,412		95,715
Weighted average shares outstanding and dilutive potential shares outstanding		11,407,616			11,336,320		9,715,585
Net income per share, diluted	$	(5.24	)	$	1.09	$	1.25

For the years 2008, 2007 and 2006, there were 672,554, 444,449 and 297,836 stock options, respectively, related to stock options and restricted stock 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 years.

Stock based compensation

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment, (“SFAS No. 123(R)”) which was issued by the FASB in December 2004. SFAS No. 123(R) revises SFAS No. 123, Accounting for Stock Based Compensation, and supersedes APB No. 25, Accounting for Stock Issued to Employees, and its related interpretations. SFAS No. 123(R) 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. 123(R) also requires measurement of the cost of employee services received in exchange for an award based on the grant-date fair value of the award. SFAS No. 123(R) 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 Company adopted SFAS No. 123(R) using the modified prospective application as permitted under SFAS No. 123(R). Accordingly, prior period amounts have not been restated. Under this application, the

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Company is required to record compensation expense 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. 123(R), the Company 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 Company’s common stock on the date of grant.

The effect (increase/(decrease)) of the adoption of SFAS No. 123(R) for the year ended December 31, 2006 was as follows (in thousands, except per share data):

Income before income taxes	$	(510	)
Net income		(483	)
Cash flow from operating activities		(279	)
Cash flow provided by financing activities		279
Net income per share:
Basic	$	(0.05	)
Diluted	$	(0.05	)

As of December 31, 2008, the Company had five share-based compensation plans in effect.  The compensation expense charged against income for those plans in 2008 was $726,845 and the related income tax benefit was $139,720.

The Company adopted stock compensation plans in 1993 and 2003 that allow for the granting of incentive and nonqualified stock options to key employees and directors.  The 2003 stock compensation plan also allows for the granting of restricted stock.  Under terms of both the 1993 and 2003 plans, options are granted at prices equal to the fair market value of the common stock on the date of grant.  Options become exercisable after one year in equal, cumulative installments over a five-year period.  No option shall expire later than ten years from the date of grant.  No further grants can be made under the 1993 stock compensation plan after March 10, 2003.  Based on the stock options outstanding at December 31, 2008, a maximum of 293,955 shares of common stock has been reserved for issuance under the 1993 stock compensation plan.  A maximum of 1,099,734 shares of common stock has been reserved for issuance under the 2003 stock compensation plan.  At December 31 2008, there were 802,534 shares available under the 2003 plan for the granting of additional options or stock awards.

The Company assumed three stock compensation plans in its merger acquisition of Integrity Financial Corporation on April 28, 2006.  Qualified and nonqualified stock options are outstanding under these plans for grants issued from 1997 to 2004 to key employees and directors at a price equal to fair market value on the date of grant.  No additional grants will be made under these plans.  Based on the stock options outstanding at December 31, 2008, a maximum of 71,457 shares of common stock has been reserved for issuance under these stock compensation plans.

The fair market value of each option award is estimated on the date of grant using the Black-Scholes option pricing model.  The risk-free interest rate is based on a U.S. Treasury instrument with a life that is similar to the expected life of the option grant.  Expected volatility is based on the historical volatility of the Company’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.

The weighted-average fair value per share of options granted in 2008, 2007 and 2006 amounted to $1.48, $3.39, and $4.93, respectively.  Fair values were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

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	2008			2007			2006
Risk-free interest rate		3.47	%		4.58	%		4.73	%
Dividend yield		4.16			3.60			3.25
Volatility		24.00			26.00			31.00
Expected life	6 years			6 years			6 years

The following is a summary of stock option activity.

	For the year ended December 31,
	2008					2007					2006
				Weighted					Weighted					Weighted
				Average					Average					Average
				Exercise					Exercise					Exercise
	Shares			Price		Shares			Price		Shares			Price
Outstanding at beginning of year		698,848		$	15.59		874,879		$	15.59		768,963		$	14.72
Granted		1,000			8.78		18,000			15.42		16,000			18.31
Assumed in merger acquisition		-			-		-			-		325,384			9.44
Exercised		(150	)		11.75		(135,581	)		9.61		(214,502	)		9.87
Forfeited/expired		(37,086	)		15.63		(58,450	)		17.22		(20,966	)		15.75
Outstanding at end of year		662,612			16.65		698,848			16.61		874,879			15.59
Options exercisable at end of year		615,703			16.56		579,902			16.11		650,020			14.36
Aggregate intrinsic value at end of year
(in thousands):
Options outstanding		-					161					2,406
Options exercisable		-					161					2,587

At December 31, 2008, information concerning stock options outstanding and exercisable is as follows:

	Options Outstanding						Options Exercisable
			Weighted
			Average		Weighted				Weighted
			Remaining		Average				Average
Range of			Contractual		Exercise		Number		Exercise
Exercise Prices	Shares		Life (Years)		Price		Exercisable		Price
5.29 - 9.97		43,276		1.40	$	9.80		42,776	$	9.83
10.00 - 14.20		198,366		2.34		12.57		191,057		12.53
15.00 - 19.82		282,070		4.99		17.96		242,970		17.83
20.00 - 27.00		138,900		4.94		21.95		138,900		21.95

In 2008, there was no intrinsic value of options exercised or grant-date fair value of options vested. In 2007 and 2006, the intrinsic value of options exercised was $785,000, and $1,558,000 respectively. The 2008, 2007, and 2006 grant-date fair value of options vested was $379,703, $474,000 and $482,000, respectively.

The cash proceeds from options exercised in 2008 amounted to $2,000 with no material related tax benefit.

The following is a summary of non-vested restricted stock activity:

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	For the year ended December 31,
	2008					2007
				Weighted					Weighted
				Average					Average
				Grant Date					Grant Date
	Shares			Fair Value		Shares			Fair Value
Non-vested at beginning of year		40,216			18.16		53,875			18.30
Granted		6,000			10.68		3,000			16.50
Vested		(12,994	)		18.30		(12,325	)		18.32
Forfeited/Expired		(2,999	)		18.26		(4,334	)		18.34
Non-vested at end of year		30,223			16.60		40,216			18.16

The fair value of restricted stock vested in 2008 and 2007 was approximately $238,000 and $226,000, respectively.  There was no vesting of restricted stock in 2006.

As of December 31, 2008, there was $477,561 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all of the Company’s stock benefit plans.  That cost is expected to be recognized over a weighted-average period of 1.2 years.

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

Note 16 – Off-balance sheet arrangements

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

Commitments by the 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 December 31, 2008, total commitments to extend credit and undisbursed advances on customer lines of credit amounted to $371.7 million.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many commitments expire without being fully drawn, the total commitment amounts do not necessarily represent future cash requirements.  The Company evaluates each customer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, upon extension of credit is based on the credit evaluation of the borrower.

The 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 $16.1 million at December 31, 2008 and $22.2 million at December 31, 2007.

Dover originates certain 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 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 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

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recorded through the income statement in income from mortgage loan sales.  The commitments to originate residential mortgage loans totaled $5.7 million at December 31, 2008, and the related forward sales commitments totaled $5.7 million.  Loans held for sale by Dover totaled $30.4 million at December 31, 2008, and the related forward sales commitments totaled $30.4 million.

The Bank had loans held for sale of $5.7 million at December 31, 2008.  Binding commitments of the Bank for the origination of mortgage loans intended to be held for sale at December 31, 2008 totaled $40.5 million, and the related forward sales commitments also totaled $40.5 million.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend is represented by the contractual notional amount of those instruments.  The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

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

Note 17 - Fair value of assets and liabilities

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale, derivative assets, and mortgage servicing rights 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 and liabilities on a non-recurring basis, such as loans held for sale, loans held for investment and certain other assets and liabilities. These non-recurring fair value adjustments typically involve application of lower or cost or market accounting or write-downs of individuals assets or liabilities.

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.

Investments 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-

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backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 may 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 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 net liquidation value, market value of similar debt, enterprise 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 December 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 loans 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 models that use primarily market observable inputs, such as yield curves and option volatilities, and include the value associated with counterparty credit risk. The Company classifies derivatives instruments held or issued for risk management or customer-initiated activities as Level 2.

Mortgage Servicing Rights

Mortgage servicing rights are recorded at fair value on a recurring basis, with changes in fair value recorded as a component of mortgage loan sales.  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 to determine fair value. Loan servicing rights are adjusted to fair value through a valuation allowance as determined by the model. As such, the Company classifies mortgage servicing rights as Level 3.

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Assets and Liabilities Recorded at Fair Value on a Recurring Basis

December 31, 2008

(dollars in thousands)	Total			Level 1		Level 2			Level 3
Investment securities available for sale	$	205,426		$	1,829	$	203,597		$	-
Mortgage servicing rights		4,043			-		-			4,043
Total assets at fair value	$	209,469		$	1,829	$	203,597		$	4,043
Derivative liabilities		(456	)		-		(456	)		-
Total liabilities at fair value	$	(456	)	$	-	$	(456	)	$	-

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2008:

	Fair Value Measurements Using Significant
(dollars in thousands)	Unobservable Inputs (Level 3)
	MSR's
Beginning balance at January 1, 2008	$	2,900
Total gains or losses (realized/unrealized):
Included in earnings		(39	)
Included in other comprehensive income		-
Purchases, issuances and settlements		1,182
Transfers in and/or out of Level 3		-
Ending balance at December 31, 2008	$	4,043

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.

December 31, 2008

(dollars in thousands)	Total		Level 1		Level 2		Level 3
Loans	$	94,782	$	-	$	-	$	94,782
Total assets at fair value	$	94,782	$	-	$	-	$	94,782

Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value for each class of the Company’s financial instruments.

Cash and cash equivalents.    The carrying amounts for cash and due from banks approximate fair value because of the short maturities of those instruments.

Investment securities.   The fair value of investment securities is based on quoted market prices, if available.  If a quoted market price is not available, fair value is estimated using quoted market prices for

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similar securities.  The fair value of equity investments in the restricted stock of the Federal Reserve Bank and Federal Home Loan Bank equals the carrying value.

Loans.    The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  Substantially all residential mortgage loans held for sale are pre-sold and their carrying value approximates fair value.  The fair value of variable rate loans with frequent repricing and negligible credit risk approximates book value.

Investment in bank-owned life insurance.   The carrying value of bank-owned life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the insurer.

Deposits.    The fair value of noninterest-bearing demand deposits and NOW, savings, and money market deposits are the amounts payable on demand at the reporting date.  The fair value of time deposits is estimated using the rates currently offered for deposits of similar remaining maturities.

Borrowed funds.   The carrying value of retail repurchase agreements and federal funds purchased is considered to be a reasonable estimate of fair value.  The fair value of Federal Home Loan Bank advances and other borrowed funds is estimated using the rates currently offered for advances of similar remaining maturities.

Accrued interest.    The carrying amounts of accrued interest approximate fair value.

Financial instruments with off-balance sheet risk.  The fair value of financial instruments with off-balance sheet risk is considered to approximate carrying value, since the large majority of these future financing commitments would result in loans that have variable rates and/or relatively short terms to maturity.  For other commitments, generally of a short-term nature, the carrying value is considered to be a reasonable estimate of fair value.  The various financial instruments were disclosed in Note 16.

The estimated fair values of financial instruments at December 31 are as follows:

	2008				2007
(dollars in thousands)	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial Assets
Cash and cash equivalents	$	29,353	$	29,353	$	39,117	$	39,117
Investment securities:
Available-for-sale		205,426		205,426		147,149		147,149
Held-to-maturity		27,794		27,580		35,650		35,251
Loans held for sale		36,138		36,138		17,586		17,586
Net loans		1,585,195		1,480,270		1,446,116		1,455,590
Accrued interest receivable		7,196		7,196		9,380		9,380
Bank-owned life insurance		29,901		29,901		28,856		28,856
Other earning assets		19,825		19,825		14,660		14,660
Financial Liabilities
Deposits		1,514,747		1,526,719		1,441,042		1,407,975
Retail repurchase agreements		18,145		18,145		29,133		29,133
Federal Home Loan Bank advances		238,910		248,283		131,790		131,714
Federal funds purchased		37,000		37,000		13,500		13,500
Subordinated debt		15,000		14,173		-		-
Trust preferred securities		56,702		35,603		56,702		56,702
Accrued interest payable		4,078		4,078		4,624		4,624

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The fair value estimates are made at a specific point in time based on relevant market and other information about the financial instruments.  Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on current economic conditions, risk characteristics of various financial instruments, and such other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.  In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Note 18 – Subsequent Events

In February 2009, in connection with the Troubled Asset Relief Program (TARP) Capital Purchase Program, established as part of the Emergency Economic Stabilization Act of 2008, FNB United issued to the U.S. Treasury 51,500 shares of FNB United Corp. Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Preferred Stock”) for $51.5 million.  The Preferred Stock will pay cumulative dividends at a rate of 5% for the first five years and thereafter at a rate of 9% per year.  As part of its purchase of the Preferred Stock, the Treasury Department received a warrant to purchase 2,207,143 shares of FNB United’s common stock at an initial per share exercise price of $3.50. Further details and the associated regulatory restrictions are discussed in “Regulation and Supervision”.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

FNB United Corp’s management, with the participation of its Cheif Executive Officer and its Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2008. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2008.

Management’s Report on Internal Control over Financial Reporting

Management of FNB United Corp. and Subsidiary (the “Corporation”) is responsible for preparing the Corporation’s annual consolidated financial statements and for establishing and maintaining adequate internal control over financial reporting for the Corporation.  Management has evaluated the effectiveness of the Corporation’s internal control over financial reporting, including controls over the preparation of financial statements in accordance with the instructions to the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C),as of December 31, 2008 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Corporation’s annual or interim financial statements will not be prevented or detected on a timely basis. As of December31, 2008, the Corporation did not have adequate staffing and segregation of duties in its Accounting Department. Because of this material weakness, management has concluded that the Corporation did not maintain effective internal control over financial reporting as of December31, 2008 based on criteria established in Internal Control—Integrated Framework issued by the COSO.

The Corporation’s registered public accounting firm that audited the Corporation’s consolidated financial statements included in this annual report has issued an attestation report on the effectiveness of the Corporation’s internal control over financial reporting.

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Management is also responsible for compliance with laws and regulations relating to safety and soundness which are designated by the FDIC and the appropriate federal banking agency.  Management assessed its compliance with these designated laws and regulations relating to safety and soundness and believes that the Corporation complied, in all significant respects, with such laws and during the year ended December 31, 2008.

Changes in Internal Control over Financial Reporting

The Company assesses the adequacy of its internal control over financial reporting quarterly and enhances its control in response to internal control assessments and internal and external audit and regulatory recommendations. No such control enhancements during the quarter ended December 31, 2008 have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 

Item 9B. Other Information

None.

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PART III

Item 10. Directors, Executive Officers, and Corporate Governance

The information set forth in FNB United’s proxy statement for the Annual Meeting of Shareholders to be held on May 12, 2009 (the “Proxy Statement”) under the headings “Election of Directors,” “Executive Officers,” “Report of the Audit Committee,” and “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference.

Item 11. Executive Compensation

The information set forth in the Proxy Statement under the headings “Compensation Discussion and Analysis,” “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation,” and “Report of the Compensation Committee on the Compensation Discussion and Analysis” is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

The information set forth in the Proxy Statement under the headings “Voting Securities Outstanding and Principal Shareholders,” “Security Ownership of Management,” and “Equity Compensation Plan Information” is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions and Director Independence

The information set forth in the Proxy Statement under the headings “Business Relationships and Related Person Transactions” and “Election of Directions” is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

The information set forth in the Proxy Statement under the heading “Independent Auditors” is incorporated herein by reference.

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PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)(1)    Financial Statements.  The following financial statements and supplementary data are included in Item 8 of this report.

Financial Statements	Form 10-K Page
Quarterly Financial Information	41
Reports of Independent Registered Public Accounting Firm	43
Consolidated Balance Sheets as of December 31, 2008 and 2007	45
Consolidated Statements of Income for the years ended December 31, 2008, 2007 and 2006	46
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income for the years ended December 31, 2008, 2007 and 2006	47
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006	48
Notes to Consolidated Financial Statements	49

(a)(2)    Financial Statement Schedules.  All applicable financial statement schedules required under Regulation S-X have been included in the Notes to the Consolidated Financial Statements.

(a)(3)    Exhibits.  The exhibits required by Item 601 of Regulation S-K are listed below.

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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.
3.16	Articles of Amendment to Articles of Incorporation, adopted January 23, 2009, incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form 8-K Current Report filed January 23, 2009.
3.17	Articles of Amendment to Articles of Incorporation, adopted February 11, 2009, incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form 8-K Current Report filed February 13, 2009.
3.20	Amended and Restated Bylaws of the Registrant, adopted February 11, 2009, incorporated herein by reference to Exhibit 3.2 to the Registrant’s Form 8-K Current Report filed February 13, 2009.
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.
4.11	Specimen of Registrant’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, Stock Certificate, incorporated herein by reference to Exhibit 4.1 to the Registrant’s Form 8-K Current Report filed February 13, 2009.
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 filed November 8, 2005.
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.

91

4.30	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 filed November 8, 2005.
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.
4.40	Warrant to purchase up to 2,207,143 shares of Common Stock used to the United States Department of the Treasury, incorporated herein by reference to Exhibit 4.2 to the Registrant’s Form 8-K Current Report filed February 13, 2009.
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 and restated as of December 31, 2008.
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.

92

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*	Amended and Restated Employment Agreement dated as of December 31, 2008 among FNB United Corp., CommunityONE Bank, National Association and Michael C. Miller.
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*	Amended and Restated Employment Agreement dated as of December 31, 2008 between CommunityONE Bank, National Association and R. Larry Campbell.
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*	Amendment to Executive Income Deferred Compensation Agreement dated as of December 31, 2008 between CommunityONE Bank, National Association and R. Larry Campbell.
10.35*	Amended and Restated Change of Control Agreement dated as of December 31, 2008 among FNB United Corp., CommunityONE Bank, National Association, and R. Mark Hensley.
10.36*	Amended and Restated Change of Control Agreement dated as of December 31, 2008 among FNB United Corp., CommunityONE Bank, National Association, and Mark A. Severson.
10.37*	Form of Change of Control Agreement among FNB United Corp., CommunityONE Bank, National Association and certain key officers and employees.
10.38*	Form of Letter Agreement between FNB United Corp. and senior executive officers incorporated herein by reference to the Registrant’s Form 8-K Current Report filed February 13, 2009.
10.40	Guarantee Agreement dated as of November 4, 2005, 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 5, 2005.
10.41	Guarantee Agreement dated as of April 27, 2006 between FNB Corp. and Wilmington Trust Company, as guarantee trustee, for the benefit of the holders of trust preferred securities, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Form 8-K Current Report dated April 27, 2006 and filed April 28, 2006.
10.42	Revolving Credit Agreement dated as of May 27, 2008, between FNB United Corp. and SunTrust Bank, incorporated herein by reference to Exhibit 10.42 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 2008.

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10.43	Subordinated Debt Loan Agreement dated as of June 30, 2008, between CommunityONE Bank, National Association and SunTrust Bank, incorporated herein by reference to Exhibit 10.43 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 2008.
10.5	Letter Agreement between the Registrant and the United States Department of the Treasury, dated February 13, 2009, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Form 8-K Current Report filed February 13, 2009.
14	Code of Ethics for Senior Financial Officers, incorporated herein by reference to Exhibit 14 to the Registrant’s Form 10-K Annual Report for the fiscal year ended December 31, 2003.
21	Subsidiaries of the Registrant.
23.10	Consent of Independent Registered Public Accounting Firm – Dixon Hughes PLLC
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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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, as of March 16, 2009.

	FNB United Corp.
	(Registrant)
By:	/s/ Michael C. Miller
	Michael C. Miller
	President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, as of March 16, 2009.

Signature	Title
/s/ Michael C. Miller	President and Chief Executive Officer
Michael C. Miller	(Principal Executive Officer)
/s/ Mark A. Severson	Executive Vice President and Treasurer
Mark A. Severson	(Principal Financial and Accounting Officer)
/s/ Jacob F. Alexander III	Director
Jacob F. Alexander III
/s/ Larry E. Brooks	Director
Larry E. Brooks
/s/ James M. Campbell, Jr.	Director
James M. Campbell, Jr.
/s/ R. Larry Campbell	Director
R. Larry Campbell
/s/ Darrell L. Frye	Director
Darrell L. Frye
/s/ Hal F. Huffman, Jr.	Director
Hal F. Huffman, Jr.

95

/s/ Thomas A. Jordan	Director
Thomas A. Jordan
/s/ Lynn S. Lloyd	Director
Lynn S. Lloyd
/s/ Ray H. McKenney, Jr.	Director
Ray H. McKenney, Jr.
/s/ Eugene B. McLaurin, II	Director
Eugene B. McLaurin, II
/s/ R. Reynolds Neely, Jr.	Director
R. Reynolds Neely, Jr.
/s/ J. M. Ramsay III	Director
J. M. Ramsay III
/s/ Suzanne B. Rudy	Director
Suzanne B. Rudy
/s/ Carl G. Yale	Director
Carl G. Yale

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EX-10.23

EXHIBIT 10.23

FNB UNITED CORP.

2003 STOCK INCENTIVE PLAN

(as amended and restated as of December 31, 2008)

1.             PURPOSE.

The purpose of this Plan is to attract and retain Key Employees and Non-Employee Directors for FNB United Corp. (FNB) and to provide such persons with incentives and rewards for superior performance and increased shareholder value. This Plan will authorize the Committee to grant Incentive Stock Options, Non-Qualified Stock Options, Restricted Shares, Stock Appreciation Rights, Deferred Shares, Performance Shares, Performance Units and Other Stock-Based Awards to those officers, Key Employees and Non-Employee Directors who are selected to participate in the Plan.

2.             DEFINITIONS.

As used in this Plan, the following terms shall be defined as set forth below:

"AFFILIATE" means (i) any entity that, directly or indirectly, is controlled by the Company, (ii) any entity in which the Company has a significant equity interest, (iii) an affiliate of the Company, as defined in Rule 12b-2 promulgated under Section 12 of the Exchange Act, and (iv) any entity in which the Company has at least twenty percent (20%) of the combined voting power of the entity's outstanding voting securities, in each case as designated by the Board as being a participating employer in the Plan.

"AWARD" means any Option, Stock Appreciation Right, Restricted Shares, Deferred Shares, Performance Shares, Performance Units or Other Stock-Based Awards granted under the Plan, whether singly, in combination, or in tandem, to a Participant by the Committee pursuant to such terms, conditions, restrictions and/or limitations, if any, as the Committee may establish.

"AWARD AGREEMENT" means any written agreement, contract, or other instrument or document evidencing any Award approved or authorized by the Committee and delivered to a Participant.

"BASE PRICE" means the price to be used as the basis for determining the Spread upon the exercise of a Stock Appreciation Right.

"BOARD" means the Board of Directors of FNB United Corp.

"CHANGE IN CONTROL" means (a) the Company is merged or consolidated or reorganized into or with another corporation, person or entity (including, without limitation, a merger in which the Company is the surviving entity) and, as a result of such transaction, the holders of the Company's Common Stock immediately before the transaction, as a group, hold less than 50% of the combined voting power of the outstanding securities of the surviving entity

immediately after the transaction; (b) the Company's Common Stock is acquired in a share exchange pursuant to Section 55-11-02 of the General Statutes of North Carolina and, as a result of such transaction, the holders of the Company's Common Stock immediately before the transaction, as a group, hold less than 50% of the combined voting power of the outstanding securities of the acquiring corporation immediately after the transaction; (c) the Company sells or otherwise transfers assets having an aggregate fair market value (as determined in good faith by the Board of Directors of the Company) of more than 50% of the Company's total assets, as reflected on the most recent audited consolidated balance sheet of the Company, and, as a result of such transaction, neither the Company nor the holders of the Company's Common Stock immediately before the transaction, as a group, hold 50% or more of the combined voting power of the outstanding securities of the transferee immediately after the transaction; (d) there is a report filed on Schedule 13D or Schedule 14D-1 of the Securities Exchange Act of 1934, as amended, by a person (other than a person that satisfies the requirements of Rule 13d-1(b)(1) under the Exchange Act for filing such report on Schedule 13G), which report as filed discloses that any person (as the term "person" is used in Section 13(d) and Section 14(d) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 under the Exchange Act) of securities representing more than 50% of the Company's Common Stock (whether by purchase, recapitalization of the Company or otherwise); or (e) if during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's shareholders, of each director of the Company first elected during such period was approved by a vote of at least two-thirds of the directors of the Company then still in office who were directors of the Company at the beginning of any such period. Notwithstanding the foregoing, a Change in Control shall not be deemed to have occurred for purposes of the Plan if the Company or any Company-sponsored employee benefit plan (or any trustee of any such plan on its behalf) files or becomes obligated to file a report or proxy statement disclosing beneficial ownership by a Company-sponsored employee benefit plan of more than 50% of the Company's Common Stock.  Further notwithstanding the foregoing, with respect to any Award that constitutes a “nonqualified deferred compensation plan” within the meaning of Section 409A, “Change in Control” shall mean a “change in the ownership of the corporation,” a “change in effective control of the corporation” or a “change in the ownership of a substantial portion of the assets of the corporation,” as such terms are defined in Section 409A.

"CODE" means the Internal Revenue Code of 1986, as amended from time to time.

"COMMITTEE" means a Committee of the Board which shall have a least two members, each of whom shall be appointed by and shall serve at the pleasure of the Board and all of whom shall be "disinterested persons" with respect to the Plan within the meaning of Section 16 of the Exchange Act.

"COMPANY" means FNB United Corp. or any successor corporation.

"COVERED OFFICER" means at any date (i) any individual who, with respect to the previous taxable year of the Company, was a "covered employee" of the company within the meaning of Section 162(m) of the Code; provided, however, that the term "Covered Officer" shall not include any such individual who is designated by the Committee, in its discretion, at the time of any Award or at any subsequent time, as reasonably expected not to be such a "covered employee" with respect to the current taxable year of the Company and (ii) any individual who is

2

designated by the Committee, in its discretion, at the time of any Award or at any subsequent time, as reasonably expected to be such a "covered employee" with respect to the current taxable year of the Company or with respect to the taxable year of the Company in which any applicable Award will be paid.

"DEFERRAL PERIOD" means the period of time during which Deferred Shares are subject to deferral limitations enumerated in Section 10 of this Plan.

"DEFERRED SHARES" means an Award pursuant to Section 10 of this Plan providing the right to receive Shares at the end of a specified Deferral Period.

"DISABILITY" means, unless otherwise defined in the applicable Award Agreement, a disability that would qualify as a total and permanent disability under the Company's then current long-term disability plan.  Notwithstanding the foregoing, with respect to any Award that constitutes a “nonqualified deferred compensation plan” within the meaning of Section 409A, “Disability” has the meaning set forth in Section 409A.

"DIVIDEND EQUIVALENTS" means amounts equivalent to the dividends paid on Shares of common stock. They may be granted in connection with Awards denominated in notional Shares, or they may be granted on a freestanding basis.

"EARLY RETIREMENT" means, unless otherwise defined in the applicable Award Agreement, the termination of a Participant from the employ or service of the Company or any of its Subsidiaries or Affiliates at a time when the Participant would meet the age and service requirements for "early retirement" under the terms of the applicable Company pension plan.

"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time.

"FAIR MARKET VALUE" on any date with respect to the Stock means (1) if the Stock is listed on a national securities exchange, the last reported sale price of the Stock on such exchange, or (2) if the Stock is otherwise publicly traded, the last reported sale price of the Stock under the quotation system under which such sale price is reported, or (3) if no such last sale price is available on such date, the last reported sale price of the Stock for the immediately preceding business day (a) on the national securities exchange on which the Stock is listed or, (b) if the Stock is otherwise publicly traded, under the quotation system under which such data are reported, or (4) if none of the prices described above is available, the fair market value per share of the Stock using any reasonable method determined by the Board that satisfies the requirements of Section 409A, particularly Treasury Regulation Section 1.409A-1(b)(5)(iv).

"FNB" means FNB United Corp. or any successor to such corporation.

"GRANT DATE" means the date specified by the Committee on which a grant of an Award shall become effective, which shall not be earlier than the date on which the Committee takes action with respect thereto.

"GRANTEE" means the person so designated in an agreement as the recipient of an Award granted by the Company.

3

"HARDSHIP" means an unanticipated emergency that is caused by an event beyond the control of the Participant that would result in severe financial hardship to the Participant resulting from (i) a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, (ii) a loss of the Participant's property due to casualty, or (iii) such other extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Committee.

"INCENTIVE STOCK OPTION (ISO)" means any Option that is intended to qualify as an "Incentive Stock Option" under Section 422 of the Code or any successor provision.

"KEY EMPLOYEE" means an employee of FNB or any Subsidiary who, in the judgment of the Committee acting in its absolute discretion, is key to the business performance and success of FNB.

"NON-EMPLOYEE DIRECTOR" means a member of the Board or of an advisory board of a Subsidiary who is not an employee of the Company or an Affiliate.

"NONQUALIFIED STOCK OPTION" or "NQSO" means an Option that is not intended to qualify as an Incentive Stock Option.

"NORMAL RETIREMENT" means, unless otherwise defined in the applicable Award Agreement, retirement of a Participant from the employ or service of the Company or any of its Subsidiaries or Affiliates in accordance with the terms of the applicable Company pension plan at or after attainment of age 65, or if a Participant is not covered by any such plan, retirement on or after attainment of age 65.

"OPTION" means any Option (ISO or NQSO) to purchase Shares granted under this Plan.

"OPTION PRICE" means the purchase price payable to purchase one share upon the exercise of an Option or other Award.

"OPTIONEE" means the person so designated in an agreement evidencing an outstanding Option or other Award.

"OTHER STOCK-BASED AWARD" means any Award granted under Section 12 of the Plan.

"PARENT CORPORATION" means any corporation, which is a parent of FNB within the meaning of Section 424(e) of the Code.

"PARTICIPANT" means an officer, a Key Employee or a Non-Employee Director who is selected by the Board or the Committee to receive benefits under this Plan, provided that Non-Employee Directors shall not be eligible to receive grants of Incentive Stock Options.

"PERFORMANCE OBJECTIVES" means performance goals or targets established pursuant to this Plan for Participants who have received grants of Performance Shares or Performance Units or, when so determined by the Committee, Deferred Shares, Options, Restricted Shares or Other Stock-Based Awards. Performance Objectives may be described in terms of Company-wide objectives or objectives that are related to the performance of the

4

individual Participant or the division, department or function within the Company or Subsidiary in which the Participant is employed. Any Performance Objectives applicable to Awards intended to qualify as "performance-based compensation" under Section 162(m) of the Code shall be limited to specified levels of, or increases in, the Company's or Subsidiary's return on equity, earnings per share, earnings growth, return on capital, return on assets, divisional return on capital, divisional return on net assets, total shareholder return and/or increase in the Fair Market Value of the Shares. Except in the case of Performance Objectives related to an Award intended to qualify under Section 162(m) of the Code, if the Committee determines that a change in the business, operations, corporate structure or capital structure of the Company, or the manner in which it conducts its business, or other events or circumstances render the Performance Objectives unsuitable, subject to Section 11(h) of this Plan, the Committee, after the date of grant, may modify such Performance Objectives, in whole or in part, as the Committee deems appropriate and equitable.

"PERFORMANCE PERIOD" means a period of time established under Section 11 of this Plan within which the Performance Objectives relating to a Performance Share, Performance Unit, Option, Deferred Share or Restricted Share are to be achieved.

"PERFORMANCE SHARE" means an Award pursuant to Section 11 of this Plan that provides the Participant the opportunity to earn one or more Shares contingent upon the achievement of one or more Performance Objectives during a Performance Period.

"PERFORMANCE UNIT" means an Award pursuant to Section 11 of this Plan that provides the Participant the opportunity to earn one or more units, denominated in Shares or cash or a combination thereof, contingent upon achieving one or more Performance Objectives during a Performance Period.

"PERSON" means any individual, corporation, partnership, associate, joint-stock company, trust, unincorporated organization, government or instrumentality of a government or other entity.

"PLAN" means this FNB United Corp. 2003 Stock Incentive Plan as effective as of the date adopted by the Board in 2003 and as amended from time to time thereafter.

"RESTRICTED SHARES" means Shares granted under Section 9 of this Plan subject to such restrictions, including, but not limited to, service requirements and/or Performance Objectives, as may be determined by the Committee at the time of grant.

"RULE 16B-3" means Rule 16b-3 of the Exchange Act and any successor provision thereto as in effect from time to time.

“SECTION 409A” means Code Section 409A, including any proposed and final regulations and other guidance issued thereunder by the Department of the Treasury and/or the Internal Revenue Service.

"SHARES" or "STOCK" means Shares of the common stock of FNB United Corp. $2.50 par value, or any security into which Shares may be converted by reason of any transaction or event of the type referred to in Section 4 of this Plan.

5

"SPREAD" means, in the case of a Stock Appreciation Right, the amount by which the Fair Market Value on the date when any such right is exercised exceeds the Base Price specified in such right or, in the case of a Tandem Stock Appreciation Right, the amount by which the Fair Market Value on the date when any such right is exercised exceeds the Option Price specified in the related Option.

"STOCK APPRECIATION RIGHT" means a right granted under Section 8 of this Plan, including a Stock Appreciation Right or a Tandem Stock Appreciation Right.

"SUBSIDIARY" means a corporation or other entity (i) more than 50 percent of whose outstanding Shares or securities (representing the right to vote for the election of directors or other managing authority) are, or (ii) which does not have outstanding Shares or securities (as may be the case in a partnership, joint venture or unincorporated association), but more than 50 percent of whose ownership interest (representing the right generally to make decisions for such other entity) is, as of the date this Plan is approved by the Board and thereafter owned or controlled directly or indirectly by the Company, provided that for purposes of determining whether any person may be a Participant for purposes of any grant of Incentive Stock Options, "Subsidiary" means any corporation in which the Company owns or controls directly or indirectly more than 50 percent of the total combined voting power represented by all classes of stock issued by such corporation at the time of such grant.

"TANDEM STOCK APPRECIATION RIGHT" means a Stock Appreciation Right granted pursuant to Section 8 of this Plan that is granted in tandem with an Option or any similar right granted under any other Plan of the Company such that the exercise of one results in the cancellation of the other.

"TEN PERCENT SHAREHOLDER" means a person who owns, at the time of an Award and after taking into account the attribution rules of Section 424(d) of the Code, more than ten percent (10%) of the total combined voting power of all classes of stock of either FNB, a Subsidiary or a Parent Corporation.

3.           SHARES AVAILABLE UNDER THE PLAN.

(a)           Subject to adjustment as provided in Section 4 of this Plan, the number of Shares that may be (i) issued or transferred upon the exercise of Options or Stock Appreciation Rights, (ii) Awarded as Restricted Shares and released from substantial risk of forfeiture, or (iii) issued or transferred in payment of Deferred Shares, Performance Shares, Performance Units, or Other Stock Based Awards, shall not in the aggregate exceed 1,145,000 Shares.  Such Shares may be Shares of original issuance or Shares that have been reacquired by the Company. The number of Performance Units granted under this Plan may not in the aggregate exceed 200,000.

(b)           Upon the payment of any Option Price by the transfer to the Company of Shares or upon satisfaction of tax withholding obligations under the Plan by the transfer or relinquishment of Shares, there shall be deemed to have been issued or transferred only the number of Shares actually issued or transferred by the Company, less the number of Shares so transferred or relinquished. In any event, the number of Shares actually issued or transferred by the Company upon the exercise of Incentive Stock Options may not exceed 1,145,000, subject to adjustment as provided in Section 4 of the Plan. Upon the payment in cash of a benefit provided by any Award under this Plan, any Shares that were subject to such Award shall again be

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available for issuance or transfer under this Plan.  Performance Units that are paid in Shares or are not earned by a Participant at the end of a Performance Period are available for future grants of Performance Units.

(c)           If an Award expires or terminates for any reason without being exercised in full or is satisfied without the distribution of Stock, or Stock distributed pursuant to an Award is forfeited or reacquired by the Company, or is surrendered upon exercise of an Award, the Stock subject to such Award or so forfeited, reacquired or surrendered shall again be available for distribution for purposes of the Plan.

(d)           No Participant may receive Awards, including Options, during any one calendar year representing more than 50,000 Shares or more than 25,000 Performance Units.

(e)           Any shares issued by the Company in connection with the assumption or substitution of outstanding grants from any acquired corporation shall not reduce the Shares available for Awards under the Plan.

4.           ADJUSTMENTS.

In the event that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other similar corporate transaction or event affects the Shares such that an adjustment is necessary in order to prevent dilution or enlargement of the rights of Optionees or Grantees, then, the Committee shall in such manner as it may deem equitable: (i) adjust any or all of (1) the aggregate number of Shares or other securities of the Company (or number and kind of other securities or property) with respect to which Awards may be granted under the Plan; (2) the number of Shares or other securities of the Company (or number and kind of other securities or property) subject to outstanding Awards under the Plan; and (3) the grant or exercise price with respect to any Award under the Plan, provided that in each case, the number of shares subject to any Award shall always be a whole number; (ii) in cancellation of an option, provide for an equivalent award in respect of securities of the surviving entity of any merger, consolidation or other transaction or event having a similar effect; or (iii) in cancellation of an award, make provision for a cash payment to the holder of an outstanding Award.  Notwithstanding the foregoing: (x) any adjustments or substitutions made pursuant to this Section 4 to Awards that constitute a “nonqualified deferred compensation plan” within the meaning of Section 409A shall be made in compliance with the requirements of Section 409A; (y) any adjustments or substitutions made pursuant to this Section 4 to Awards that do not constitute a “nonqualified deferred compensation plan” subject to Section 409A shall be made in such a manner as to ensure that after such adjustment or substitution, the Awards either (A) continue not to be subject to Section 409A or (B) comply with the requirements of Section 409A; and (z) in any event, neither the Committee nor the Board shall have the authority to make any adjustments or substitutions pursuant to this Section 4 to the extent the existence of such authority would cause an Award that is not intended to be subject to Section 409A at the date of grant to violate Section 409A.

5. ADMINISTRATION OF THE PLAN.

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(a)           This Plan shall be administered by one or more Committees appointed by the Board. Any grants of Awards to officers who are subject to Section 16 of the Exchange Act shall be made by a Committee composed of not less than two members of the Board, each of whom shall be a "Non-Employee Director" within the meaning of Rule 16b-3. Any grant of an Award that is intended to qualify as "performance-based compensation" under Section 162(m) of the Code shall be made by a Committee composed of not less than two members of the Board, each of whom shall be an "outside director" within the meaning of the regulations under Section 162(m) of the Code. For purposes of grants of Awards to Non-Employee Directors, the entire Board shall serve as the Committee.

(b)           The Committee, or Committees, shall have the power and authority to grant Awards consistent with the terms of the Plan, including the power and authority: (i) to select the officers and other Key Employees of the Company, its Subsidiaries and Affiliates to whom Awards may from time to time be granted; (ii) to determine the time or times of grant, and the extent, if any, of Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Deferred Stock Awards, Other Stock-Based Awards, Performance Share Awards, Performance Unit Awards, or any combination of the foregoing, granted to any one or more Participants; (iii) to determine the number of Shares to be covered by any Award; (iv) to establish the terms and conditions of any Award, including, but not limited to: (A) the Share price; (B) any restriction or limitation on the grant, vesting or exercise of any Award (including but not limited to, the attainment (and certification of the attainment) of one or more Performance Objectives (or any combination thereof) that may apply to the individual Participant, a Company business unit, including a Subsidiary or an Affiliate, or the Company as a whole); and (C) any waiver or acceleration of vesting or forfeiture provisions regarding any Stock Option or other Award and the Stock relating thereto, based on such factors as the Committee shall determine; and to determine whether, to what extent and under what circumstances Stock and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the Participant, and whether and to what extent the Company shall pay or credit amounts equal to interest (at rates determined by the Committee), dividends or deemed dividends on such deferrals.

(c)           Subject to the provisions of the Plan, the Committee shall have full and conclusive authority to interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; to amend or modify the terms of any Award at or after grant with the consent of the holder of the Award, except to the extent prohibited by Section 7(b); to prescribe, amend and rescind rules and regulations relating to the Plan; to determine the terms and provisions of the respective Award agreements and to make all other determinations necessary or advisable for the proper administration of the Plan.  The Committee's determinations under the Plan need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Awards under the Plan (whether or not such persons are similarly situated). No member of the Committee shall be liable to any person or entity for any action taken or determination made in good faith with respect to the Plan or any Award granted hereunder.

(d)           Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive and binding upon all Persons, including the Company, any Subsidiary and Affiliate,

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and Participant, any holder or beneficiary of any Award, any Employee and any Non-Employee Director.

(e)           Notwithstanding the foregoing, the Committee may not take any actions pursuant to the exercise of its power and authority granted under this Section 5 that would (i) cause Awards not subject to Section 409A at the date of grant either (A) to become subject to Section 409A or (B) to fail to comply with the requirements of Section 409A; or (ii) cause any Award subject to Section 409A to fail to comply with the requirements of Section 409A.

6. ELIGIBILITY.

Any officer, Key Employee (including any employee-director of the Company or of any Subsidiary or Affiliate who is not a member of the Committee) or Non-Employee Director shall be eligible to be designated a Participant; provided, however, that, notwithstanding anything herein to the contrary, any Award that constitutes a “stock right,” within the meaning of Section 409A, shall be granted only to persons eligible to be designated a Participant with respect to whom the Company is an “eligible issuer of service recipient stock” under Section 409A.

7. OPTIONS.

The Committee may from time to time authorize grants to Participants of Options to purchase Shares upon such terms and conditions as the Committee may determine in accordance with the following provisions:

(a)           Each grant shall specify the number of Shares to which it pertains.

(b)           Each grant shall specify an Option Price per Share. Except in the case of substitute awards, the Option Price of an Option may not be less than 100% of the Fair Market Value of the Shares with respect to which the Option is granted on the Grant Date. If an officer or Key Employee owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Subsidiary or Parent Corporation (within the meaning of Section 424(e) of the Code), and an Incentive Stock Option is granted to such officer or Key Employee, the Option Price shall be no less than 110% of the Fair Market Value on the Grant Date. Notwithstanding the foregoing and except as permitted by the provisions of Sections 4 and 19(c) hereof, the Committee shall not have the power to (i) amend the terms of previously granted Options to reduce the Option Price of such Options, or (ii) cancel such Options and grant substitute Options with a lower Option Price than the cancelled Options.

(c)           Each Option may be exercised in whole or in part at any time, with respect to whole shares only, within the period permitted for the exercise thereof and shall be exercised by written notice of intent to exercise the Option, delivered to the Company at its principal office, and payment in full to the Company at said office of the amount of the Option Price for the number of Shares with respect to which the Option is then being exercised. Each grant shall specify the form of consideration to be paid in satisfaction of the Option Price and the manner of payment of such consideration, which may include (i) cash in the form of currency or check or other cash equivalent acceptable to the Company, (ii) nonforfeitable, unrestricted Shares that have been owned by the Optionee for at least six months and have a value at the time of exercise that is equal to the Option Price, together with any applicable withholding taxes, (iii) any other

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legal consideration that the Committee may deem appropriate, on such basis as the Committee may determine in accordance with this Plan, (including without limitation any form of consideration authorized under Section 7(d) below), provided, however that, such consideration (A) may not cause Awards intended to be exempt from Section 409A to become subject to Section 409A and (B) may not cause the Awards subject to Section 409A to violate the requirements of Section 409A, or (iv) any combination of the foregoing.

(d)           On or after the Grant Date of any Option other than an Incentive Stock Option, the Committee may determine that payment of the Option Price may also be made in whole or in part in the form of Restricted Shares or other Shares that are subject to risk of forfeiture or restrictions on transfer.  Unless otherwise determined by the Committee, whenever any Option Price is paid in whole or in part by means of any of the forms of consideration specified in this Section 7(d), the Shares received by the Optionee upon the exercise of the Options shall be subject to the same risks of forfeiture or restrictions on transfer as those that applied to the consideration surrendered by the Optionee, provided that such risks of forfeiture and restrictions on transfer apply only to the same number of Shares received by the Optionee as applied to the forfeitable or Restricted Shares surrendered by the Optionee.

(e)           Any grant may provide, to the extent permitted by law, for payment of the Option Price from the proceeds of sale through a bank or broker on the date of exercise of some or all of the Shares to which the exercise relates.

(f)           Each Option grant may specify a period of continuous employment of the Optionee by the Company or any Subsidiary (or, in the case of a Non-Employee Director, service on the Board) or other terms and conditions, such as achievement of Performance Objectives, that may be determined by the Committee that is necessary before the Options or installments thereof shall become exercisable, and any grant may provide for the earlier exercise of such rights in the event of a Change in Control of the Company or other similar transaction or event; provided, however, that such provision (A) may not cause Awards intended to be exempt from Section 409A to become subject to Section 409A and (B) may not cause the Awards subject to Section 409A to violate the requirements of Section 409A,.

(g)           Options granted under this Plan may be Incentive Stock Options, Nonqualified Stock Options, or a combination of the foregoing, provided that only Nonqualified Stock Options may be granted to Non-Employee Directors. Each grant shall specify whether (or the extent to which) the Option is an Incentive Stock Option or a Nonqualified Stock Option. Notwithstanding any such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Options designated as Incentive Stock Options or Tandem Stock Appreciation Rights related to such Incentive Stock Options are exercisable for the first time by an Optionee during any calendar year (under all Plans of the Company) exceeds $100,000 such Options shall be treated as Nonqualified Stock Options.

(h)           No Option granted under this Plan may be exercised more than 10 years from the Grant Date; provided, however, that if an Incentive Stock Option is granted to an employee who owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Subsidiary or Parent Corporation (within the meaning of Section 424(e) of the Code), the term of such Incentive Stock Option shall be no more than five years from the date of grant.

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(i)           Each grant shall be evidenced by an agreement executed on behalf of the Company by any officer thereof and delivered to the Optionee and containing such terms and provisions as the Committee may determine consistent with this Plan.

8.           STOCK APPRECIATION RIGHTS.

The Committee may also authorize grants to Participants of Stock Appreciation Rights. A Stock Appreciation Right provides a Participant the right to receive from the Company an amount, which shall be determined by the Committee and shall be expressed as a percentage (not exceeding 100 percent), of the Spread at the time of the exercise of such right. Any grant of Stock Appreciation Rights under this Plan shall be upon such terms and conditions as the Committee may determine in accordance with the following provisions:

(a)           Any grant may specify that the amount payable upon the exercise of a Stock Appreciation Right may be paid by the Company in cash, Shares or any combination thereof and may (i) either grant to the Participant or reserve to the Committee the right to elect among those alternatives or (ii) preclude the right of the Participant to receive and the Company to issue Shares or other equity securities in lieu of cash;

(b)           Any grant may specify that the amount payable upon the exercise of a Stock Appreciation Right shall not exceed a maximum specified by the Committee on the Grant Date;

(c)           Any grant may specify (i) a waiting period or periods before Stock Appreciation Rights shall become exercisable and (ii) permissible dates or periods on or during which Stock Appreciation Rights shall be exercisable; provided, however, that such specifications may not permit an exercise of the Award that would violate Section 409A;

(d)           Any grant may specify that a Stock Appreciation Right may be exercised only in the event of a Change in Control of the Company or other similar transaction or event; provided, however that, such provision (A) may not cause Awards intended to be exempt from Section 409A to become subject to Section 409A and (B) may not cause the Awards subject to Section 409A to violate the requirements of Section 409A;

(e)           On or after the Grant Date of any Stock Appreciation Rights, the Committee may provide for the payment to the Participant of Dividend Equivalents thereon in cash or Shares on a current, deferred or contingent basis; provided, that the right to Dividend Equivalents may not cause an Award that is not otherwise subject to Section 409A to become subject to 409A and shall be set forth as a separate arrangement that satisfies the requirements of Section 409A;

(f)           Each grant shall be evidenced by an agreement executed on behalf of the Company by any officer thereof and delivered to the Optionee, which shall describe the subject Stock Appreciation Rights, identify any related Options, state that the Stock Appreciation Rights are subject to all of the terms and conditions of this Plan and contain such other terms and provisions as the Committee may determine consistent with this Plan;

(g)           Each grant of a Tandem Stock Appreciation Right shall provide that such Tandem Stock Appreciation Right may be exercised only (i) at a time when the related Option (or any similar right granted under this or any other Plan of the Company) is also exercisable and the

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Spread is positive; and (ii) by surrender of the related Option (or such other right) for cancellation;

(h)           Each grant of a Stock Appreciation Right shall specify in respect of each Stock Appreciation Right a Base Price per Share, which shall be equal to or greater than the Fair Market Value of the Shares on the Grant Date. Successive grants of Stock Appreciation Rights may be made to the same Participant regardless of whether any Stock Appreciation Rights previously granted to such Participant remain unexercised. Each grant shall specify the period or periods of continuous employment of the Participant by the Company or any Subsidiary that are necessary before the Stock Appreciation Rights or installments thereof shall become exercisable, and any grant may provide for the earlier exercise of such rights in the event of a Change in Control of the Company or other similar transaction or event; provided, however, such provision (A) may not cause Awards intended to be exempt from Section 409A to become subject to Section 409A and (B) may not cause the Awards subject to Section 409A to violate the requirements of Section 409A.  No Stock Appreciation Right granted under this Plan may be exercised more than 10 years from the Grant Date.  An Award that is subject to Section 409A may not be granted in tandem with an Award that is not otherwise subject to Section 409A.

9.           RESTRICTED SHARES.

The Committee may also authorize grants to Participants of Restricted Shares upon such terms and conditions as the Committee may determine in accordance with the following provisions:

(a)           Each grant shall constitute an immediate transfer of the ownership of Shares to the Participant in consideration of the performance of services, entitling such Participant to dividend, voting and other ownership rights, subject to the substantial risk of forfeiture and restrictions on transfer hereinafter described.

(b)           Each grant may be made without additional consideration from the Participant or in consideration of a payment by the Participant that is less than the Fair Market Value on the Grant Date.

(c)           Each grant shall provide that the Restricted Shares covered thereby shall be subject to a "substantial risk of forfeiture" within the meaning of Section 83 of the Code for a period to be determined by the Committee on the Grant Date, and any grant or sale may provide for the earlier termination of such risk of forfeiture in the event of a Change in Control of the Company or other similar transaction or event.

(d)           Each grant shall provide that, during the period for which such substantial risk of forfeiture is to continue, the transferability of the Restricted Shares shall be prohibited or restricted in the manner and to the extent prescribed by the Committee on the Grant Date. Such restrictions may include, without limitation, rights of repurchase or first refusal by the Company or provisions subjecting the Restricted Shares to a continuing substantial risk of forfeiture in the hands of any transferee.

(e)           Any grant or the vesting thereof may be further conditioned upon the attainment of Performance Objectives established by the Committee in accordance with the applicable provisions of Section 11 of this Plan regarding Performance Shares and Performance Units.

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(f)           Any grant may require that any or all dividends or other distributions paid on the Restricted Shares during the period of such restrictions be automatically sequestered and reinvested on an immediate or deferred basis in the form of cash or additional Shares, which may be subject to the same restrictions as the underlying Award or such other restrictions as the Committee may determine.  Any such arrangements with respect to distributions or dividends paid on Restricted Shares that provide for a “deferral of compensation” within the meaning of Section 409A, shall be set forth as a separate arrangement that satisfies the requirements of Section 409A.

(g)           Each grant shall be evidenced by an agreement executed on behalf of the Company by any officer thereof and delivered to the Participant and containing such terms and provisions as the Committee may determine consistent with this Plan. Unless otherwise directed by the Committee, all certificates representing Restricted Shares, together with a stock power that shall be endorsed in blank by the Participant with respect to such Shares, shall be held in custody by the Company until all restrictions thereon lapse.

(h)           At the end of the restricted period and provided that any other restrictive conditions of the Restricted Shares Award are met, or at such earlier time as otherwise determined by the Committee, all restrictions set forth in the Award Agreement relating to the Restricted Share Award or in the Plan shall lapse as to the restricted Shares subject thereto, and a stock certificate for the appropriate number of Shares, free of the restrictions and restricted stock legend, shall be delivered to the Participant or the Participant's beneficiary or estate, as the case may be.

10.           DEFERRED SHARES.

The Committee may authorize grants of Deferred Shares to Participants upon such terms and conditions as the Committee may determine in accordance with the following provisions; provided, that all such Awards that are subject to Section 409A shall satisfy the requirements of Section 409A:

(a)           Each grant shall constitute the agreement by the Company to issue or transfer Shares to the Participant in the future in consideration of the performance of services, subject to the fulfillment during the Deferral Period of such conditions as the Committee may specify.

(b)           Each grant may be made without additional consideration from the Participant or in consideration of a payment by the Participant that is less than the Fair Market Value on the Grant Date.

(c)           Each grant shall provide that the Deferred Shares covered thereby shall be subject to a Deferral Period, which shall be fixed by the Committee on the Grant Date, and any grant or sale may provide for the earlier termination of such period in the event of a Change in Control of the Company or other similar transaction or event; provided, that, such provision (A) may not cause Awards intended to be exempt from Section 409A to become subject to Section 409A and (B) may not cause the Awards subject to Section 409A to violate the requirements of Section 409A.

(d)           During the Deferral Period, the Participant shall not have any right to transfer any rights under the subject Award, shall not have any rights of ownership in the Deferred Shares

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and shall not have any right to vote such Shares, but the Committee may on or after the Grant Date authorize the payment of Dividend Equivalents on such Shares in cash or additional Shares on a current, deferred or contingent basis; provided, that the payment of Dividend Equivalents may not cause an Award that is not otherwise subject to Section 409A to become subject to 409A and shall be set forth as a separate arrangement that satisfies the requirements of Section 409A.

(e)           Any grant or the vesting thereof may be further conditioned upon the attainment of Performance Objectives established by the Committee in accordance with the applicable provisions of Section 11 of this Plan regarding Performance Shares and Performance Units. Except as otherwise determined by the Committee, all Deferred Shares and all rights of the grantee to such Deferred Shares shall terminate, without further obligation on the part of the Company, unless the Grantee remains in continuous employment of the Company for the entire Deferral Period in relation to which such Deferred Shares were granted and unless any other restrictive conditions relating to the Deferred Shares are met.

(f)           Each grant shall be evidenced by an agreement executed on behalf of the Company by any officer thereof and delivered to the Participant and containing such terms and provisions as the Committee may determine consistent with this Plan.

11. PERFORMANCE SHARES AND PERFORMANCE UNITS.

The Committee also may authorize grants of Performance Shares and Performance Units, which shall become payable to the Participant upon the achievement of specified Performance Objectives, upon such terms and conditions as the Committee may determine in accordance with the following provisions:

(a)           Each grant shall specify the number of Performance Shares or Performance Units to which it pertains, which may be subject to adjustment to reflect changes in compensation or other factors.

(b)           The Performance Period with respect to each Performance Share or Performance Unit shall commence on a date specified by the Committee at the time of grant and may be subject to earlier termination in the event of a Change in Control of the Company or other similar transaction or event; provided, that, such provision (A) may not cause Awards intended to be exempt from Section 409A to become subject to Section 409A and (B) may not cause the Awards subject to Section 409A to violate the requirements of Section 409A.

(c)           Each Award shall specify the Performance Objectives that are to be achieved by the Participant with respect to the grant or the vesting thereof.

(d)           Each grant may specify in respect of the specified Performance Objectives a minimum acceptable level of achievement below which no payment will be made and shall set forth a formula or other procedure for determining the amount of any payment to be made if performance is at or above such minimum acceptable level but falls short of the maximum achievement of the specified Performance Objectives.

(e)           Each grant shall specify the time and manner of payment of Performance Shares or Performance Units that shall have been earned, and any grant may specify that any such

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amount may be paid by the Company in cash, Shares or any combination thereof and may either grant to the Participant or reserve to the Committee the right to elect among those alternatives.

(f)           Any grant of Performance Shares or Performance Units may specify that the amount payable, or the number of Shares issued, with respect thereto may not exceed a maximum specified by the Committee on the Grant Date.

(g)           Any grant of Performance Shares may provide for the payment to the Participant of Dividend Equivalents thereon in cash or additional Shares on a current, deferred or contingent basis; provided, that, the payment of Dividend Equivalents may not cause an Award that is not otherwise subject to Section 409A to become subject to 409A and shall be set forth as a separate arrangement that satisfies the requirements of Section 409A.

(h)           If provided in the terms of the grant, the Committee may adjust Performance Objectives and the related minimum acceptable level of achievement if, in the sole judgment of the Committee, events or transactions have occurred after the Grant Date that are unrelated to the performance of the Participant and result in distortion of the Performance Objectives or the related minimum acceptable level of achievement; provided, that such adjustment (A) may not cause Awards intended to be exempt from Section 409A to become subject to Section 409A and (B) may not cause the Awards subject to Section 409A to violate the requirements of Section 409A.

(i)           Each grant shall be evidenced by an agreement executed on behalf of the Company by any officer thereof and delivered to the Participant, which shall state that the Performance Shares or Performance Units are subject to all of the terms and conditions of this Plan and such other terms and provisions as the Committee may determine consistent with this Plan.

12. OTHER STOCK-BASED AWARDS.

The Committee shall have the authority to grant to Participants an "Other Stock-Based Award," which shall consist of any right that is (a) not an Award described in Sections 7 through 11 above and (b) an Award of Shares or an Award denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities convertible into Shares), as deemed by the Committee to be consistent with the purposes of the Plan. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the terms and conditions of any such Other Stock-Based Award.

13. AWARDS TO NON-EMPLOYEE DIRECTORS.

The Board may grant to Non-Employee Director's awards in the form of Nonqualified Stock Options, Stock Appreciation Rights, Restricted Shares, Deferred Shares and/or Other Stock Based Awards, including unrestricted Shares.  The grants may be made according to an approved formula of the Board or made at the discretion of the Board from time to time. The Board shall determine the terms and conditions of any such Awards, including the terms and conditions which shall apply upon a termination of the Non-Employee Director's service as a member of the Board or an advisory board of a Subsidiary, and shall have full power and authority in its discretion to administer such Awards, subject to the terms of the Plan and applicable law.

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14. PROVISIONS APPLICABLE TO COVERED OFFICERS AND PERFORMANCE-BASED AWARDS.

Notwithstanding anything in the Plan to the contrary, unless the Committee determines otherwise, all performance-based Awards granted hereunder shall be subject to the terms and provisions of this Section 14:

(a)           The Committee may grant to Covered Officers performance-based Awards that vest or become exercisable upon the attainment of performance targets related to one or more Performance Objectives selected by the Committee from among the list of Performance Objectives contained herein. For the purposes of this Section 14, performance goals shall be limited to one or more of the Performance Objectives or any combination thereof. Each Performance Objective may be expressed on an absolute and/or relative basis, may be based on or otherwise employ comparisons based on internal targets, the past performance of the Company and/or the past or current performance of other companies, and in the case of earnings-based measures, may use or employ comparisons relating to capital, shareholders' equity and/or Shares outstanding, or to assets or net assets.

(b)           With respect to any Covered Officer, the maximum annual number of Shares in respect of which all performance-based Restricted Shares, Deferred Shares, Performance Shares, Performance Units and Other Stock-Based Awards may be granted under the Plan is 50,000 and the maximum annual amount of any Award settled in cash is $250,000.

(c)           To the extent necessary to comply with Section 162(m) of the Code, with respect to Restricted Share Awards, Deferred Share Awards, Performance Share Awards, Performance Unit Awards and Other Stock-Based Awards, no later than 90 days following the commencement of each Performance Period (or such other time as may be required or permitted by Section 162(m) of the Code), the Committee shall, in writing, (i) select the Performance Objective or Objectives applicable to the Performance Period, (ii) establish the various targets and bonus amounts which may be earned for such Performance Period, and (iii) specify the relationship between Performance Objectives and targets and the amounts to be earned by each Covered Officer for such Performance Period. Following the completion of each Performance Period, the Committee shall certify in writing whether the applicable performance targets have been achieved and the amounts, if any, payable to Covered Officers for such Performance Period. In determining the amount earned by a Covered Officer for a given Performance Period, subject to any applicable Award Agreement, the Committee shall have the right to reduce (but not increase) the amount payable at a given level of performance to take into account additional factors that the Committee may deem relevant to the assessment of individual or corporate performance for the Performance Period.

15.           TRANSFERABILITY.

(a)           Except as provided in Section 15(b), no Award granted under this Plan may be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered or disposed of by a Participant other than by will or the laws of descent and distribution, and Options and Stock Appreciation Rights shall be exercisable during a Participant's lifetime only by the Participant or,

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in the event of the Participant's legal incapacity, by his guardian or legal representative acting in a fiduciary capacity on behalf of the Participant under state law and court supervision.

(b)           The Committee may expressly provide in a Nonqualified Stock Option agreement (or an amendment to such an agreement) that a Participant may transfer such Nonqualified Stock Option to a spouse or lineal descendant (a "Family Member"), a trust for the exclusive benefit of Family Members, a partnership or other entity in which all the beneficial owners are Family Members, or any other entity affiliated with the Participant that may be approved by the Committee. Subsequent transfers of any such Nonqualified Stock Option shall be prohibited except in accordance with this Section 15(b). All terms and conditions of any such Nonqualified Stock Option, including provisions relating to the termination of the Participant's employment or service with the Company or a Subsidiary, shall continue to apply following a transfer made in accordance with this Section 15(b).

(c)           Any Award made under this Plan may provide that all or any part of the Shares that are (i) to be issued or transferred by the Company upon the exercise of Options or Stock Appreciation Rights, upon the termination of the Deferral Period applicable to Deferred Shares or upon payment under any grant of Performance Shares or Performance Units, or (ii) no longer subject to the substantial risk of forfeiture and restrictions on transfer referred to in Section 9 of this Plan, shall be subject to further restrictions upon transfer.

16.           FRACTIONAL SHARES.

No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash, other securities, or other property shall be paid or transferred in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated or otherwise eliminated.

17.           WITHHOLDING TAXES.

Each Participant is solely responsible for the payment of any tax liability (including any taxes, interest and penalties that may arise under Section 409A) with respect to an Award. To the extent that the Company is required to withhold federal, state, local or foreign taxes in connection with any payment made or benefit realized by a Participant or other person under this Plan, it shall be a condition to the receipt of such payment or the realization of such benefit that the Participant or such other person make arrangements satisfactory to the Company for payment of all such taxes required to be withheld. At the discretion of the Committee, such arrangements may include relinquishment of a portion of such benefit.  The Committee may provide, at its discretion, for additional cash payments to holders of Awards to defray or offset any tax arising from the grant, vesting, exercise or payments of any Award other than ISO's; provided, however that any such cash payments shall be structured either (i) to comply with Section 409A or (b) to be exempt from Section 409A.

18. CERTAIN TERMINATIONS OF EMPLOYMENT, HARDSHIP AND APPROVED LEAVES OF ABSENCE.

Notwithstanding any other provision of this Plan to the contrary, in the event of termination of employment by reason of death, Disability, Normal Retirement, Early Retirement with the consent of the Company or leave of absence approved by the Company, or in the event

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of Hardship or other special circumstances, of a Participant who holds an Option or Stock Appreciation Right that is not immediately and fully exercisable, any Restricted Shares as to which the substantial risk of forfeiture or the prohibition or restriction on transfer has not lapsed, any Deferred Shares as to which the Deferral Period is not complete, any Performance Shares or Performance Units that have not been fully earned, or any Shares that are subject to any transfer restriction pursuant to Section 15(b) or (c) of this Plan, the Committee may in its sole discretion take any action that it deems to be equitable under the circumstances or in the best interests of the Company, including without limitation waiving or modifying any limitation or requirement with respect to any Award under this Plan; provided that such actions, waivers or modifications (A) may not cause Awards intended to be exempt from Section 409A to become subject to Section 409A and (B) may not cause the Awards subject to Section 409A to violate the requirements of Section 409A.

19. AMENDMENTS AND OTHER MATTERS.

(a)           The Board may amend, alter, suspend, discontinue or terminate the Plan or any portion thereof at any time, subject to the limitations of Sections 7(b), 4, and 26(b)(iii) hereof; provided that no such amendment, alteration, suspension, discontinuation or termination shall increase any of the limitations specified in Sections 3 or 14(b) of this Plan, other than to reflect an adjustment made in accordance with Section 4, without the further approval of the shareholders of the Company.

(b)           Subject to the restrictions of Sections 7(b), 4, and 26(b)(iii) hereof, the Committee may waive any conditions or rights under, amend any terms of, or alter, suspend, discontinue, cancel or terminate, any Award theretofore granted, prospectively or retroactively; provided that, except for amendments made to comply with applicable law (including without limitation Section 409A), stock exchange rules, or accounting rules, any such waiver, amendment, alteration, suspension, discontinuance, cancellation or termination that would adversely affect the rights of any Participant or any holder or beneficiary of any Award theretofore granted shall not to that extent be effective without the consent of the affected Participant, holder or beneficiary.

(c)           Subject to the restrictions of Sections 7(b), 4, and 26(b)(iii) hereof, the Committee is hereby authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 4 hereof) affecting the Company, any Subsidiary or Affiliate, or the financial statements of the Company or any Subsidiary or Affiliate, or of changes in applicable laws (including Section 409A), regulations, accounting principles, stock exchange rules, or accounting rules, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan; provided that no such adjustment shall be authorized to the extent that such authority would be inconsistent with a performance-based Award's meeting the requirements of Section 162(m) of the Code.

(d)           This Plan shall not confer upon any Participant any right with respect to continuance of employment or other service with the Company or any Subsidiary and shall not interfere in any way with any right that the Company or any Subsidiary would otherwise have to terminate any Participant's employment or other service at any time.

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(e)           To the extent that any provision of this Plan would prevent any Option that was intended to qualify under particular provisions of the Code from so qualifying, such provision of this Plan shall be null and void with respect to such Option, provided that such provision shall remain in effect with respect to other Options, and there shall be no further effect on any provision of this Plan.

20.           GOVERNING LAW.

The validity, construction and effect of this Plan and any Award hereunder shall be determined in accordance with the laws (including those governing contracts) of the State of North Carolina, without giving effect to the conflicts of law principles thereof.

21.           NO RIGHTS TO AWARDS.

No Person shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of Employees, Non-Employee Directors, or holders or beneficiaries of Awards. The terms and conditions of Awards need not be the same with respect to each recipient.

22.           SHARE CERTIFICATES.

All certificates for Shares or other securities of the Company or any Subsidiary or Affiliate delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Shares or other securities are then listed, and any applicable federal or state laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.

23.           AWARD AGREEMENTS.

Each Award hereunder shall be evidenced by an Award Agreement that shall be delivered to the Participant and shall specify the terms and conditions of the Award and any rules applicable thereto. In the event of a conflict between the terms of the Plan and any Award Agreement, the terms of the Plan shall prevail. The Award Agreement shall be executed or acknowledged by the Participant only if required by the Committee.

24.           NO LIMIT ON OTHER COMPENSATION ARRANGEMENTS.

Nothing contained in the Plan shall prevent the Company or any Subsidiary or Affiliate from adopting or continuing in effect other compensation arrangements, which may, but need not, provide for the grant of Options, Restricted Stock, Shares and other types of Awards provided for hereunder (subject to stockholder approval as such approval is required), and such arrangements may be either generally applicable or applicable only in specific cases; provided that such arrangements may not cause any Awards granted hereunder to violate Section 409A or cause any Awards granted hereunder that are exempt from Section 409A to become subject to Section 409A.

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25.           SEVERABILITY.

If any provision of the Plan or any Award is, or becomes, or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or Award and the remainder of the Plan and any such Award shall remain in full force and effect.

26.           OTHER LAWS.

(a)           The Committee may refuse to issue or transfer any Shares or other consideration under an Award if, acting in its sole discretion, it determines that the issuance or transfer of such Shares or such other consideration might violate any applicable law or regulation or entitle the Company to recover the same under Section 16(b) of the Exchange Act, and any payment tendered to the Company by a Participant, other holder or beneficiary in connection with the exercise of such Award shall be promptly refunded to the relevant Participant, holder, or beneficiary.  Without limiting the generality of the foregoing, no Award granted hereunder shall be construed as an offer to sell securities of the Company, and no such offer shall be outstanding, unless and until the Committee in its sole discretion has determined that any such offer, if made, would be in compliance with all applicable requirements of the U.S. federal securities laws and any other laws to which such offer, if made, would be subject.

(b)           Certain Limitations to Ensure Compliance with Section 409A.

(i)           In General.  It is the intent of the parties that, to the extent Section 409A is applicable, this Plan and all payments made pursuant to any Award hereunder shall be in compliance with the requirements of Section 409A.  To the extent Section 409A is applicable, if any provision of this Plan, or any Award, payment, distribution, deferral election, transaction or other action or arrangement contemplated by this Plan shall not be in compliance with Section 409A, then such Award, payment distribution, deferral election, transaction or other action or arrangement shall not be undertaken and, to the extent permitted by Section 409A, the Plan shall be deemed automatically amended without further action on the part of the shareholders of the Company or the Board to the minimum extent necessary to comply with Section 409A and will thereafter be given effect as so amended.  If postponing payment of any amounts due to specified employees (within the meaning of Section 409A) under this Plan is necessary for compliance with the requirements of Section 409A to avoid adverse tax consequences to the Participant, then payment of such amounts shall be postponed to comply with Section 409A.  Any and all payments that are postponed under this Section 26(b)(i) shall be paid to the Participant in a lump sum at the earliest time that does not result in adverse tax consequences to the Participant under Section 409A.

(ii)           409A Awards. Without limiting the generality of the Section 26(b)(i), the following rules will apply to Awards that constitute a “nonqualified deferred compensation plan” within the meaning of Section 409A (a “409A Award”):

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(1)           Elections. If a Participant is permitted to elect to defer an Award or any payment under an Award, such election will be permitted only at times in compliance with Section 409A (including transition rules thereunder).

(2)           Exercise and Distribution. Except as provided in Section 26(b)(ii)(3) hereof, no 409A Award shall be exercisable (if the exercise would result in a distribution) or otherwise distributable to a Participant (or his or her beneficiary) except upon the occurrence of one of the following (or a date related to the occurrence of one of the following), which must be specified in a written document governing such 409A Award and otherwise meet the requirements of Treasury Regulation Section 1.409A-3:

a.           A specified time or a fixed schedule;

b.           The Participant’s separation from service (within the meaning of Treasury Regulation  Section 1.409A-1(h) and other applicable rules under Section 409A), subject to any postponement of such payment that may be required by Section 26(b)(i) above;

c.           The death of the Participant;

d.           The date the Participant has experienced a Disability; and

e.           The occurrence of a Change in Control.

(3)           No Acceleration. The exercise or distribution of a 409A Award may not be accelerated prior to the time specified in accordance with Section 26(b)(ii)(2) hereof, except to the extent otherwise permitted by Section 409A including Treasury Regulation Section 1.409A-3(j).

(iii)           Limitation on Adjustments.  Any amendment, modification, substitution, termination, or liquidation of, or addition, waiver, cancellation, acceleration, extension, or deferral of any conditions or rights under, this Plan or any Award (A) must not cause Awards intended to be exempt from Section 409A to become subject to Section 409A and (B) must not cause the Awards subject to Section 409A to violate the requirements of Section 409A.

(iv)           Scope and Application.  For purposes of this Agreement, references to a provision, plan, or event “satisfying” the requirements of Section 409A or being in “compliance” with the requirements of Section 409A shall mean that such provision, plan or event will not cause adverse tax consequences to the Participant under Section 409A.  For purposes of this Agreement, reverences to a provision, plan, or event that “fails to comply” with Section 409A or that “violates” Section 409A shall mean that such provision, plan, or event will cause adverse tax consequences to the Participant under Section 409A.  Grants of Options, and Stock Appreciation Rights under this Agreement are intended to be exempt from Section 409A unless otherwise expressly specified by the Committee.  The rules applicable to 409A Awards under this Section 26(b) constitute further restrictions on terms of Awards set forth elsewhere in this Plan.

27.           NO TRUST OR FUND CREATED.

Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Subsidiary or Affiliate

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and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Subsidiary or Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Subsidiary or Affiliate.

28.           HEADINGS.

Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof.

29.           EFFECTIVE DATE AND SHAREHOLDER APPROVAL.

This Plan shall become effective upon its approval by the Board subject to approval by the shareholders of the Company at the next Annual Meeting of Shareholders. The Committee may grant Awards subject to the condition that this Plan shall have been approved by the shareholders of the Company.

30.           TERMINATION.

This Plan shall terminate ten years from the date on which this Plan was first approved by the Board, and no Award shall be granted after that date. Unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award granted hereunder may, and the authority of the Committee to amend, alter, adjust, suspend, discontinue or terminate any such Award or to waive any conditions or rights under any such Award shall, continue after the authority for grant of new Awards hereunder has been exhausted.

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EX-10.30

EXHIBIT 10.30

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into effective as of the 31st day of December, 2008 (the “Effective Date”) by and among FNB United Corp., a North Carolina corporation (“FNB”), CommunityONE Bank, National Association, a national banking corporation formerly known as First National Bank and Trust Company and wholly owned subsidiary of FNB (the “Bank”), and Michael C.  Miller, President of each of FNB and the Bank (the “Executive”).  FNB and the Bank are hereinafter sometimes referred to together or individually as the “Employer.”

WITNESSETH:

WHEREAS, the Executive is currently employed as the President of each of FNB and the Bank pursuant to the terms of an employment agreement between the Executive and the Bank dated as of January 1, 2006 (the “Prior Agreement”) and is highly knowledgeable about their businesses, operations, markets and customers; and

WHEREAS, the Executive is a valued executive of the Employer and, to induce the Executive to continue employment with the Employer and to enhance the Executive’s job security, the Employer entered into the Prior Agreement to provide compensation to the Executive in certain events, including but not limited to the Executive’s termination of employment following a change in control of the Employer; and

WHEREAS, because the Executive is familiar with and will continue to gain extensive knowledge regarding the Employer’s products, relationships, trade secrets and confidential information relating to the Employer and its business, products, processes and developments and has generated and will continue to generate confidential information in the course of his duties, the Employer wished to protect its long-term interests by having the Executive enter into certain nondisclosure and noncompetition covenants set forth in the Prior Agreement; and

WHEREAS, the parties desire to amend and restate the Prior Agreement to bring the Prior Agreement into compliance with Section 409A of the Internal Revenue Code of 1986, as amended from time to time (including corresponding provisions of succeeding law) (the “Code”), the regulations promulgated thereunder, and other guidance issued thereunder by the Department of the Treasury and/or the Internal Revenue Service (“Section 409A”); and

WHEREAS; the parties intend that this Agreement shall amend, restate and supersede the Prior Agreement in its entirety, and that from and after the effective date of this Agreement, the Prior Agreement shall be of no further force and effect; and

WHEREAS, none of the conditions or events included in the definition of the term “golden parachute payment” that is set forth in Section 18(k)(4)(A)(ii) of the Federal Deposit Insurance Act [12 U.S.C. 1828(k)(4)(A)(ii)] and in Federal Deposit Insurance Corporation Rule

359.1(f)(1)(ii) [12 CFR 359.1(f)(1)(ii)] exists or, to the best knowledge of the Employer, is contemplated insofar as the Employer or any affiliates are concerned.

NOW, THEREFORE, in consideration of the terms contained herein, including the compensation the Employer agrees to pay to the Executive upon certain events, the Executive's continued employment with the Employer, the Executive's covenants and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Employer and the Executive hereby agree as follows:

1.           Employment and Duties.

(a)           Employment.  During the Employment Term (as defined in Section 3 below), and upon the terms and conditions set forth in this Agreement, the Employer shall employ the Executive, and the Executive shall serve, as President and Chief Executive Officer of each of FNB and the Bank. As such, the Executive shall have the responsibilities, duties and authority reasonably accorded to, expected of, and consistent with those positions and will report directly to the board of directors of each of FNB and the Bank (hereinafter sometimes referred to together or individually as the “Board”).  The Executive shall serve the Employer faithfully, diligently, competently, and to the best of his ability, and he shall exclusively devote his full time, energy, and attention to the business of the Employer and to the promotion of the Employer’s interests throughout the Employment Term.  The Executive shall faithfully adhere to, execute and fulfill all lawful requests, instructions and policies made by the Board or its authorized agent(s).

(b)           No Other Employment.  Without the written consent of FNB’s board of directors, during the Employment Term, the Executive shall not render services to or for any person, firm, corporation, or other entity or organization in exchange for compensation, regardless of the form in which such compensation is paid and regardless of whether it is paid directly or indirectly to the Executive. The foregoing limitation shall not be construed as prohibiting the Executive from managing his personal affairs in a manner that does not interfere with the proper performance of his duties and responsibilities as President or making or managing personal investments in such form or manner as will not require his services in the operation or affairs of the companies or enterprises in which such investments are made and will not violate Section 6 below.

(c)           Board of Directors of FNB.  The Executive is currently serving as a director of FNB.  FNB shall nominate the Executive for election as a director at such times as necessary so that the Executive will, if elected by shareholders, remain a director of FNB throughout the term of this Agreement.  The Executive hereby consents to serve as a director of FNB, and the Executive hereby consents to being named as a director of FNB in documents filed by FNB with the Securities and Exchange Commission.  The Executive shall be deemed to have resigned as a director of FNB effective immediately after termination of the Executive’s employment under Section 4 of this Agreement other than by reason of the Executive’s retirement under Section 4(g), regardless of whether the Executive submits a formal, written resignation as director.

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(d)           Board of Directors of the Bank.   The Executive is currently serving as a director of the Bank.  The Board shall undertake every lawful effort to ensure that the Executive continues throughout the term of his employment to be elected or reelected as a director of the Bank.  The Executive shall be deemed to have resigned as a director of the Bank effective immediately after termination of the Executive’s employment under Section 4 of this Agreement other than by reason of the Executive’s retirement under Section 4(g), regardless of whether the Executive submits a formal, written resignation as director.

2.           Compensation.   For all services rendered by the Executive during the Employment Term as defined in Section 3 below, the Employer shall compensate the Executive as follows:

(a)           Base Salary.  During the Employment Term, the Employer shall pay the Executive an annual salary in an amount not less than the amount of the Executive’s annual salary as of the Effective Date (such salary as it may be increased from time to time being hereinafter referred to as the “Base Salary”).  Such salary shall be payable in accordance with the Employer’s customary payroll practices and shall be subject to all applicable federal and state withholding, payroll and other taxes.  During the Employment Term, the Base Salary shall be reviewed annually by the Compensation Committee of FNB’s board of directors or by such other board committee as has jurisdiction over executive compensation and may be increased from time to time consistent with such review.

(b)            Perquisites, Benefits and Other Compensation.   During the Employment Term, the Executive shall be entitled to receive additional benefits and compensation from the Employer in such form and to such extent as specified below:

(i)           Benefit Plans and Programs.  The Executive will be entitled to participate, in accordance with the provisions thereof, in all group health, disability and life insurance, and all bonus, pension, retirement and other employee benefit plans and programs made available by the Employer to its employees generally or to its senior officers.  Without limiting the generality of the foregoing, the Executive shall be entitled to participate, in accordance with the provisions thereof, in the Employer’s arrangement for performance compensation for stakeholders (or any successor plan) (the “Stakeholders Plan”) and the FNB United/CommunityONE Executive Short-Term Incentive Plan (hereinafter together referred to as the “Bonus Plans”).  In addition, the Executive shall be eligible to participate in the Employer’s stock-based incentive compensation plans then available to other employees or executives of the Employer in accordance with the provisions of such plans and with awards thereunder determined by FNB’s board of directors or by the Compensation Committee of the Board, in its sole discretion.

(ii)           Supplemental Plan.  The Executive will be entitled to participate, in accordance with the provisions thereof, in the FNB Supplemental Executive Retirement Plan, as such plan may be amended from time to time.

(iii)           Club Dues.  The Employer shall pay or reimburse the Executive for the monthly dues and assessments necessary for the Executive to maintain the status of an active member of the Asheboro Country Club and Pinewood Country Club or such other clubs as

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are reasonably necessary to the conduct of the Employer’s business and as the Compensation Committee of FNB’s board of directors may from time to time approve.  The Employer shall also pay or reimburse the Executive for the dues and expenses incurred by the Executive for membership in such civic clubs or groups as are reasonably necessary to the conduct of the Employer’s business and as may be approved by the Compensation Committee.

(iv)           Vacation.  The Executive shall be entitled to paid annual vacation and sick leave in accordance with the policies established from time to time by the Employer.

(v)           Automobile.  The Employer shall provide the Executive with a suitable vehicle for his exclusive use in the discharge of his duties hereunder and shall pay all operating and service expenses, including automobile insurance, related to such vehicle.  Any personal use of such vehicle by the Executive will be appropriately accounted for and reported as additional compensation.

(vi)           Business Expenses.  The Employer shall reimburse the Executive for any reasonable out-of-pocket business and travel expenses incurred by the Executive in the ordinary course of performing his duties for the Employer upon presentation by the Executive, from time to time, of appropriate documentation therefor and in accordance with the Employer’s policies and practices as established or modified from time to time.

(vii)           Meeting and Convention Attendance.  The Employer shall pay all registration, travel, accommodation and meal expenses for the Executive to attend such meetings and conferences as are approved by the Board or an appropriate committee of the Board.  The Employer shall also pay all registration, travel, accommodation and meal expenses for the Executive and his spouse to attend the annual conventions of the American and North Carolina Bankers Associations each year.

3.            Term.  The initial term of this Agreement shall be for a period of three years commencing on the Effective Date.  On the first anniversary of the Effective Date of this Employment Agreement and on each anniversary thereafter, this Agreement shall be extended automatically for one additional year unless FNB’s board of directors determines that the term shall not be extended.  If the board of directors determines not to extend the term, it shall promptly notify the Executive in writing.  If the board of directors decides not to extend the term of this Agreement, this Agreement shall nevertheless remain in full force until its term expires.  The board of director’s decision not to extend the term of this Agreement shall not – by itself – give the Executive any rights under this Agreement to claim an adverse change in his position, compensation, or circumstances or otherwise to claim entitlement to severance benefits under this Agreement.  Unless sooner terminated, this Agreement and the Executive’s employment hereunder shall terminate on December 31 of the year in which the Executive attains age 65.  The Executive's total term of employment with the Employer during the initial and any extended term is collectively defined and sometimes referred to under this Agreement as the "Employment Term."

4.           Termination.    The Executive’s term of employment under this Agreement may be terminated before the end of the initial term or any extension thereof as set forth in this Section 4.  Notwithstanding anything contained herein to the contrary, the Executive’s

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employment with the Employer shall not be considered to have terminated for purposes of the Executive’s receiving any compensation or other benefits otherwise provided under this Agreement unless (i) he would be considered to have incurred a “separation from service” within the meaning of Section 409A from the Employerand any other entity that, along with the Employer, would be considered a “service recipient” within the meaning of Section 409A or (ii) the payment of such compensation or such other benefits would not be subject to Section 409A.

(a)           Death.  In the event of the death of the Executive during his employment under this Agreement, this Agreement shall be terminated as of the date of death.  In such event, the Employer shall pay the Executive’s Base Salary, at the rate in effect at the time of his death and through the last day of the calendar month in which such death occurs, to the Executive’s designated beneficiary, or, in the absence of such designation, to the estate or other legal representative of the Executive.  In addition, the Employer shall pay to the Executive’s designated beneficiary, or, in the absence of such designation, to the estate or other legal representative of the Executive, at the same time as bonus payments for the year of death would otherwise be payable under the Stakeholders Plan, a prorated bonus for the year of death that the Executive would have received if he had been employed throughout such year and had received the same performance rating as he received for the immediately preceding year, prorated on a daily basis as of the date of the Executive’s death.  Any rights and benefits the Executive’s estate or any other person may have under employee benefit plans and programs of the Employer in the event of the Executive’s death shall be determined in accordance with the terms of such plans and programs.

(b)           Long-Term Disability.  If the Executive suffers any disability while employed under this Agreement that prevents him from performing his duties under this Agreement for a period of 90 consecutive days, then, unless otherwise then agreed in writing by the parties hereto, the employment of the Executive under this Agreement shall, at the election of the Employer, be terminated effective as of the ninetieth day of such period.  Upon termination of the Executive’s employment by reason of disability under this Section 4(b), the Executive shall be entitled to receive his Base Salary, at the rate in effect on the date of such termination, less any disability insurance payments paid to the Executive on a policy maintained for the benefit of the Executive by the Employer, through the end of the then current term of this Agreement.  Such salary continuation shall be subject to all applicable federal and state withholding taxes and any postponement of payment that may be required pursuant to Section 15 below.  Any rights and benefits the Executive may have under the employee benefit plans and programs of the Employer in the event of the Executive’s disability shall be determined in accordance with the terms of such plans and programs.

For purposes of this Agreement, “disability” shall mean the inability, by reason of bodily injury or physical or mental disease, or any combination thereof, of the Executive to perform his customary or other comparable duties with the Employer, with or without reasonable accommodation.  In the event that the Executive and the Employer are unable to agree as to whether the Executive is suffering a disability, the Executive and the Employer shall each select a physician and the two physicians so chosen shall make the determination or, if they are unable to agree, they shall select a third physician, and the determination as to whether the Executive is suffering a disability shall be based upon the determination of a majority of the three physicians.

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The Employer shall pay the reasonable fees and expenses of all physicians selected pursuant to this Section 4(b).

(c)           Termination for Cause.  Nothing herein shall prevent the Employer from terminating the Executive’s employment at any time for Cause (as hereinafter defined).  Upon termination for Cause, the Executive shall receive his Base Salary only through the date that such termination becomes effective and the amount of any compensation previously deferred by the Executive, provided that the payment of any such deferred amount will be made in accordance with the provisions of the plan, program or arrangement of the Employer permitting the deferral.  Neither the Executive nor any other person shall be entitled to any further payments from the Employer, for salary or any other amounts.  Notwithstanding the foregoing, any rights and benefits the Executive may have under the employee benefit plans and programs of the Employer following a termination of the Executive’s employment for Cause shall be determined in accordance with the terms of such plans, agreements and programs.

For purposes of this Agreement, termination for Cause shall mean a termination by the Employer of the Executive’s employment by a vote of the majority of the Board members then in office, as a result of (i) an intentional, willful and continued failure by the Executive to perform his duties in the capacities indicated above (other than due to disability); (ii) an intentional, willful and material breach by the Executive of his fiduciary duties of loyalty and care to the Employer; (iii) an intentional, willful and knowing violation by the Executive of any provision of this Agreement; (iv) an intentional, willful and knowing violation by the Executive of the Employer’s Code of Business Ethics or Code of Ethics for Senior Financial Officers; (v) a conviction of, or the entering of a plea of nolo contendere by the Executive for any felony or any crime involving fraud or dishonesty, or (vi) a willful and knowing violation of any material federal or state banking law or regulation applicable to the Employer or the occurrence of any event described in Section 19 of the Federal Deposit Insurance Act or any other act or event as a result of which the Executive becomes unacceptable to, or is removed, suspended or prohibited from participating in the conduct of the Employer’s affairs by any regulatory authority having jurisdiction over the Employer; provided, however, that the Board has given the Executive advance notice of such termination for Cause, including the reasons therefor, together with a reasonable opportunity for the Executive to appear with counsel before the Board and to reply to such notice.

(d)           Termination Other than for Cause and Not in Connection with a Change in Control.  The Employer may terminate the Executive’s employment under this Agreement at any time upon 90 days written notice to the Executive for whatever reason it deems appropriate, or for no reason.  In the event such termination by the Employer occurs and is not due to death as provided in Section 4(a) above, disability as provided in Section 4(b) above or for Cause as provided in Section 4(c) above, the Employer shall (i) continue the Executive’s Base Salary, at the rate in effect at the time of such termination, through the end of the then current term of this Agreement, (ii) pay to the Executive for the year of termination and for each subsequent calendar year or portion thereof through the end of the then current term of this Agreement an amount (prorated in the case of any partial year) equal to the average of the bonuses paid to the Executive under the Bonus Plans for the three calendar years immediately preceding the year of termination, such payments to be made at the normal times for payment of bonuses under the Bonus Plans, and (iii) pay to the Executive the amount of any compensation previously deferred

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by the Executive, provided that the payment of any such deferred amount will be made in accordance with the provisions of the plan, program or arrangement of the Employer permitting the deferral.  All compensation continuation shall be subject to applicable federal and state withholding taxes and any postponement of payment that may be required pursuant to Section 15 below.  Any rights and benefits the Executive may have under employee benefit plans and programs of the Employer following a termination of the Executive’s employment by the Employer other than for Cause, including rights and benefits under retirement plans and programs, shall be determined in accordance with the terms of such plans and programs; provided that all stock options and restricted stock awards granted to the Executive and outstanding as of the date of termination (other than those under which vesting is performance-based or is dependent upon the satisfaction of conditions other than continued employment) shall become immediately and fully vested and the Executive shall have up to three years to exercise all such outstanding options following the date of termination but in no event beyond their specified term.  Notwithstanding the foregoing, no such accelerated vesting or change in exercise period shall be permitted if it would cause an option or restricted stock award that is not otherwise subject to Section 409A to become subject to Section 409A or if it would cause an option or restricted stock award that is subject to Section 409A to violate Section 409A.

In addition to the foregoing, in the event of a termination pursuant to this Section 4(d) and provided the Executive properly elects coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), the Employer shall reimburse the Executive for one hundred percent (100%) of all applicable premiums for continuation coverage for the Executive under the group health plan of the Employer in which the Executive was a participant at the time of the termination of his employment.  On a monthly basis following a termination pursuant to this Section 4(d), the Employer shall pay to Executive a cash payment that shall equal the premium costs that the Executive paid on an after-tax basis over the preceding month period for such COBRA coverage until the earlier of (w) the end of the term remaining under this Agreement at the time the Executive’s employment is terminated, (x) December 31 of the year the Executive attains age 65, (y) the date on which the Executive is eligible to participate in a group health plan of another employer as a full-time employee, or (z) the Executive’s death; provided, however that, as of the nineteenth month following a termination pursuant to this Section 4(d), the Executive shall not be entitled to further reimbursement for premium costs for such COBRA coverage.

In the event the Executive is eligible to be covered by the Postretirement Medical and Life Insurance Benefits Plan, or any successor or similar plan, of the Employer at the time of his termination pursuant to this Section 4(d), the Executive may elect, in lieu of electing COBRA continuation coverage under the provisions of the immediately preceding paragraph, to participate in such Postretirement Medical and Life Insurance Benefits Plan of the Employer. On a monthly basis following a termination pursuant to this Section 4(d), the Employer shall pay to the Executive a cash payment that shall equal the premium costs that the Executive paid on an after-tax basis over the month period for coverage under such Postretirement Medical and Life Insurance Benefits Plan, as adjusted to reflect the Employer’s subsidized cost-sharing arrangement, if any, that is otherwise provided to all similarly situated employees based on their years of service with the Employer until the earlier of (w) the end of the term remaining under this Agreement at the time the Executive’s employment is terminated, (x) December 31 of the year the Executive attains age 65, (y) the date on which the Executive is eligible to participate in

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a group health plan of another employer as a full-time employee, or (z) the Executive’s death; provided, however that, as of the nineteenth month following the Executive’s termination pursuant to this Section 4(d), the Executive shall not be entitled to further reimbursement for premium costs for coverage under such Postretirement Medical and Life Insurance Benefits Plan. After the 18th month following a termination pursuant to this Section 4(d), the Executive shall continue to be entitled to participate in the Postretirement Medical and Life Insurance Benefits Plan of the Employer and to receive the Employer’s subsidized cost-sharing arrangement, if any, that is otherwise provided to all similarly situated employees based on their years of service with the Employer.

In addition to the foregoing, in the event of a termination pursuant to this Section 4(d) the Employer shall reimburse the Executive for one hundred percent (100%) of all applicable premiums actually paid by the Executive for disability insurance and, if the Executive does not elect to participate in the Postretirement Medical and Life Insurance Benefits Plan of the Employer pursuant to the immediately preceding paragraph, life insurance policies following termination of employment not to exceed, in scope or benefit, any group disability or life insurance plan made available by the Employer to similarly situated employees in which the Executive was a participant at the time of his termination of employment.  On a monthly basis following a termination pursuant to this Section 4(d), the Employer shall pay to the Executive a cash payment that shall equal the premium costs that the Executive paid on an after-tax basis over the month period for coverage under such disability and, if applicable, life insurance policies until the earlier of (w) the end of the term remaining under this Agreement at the time the Executive’s employment is terminated, (x) December 31 of the year the Executive attains age 65, (y) the date on which the Executive is eligible to participate in a group disability and, if applicable, life insurance plan of another employer as a full-time employee, or (z) the Executive’s death; provided, however that, as of the nineteenth month following the Executive’s termination pursuant to this Section 4(d), the Executive shall not be entitled to further reimbursement for premium costs for coverage under such disability and, if applicable, life insurance policies.

In no event shall the amount of expenses eligible for reimbursement under this Section 4(d) for any calendar year affect the expenses eligible for reimbursement in another calendar year.  In no event shall any reimbursement made pursuant to the two immediately preceding paragraphs be made later than the last day of the calendar year following the year in which the Executive incurred the expenses being reimbursed.  Any reimbursement payments made pursuant to either of the two immediately preceding paragraphs shall be subject to any postponement of payment that may be required by Section 15.  In the event a termination by the Employer of the Executive’s employment under this Agreement occurs within 24 months following a Change in Control (as defined in Section 5(c)) and is not due to death as provided in Section 4(a) above, disability as provided in Section 4(b) above, or for Cause as provided in Section 4(c) above, then the Executive’s rights to compensation shall be governed by Section 5 and not this Section 4(d).

(e)           At the Executive’s Option with Good Reason.  The Executive may terminate his employment with Good Reason (as defined below) upon at least 60 days advance notice to Employer; provided that the termination will take effect at the end of the 60-day notice period unless the event or circumstance constituting Good Reason is cured by the Employer or

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unless the notice of termination with Good Reason is revoked by the Executive within such 60-day period.  In the event of such a voluntary termination of employment with Good Reason, the Employer shall (i) continue the Executive’s Base Salary, at the rate in effect at the time of such termination, through the end of the then current term of this Agreement, (ii) pay to the Executive for the year of termination and for each subsequent calendar year or portion thereof through the end of the then current term of this Agreement an amount (prorated in the case of any partial year) equal to the average of the bonuses paid to the Executive under the Bonus Plans for the three calendar years immediately preceding the year of termination, such payments to be made at the normal times for payment of bonuses under the Bonus Plans, and (iii) pay to the Executive the amount of any compensation previously deferred by the Executive, provided that the payment of any such deferred amount will be made in accordance with the provisions of the plan, program or arrangement of the Employer permitting the deferral.  All compensation continuation shall be subject to applicable federal and state withholding taxes and any postponement of payment that may be required pursuant to Section 15 below.  Any rights and benefits the Executive may have under employee benefit plans and programs of the Employer following a termination by the Executive of his employment for Good Reason, including rights and benefits under retirement plans and programs, shall be determined in accordance with the terms of such plans and programs; provided that all stock options and restricted stock awards granted to the Executive and outstanding as of the date of termination (other than those under which vesting is performance-based or is dependent upon the satisfaction of conditions other than continued employment) shall become immediately and fully vested and the Executive shall have up to three years to exercise all such outstanding options following the date of termination but in no event beyond their specified term.  Notwithstanding the foregoing, no such accelerated vesting or change in exercise period shall be permitted if it would cause an option or restricted stock award that is not otherwise subject to Section 409A to become subject to Section 409A or if it would cause an option or restricted stock award that is subject to Section 409A to violate Section 409A.

In addition to the foregoing, in the event of a termination pursuant to this Section 4(e) and provided the Executive properly elects coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), the Employer shall reimburse the Executive for one hundred percent (100%) of all applicable premiums for continuation coverage for the Executive under the group health plan of the Employer in which the Executive was a participant at the time of the termination of his employment.  On a monthly basis following a termination pursuant to this Section 4(e), the Employer shall pay to Executive a cash payment that shall equal the premium costs that the Executive paid on an after-tax basis over the preceding month period for such COBRA coverage until the earlier of (w) the end of the term remaining under this Agreement at the time the Executive’s employment is terminated, (x) December 31 of the year the Executive attains age 65, (y) the date on which the Executive is eligible to participate in a group health plan of another employer as a full-time employee, or (z) the Executive’s death; provided, however that, as of the nineteenth month following a termination pursuant to this Section 4(e), the Executive shall not be entitled to further reimbursement for premium costs for such COBRA coverage.

In the event the Executive is eligible to be covered by the Postretirement Medical and Life Insurance Benefits Plan, or any successor or similar plan, of the Employer at the time of his termination pursuant to this Section 4(e), the Executive may elect, in lieu of electing COBRA

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continuation coverage under the provisions of the immediately preceding paragraph, to participate in such Postretirement Medical and Life Insurance Benefits Plan of the Employer. On a monthly basis following a termination pursuant to this Section 4(e), the Employer shall pay to the Executive a cash payment that shall equal the premium costs that the Executive paid on an after-tax basis over the month period for coverage under such Postretirement Medical and Life Insurance Benefits Plan, as adjusted to reflect the Employer’s subsidized cost-sharing arrangement, if any, that is otherwise provided to all similarly situated employees based on their years of service with the Employer until the earlier of (w) the end of the term remaining under this Agreement at the time the Executive’s employment is terminated, (x) December 31 of the year the Executive attains age 65, (y) the date on which the Executive is eligible to participate in a group health plan of another employer as a full-time employee, or (z) the Executive’s death; provided, however that, as of the nineteenth month following the Executive’s termination pursuant to this Section 4(e), the Executive shall not be entitled to further reimbursement for premium costs for coverage under such Postretirement Medical and Life Insurance Benefits Plan. After the 18th month following a termination pursuant to this Section 4(e), the Executive shall continue to be entitled to participate in the Postretirement Medical and Life Insurance Benefits Plan of the Employer and to receive the Employer’s subsidized cost-sharing arrangement, if any, that is otherwise provided to all similarly situated employees based on their years of service with the Employer.

In addition to the foregoing, in the event of a termination pursuant to this Section 4(e) the Employer shall reimburse the Executive for one hundred percent (100%) of all applicable premiums actually paid by the Executive for disability insurance and, if the Executive does not elect to participate in the Postretirement Medical and Life Insurance Benefits Plan of the Employer pursuant to the immediately preceding paragraph, life insurance policies following termination of employment not to exceed, in scope or benefit, any group disability or life insurance plan made available by the Employer to similarly situated employees in which the Executive was a participant at the time of his termination of employment.  On a monthly basis following a termination pursuant to this Section 4(e), the Employer shall pay to the Executive a cash payment that shall equal the premium costs that the Executive paid on an after-tax basis over the month period for coverage under such disability and, if applicable, life insurance policies until the earlier of (w) the end of the term remaining under this Agreement at the time the Executive’s employment is terminated, (x) December 31 of the year the Executive attains age 65, (y) the date on which the Executive is eligible to participate in a group disability and, if applicable, life insurance plan of another employer as a full-time employee, or (z) the Executive’s death; provided, however that, as of the nineteenth month following the Executive’s termination pursuant to this Section 4(e), the Executive shall not be entitled to further reimbursement for premium costs for coverage under such disability and, if applicable, life insurance policies.

In no event shall the amount of expenses eligible for reimbursement under this Section 4(e) for any calendar year affect the expenses eligible for reimbursement in another calendar year.  In no event shall any reimbursement made pursuant to the two immediately preceding paragraphs be made later than the last day of the calendar year following the year in which the Executive incurred the expenses being reimbursed.  Any reimbursement payments made pursuant to either of the two immediately preceding paragraphs shall be subject to any postponement of payment that may be required by Section 15.

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For purposes of this Agreement, termination with Good Reason means a termination of the Executive’s employment by the Executive due to a failure of the Employer or any successor to fulfill its obligations under this Agreement in any material respect, including (a)any failure to elect or reelect or to appoint or reappoint the Executive to the office of President and Chief Executive Officer of each of FNB and the Bank or as a member of each of their boards of directors, or (b) any other material change by the Employer in the functions, duties or responsibilities of the Executive’s position as chief executive officer with the Employer that would reduce the ranking or level, dignity, responsibility, importance or scope of such position, or (c) any imposition on the Executive of a requirement to be permanently based at a location more than 50 miles from the principal office of the Employer as of the date of this Agreement without the consent of the Executive, or (d) any reduction without the consent of the Executive in the Executive’s annual salary below the Base Salary then provided for under Section 2(a).

In the event a termination by the Executive of his employment under this Agreement occurs within 24 months following a Change in Control (as defined in Section 5(c)) and such termination is for Good Reason, then the Executive’s rights to compensation shall be governed by Section 5 and not this Section 4(e).

(f)           At the Executive’s Option without Good Reason.  The Executive may terminate his employment without Good Reason at any time upon at least 60 days advance written notice to the Employer; provided, however, that the Employer, in its discretion, may cause such termination to be effective at any time during such notice period.  In the event of such a voluntary termination of employment without Good Reason, the Executive will be entitled to receive only any earned but unpaid Base Salary and the other benefits of this Agreement through the date on which the Executive's termination becomes effective.  Notwithstanding the foregoing, any rights and benefits the Executive may have under employee benefit plans and programs of the Employer following a voluntary termination of the Executive’s employment without Good Reason, including rights and benefits under retirement plans and programs, shall be determined in accordance with the terms of such plans and programs.

(g)           Retirement.  The Executive’s employment under this Agreement shall terminate upon the date of the Executive’s retirement, which date (hereinafter referred to as the “Retirement Date”) shall be the earlier to occur of (i) December 31 of the year in which the Executive attains age 65, and (ii) the date on which the Executive voluntarily terminates his employment upon satisfaction of the requirements for early retirement under the Employer’s retirement plans.  In the event of the Executive’s retirement, (i) the Executive shall be entitled to receive all earned but unpaid Base Salary through the Retirement Date; (ii) the Employer shall pay to the Executive, at the same time as bonus payments for the year in which the Retirement Date occurs would otherwise be made under the Stakeholders Plan, subject to any postponement of such payment that may be required by Section 15, a prorated bonus for such year equal to the amount of the bonus the Executive would have received if he had been employed throughout such year; prorated on a daily basis as of the Retirement Date; (iii) all stock options and restricted stock awards granted to the Executive and outstanding as of the date the Retirement Date (other than those under which vesting is performance-based or is dependent upon the satisfaction of conditions other than continued employment) shall become immediately and fully vested; and (iv) the Executive shall receive such retirement and other benefits as he is entitled to receive under, and in accordance with, the terms of the Employer’s retirement and other benefit plans.  Notwithstanding the foregoing, no such accelerated vesting provided for in clause (iii)

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above shall be permitted if it would cause an option or restricted stock award that is not otherwise subject to Section 409A to become subject to Section 409A or if it would cause an option or restricted stock award that is subject to Section 409A to violate Section 409A.

5.           Termination Following a Change in Control.

(a)           Change in Control Cash Benefits.  If the Executive’s employment is terminated by the Employer other than for Cause or by the Executive with Good Reason within 24 months following a Change in Control, then the Executive shall be entitled to receive an aggregate amount in cash equal to 2.99 multiplied by the Executive’s average annual cash compensation for the five fiscal years immediately preceding the Change in Control.  Such amount shall be payable on the date that is six months after termination of employment.

(b)           Benefit Plans.  In addition to the benefit set forth in Section 5(a), in the event of a termination pursuant to Section 5(a) and provided the Executive properly elects coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), the Employer shall reimburse the Executive for one hundred percent (100%) of all applicable premiums for continuation coverage for the Executive under the group health plan of the Employer in which the Executive was a participant at the time of the termination of his employment.  On a monthly basis following a termination pursuant to Section 5(a), the Employer shall pay to Executive a cash payment that shall equal the premium costs that the Executive paid on an after-tax basis over the preceding month period for such COBRA coverage until the earlier of (w) the end of the term remaining under this Agreement at the time the Executive’s employment is terminated, (x) December 31 of the year the Executive attains age 65, (y) the date on which the Executive is eligible to participate in a group health plan of another employer as a full-time employee, or (z) the Executive’s death; provided, however that, as of the nineteenth month following a termination pursuant to Section 5(a), the Executive shall not be entitled to further reimbursement for premium costs for such COBRA coverage.

In the event the Executive is eligible to be covered by the Postretirement Medical and Life Insurance Benefits Plan, or any successor or similar plan, of the Employer at the time of his termination pursuant to Section 5(a), the Executive may elect, in lieu of electing COBRA continuation coverage under the provisions of the immediately preceding paragraph, to participate in such Postretirement Medical and Life Insurance Benefits Plan of the Employer. On a monthly basis following a termination pursuant to Section 5(a), the Employer shall pay to the Executive a cash payment that shall equal the premium costs that the Executive paid on an after-tax basis over the month period for coverage under such Postretirement Medical and Life Insurance Benefits Plan, as adjusted to reflect the Employer’s subsidized cost-sharing arrangement, if any, that is otherwise provided to all similarly situated employees based on their years of service with the Employer until the earlier of (w) the end of the term remaining under this Agreement at the time the Executive’s employment is terminated, (x) December 31 of the year the Executive attains age 65, (y) the date on which the Executive is eligible to participate in a group health plan of another employer as a full-time employee, or (z) the Executive’s death; provided, however that, as of the nineteenth month following the Executive’s termination pursuant to Section 5(a), the Executive shall not be entitled to further reimbursement for premium costs for coverage under such Postretirement Medical and Life Insurance Benefits Plan. After the 18th month following a termination pursuant to Section 5(a), the Executive shall

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continue to be entitled to participate in the Postretirement Medical and Life Insurance Benefits Plan of the Employer and to receive the Employer’s subsidized cost-sharing arrangement, if any, that is otherwise provided to all similarly situated employees based on their years of service with the Employer.

In addition to the foregoing, in the event of a termination pursuant to Section 5(a) the Employer shall reimburse the Executive for one hundred percent (100%) of all applicable premiums actually paid by the Executive for disability insurance and, if the Executive does not elect to participate in the Postretirement Medical and Life Insurance Benefits Plan of the Employer pursuant to the immediately preceding paragraph, life insurance policies following termination of employment not to exceed, in scope or benefit, any group disability or life insurance plan made available by the Employer to similarly situated employees in which the Executive was a participant at the time of his termination of employment.  On a monthly basis following a termination pursuant to Section 5(a), the Employer shall pay to the Executive a cash payment that shall equal the premium costs that the Executive paid on an after-tax basis over the month period for coverage under such disability and, if applicable, life insurance policies until the earlier of (w) the end of the term remaining under this Agreement at the time the Executive’s employment is terminated, (x) December 31 of the year the Executive attains age 65, (y) the date on which the Executive is eligible to participate in a group disability and, if applicable, life insurance plan of another employer as a full-time employee, or (z) the Executive’s death; provided, however that, as of the nineteenth month following the Executive’s termination pursuant to Section 5(a), the Executive shall not be entitled to further reimbursement for premium costs for coverage under such disability and, if applicable, life insurance policies.

In no event shall the amount of expenses eligible for reimbursement under this Section 5(b) for any calendar year affect the expenses eligible for reimbursement in another calendar year.  In no event shall any reimbursement made pursuant to the two immediately preceding paragraphs be made later than the last day of the calendar year following the year in which the Executive incurred the expenses being reimbursed.  Any reimbursement payments made pursuant to either of the two immediately preceding paragraphs shall be subject to any postponement of payment that may be required by Section 15.

The Employer shall also cause the Executive to become fully vested in any qualified and nonqualified plans, programs or arrangements in which the Executive participated if the plan, program or arrangement does not address the effect of a Change in Control; provided, that (x) such vesting does not cause any such plan, program or arrangement that is not otherwise subject to Section 409A to become subject to Section 409A and (y) such vesting does not cause any such plan, program or arrangement that is subject to Section 409A to violate Section 409A.  Subject to the foregoing, any rights and benefits the Executive may have under the employee benefit plans and programs of the Employer following a termination of the Executive’s employment by the Employer other than for Cause or by the Executive with Good Reason shall be determined in accordance with the terms of such plans and programs.

(c)           Definition of Change in Control.  For the purposes of this Agreement, the term “Change of Control” shall mean a change in control as defined in Section 409A, including –

(i)           Change in ownership: a change in ownership of the Bank occurs on the date any one person, or more than one person acting as a group, acquires ownership of

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stock of FNB or the Bank, that together with stock of FNB or the Bank held by such person or group, constitutes more than 50% of the total fair market value or total voting power of stock of FNB or the Bank,

(ii)           Change in effective control: (x) any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock possessing 30% or more of the total voting power of the stock of FNB or the Bank, or (y) a majority of the board of directors of FNB is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the board of directors of FNB before the date of the appointment or election; provided, however, for purposes of this Section 5(c)(ii), the terms FNB or the Bank shall refer to the relevant corporation identified in Treasury Regulation 1.409A-3(i)(5)(ii) for which no other corporation is a majority shareholder for purposes of that regulation, or

(iii)           Change in ownership of a substantial portion of assets: a change in ownership of a substantial portion of the assets of the Bank or FNB occurs on the date that any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets of FNB or the Bank having a total gross fair market value equal to or exceeding 40% of the total gross fair market value of all of the assets of FNB or the Bank, as applicable, immediately before the acquisition or acquisitions.  For this purpose, gross fair market value means the value of the assets of FNB or the Bank, as applicable, or the value of the assets being disposed of, determined without regard to any liabilities associated with the assets.

(d)           No Multiple Severance Payments.  If the Executive receives payment under this Section 5, he shall not be entitled to any severance benefits under Section 4.

(e)           No Solicitation of Change in Control.  The Executive will not solicit, counsel or encourage any third party to offer, propose or pursue, or to solicit, counsel or encourage another third party to offer, propose or pursue, any acquisition, merger or other change in control of FNB or the Bank without the prior authorization of the Board of Directors of the Bank or FNB as reflected in the minutes of a regular or special meeting, or in a written consent action, of the Board of Directors of the Bank or FNB.  Any violation of this Section 5(e) occurring in connection with an offer, proposal or pursuit by a third party to engage in an acquisition, merger or other change in control of FNB or the Bank shall be deemed to constitute a forfeiture by the Executive of all of his rights under Sections 5(a) and 5(b) hereof.

(f)           Gross-Up for Taxes.

(i)           If the Executive receives the cash payment under Section 5(a) and acceleration of benefits under any benefit, compensation, or incentive plan or arrangement with the Employer (collectively, the “Total Benefits”), and if any part of the Total Benefits is subject to excise taxes (the “Excise Tax”) under section 280G and section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), the Employer shall pay to the Executive at the time specified in subsection (iii) below an additional amount (the “Gross-Up Payment”) such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Benefits

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and any U.S federal, state, and for local income or payroll tax upon the Gross-Up Payment, but before deduction for any U.S. federal, state and local income or payroll tax on the Total Benefits, shall be equal to the Total Benefits.  For purposes of calculating the Gross-Up Payment, the Executive shall be deemed to pay income taxes at the highest applicable marginal rate of federal, state or local income taxation for the calendar year in which the Gross-Up Payment is to be made.

(ii)           Subject to any determination made by the Internal Revenue Service (the “IRS”), all determinations as to whether a Gross-Up Payment is required and the amount of Gross-Up Payment and the assumptions to be used in arriving at the determination shall be made by the Employer’s independent certified public accountants or tax counsel selected by such accountants or both (the “Accountants”) in accordance with the principles of section 280G of the Code.  All fees and expenses of the Accountants will be borne by the Employer.  Subject to any determinations made by the IRS, determinations of the Accountants under this Agreement with respect to (x) the initial amount of any Gross-Up Payment and (y) any subsequent adjustment of such payment shall be binding on the Employer and the Executive.

(iii)           The Gross-Up Payment calculated pursuant to Section 5(f)(ii) shall be paid no later than the 30th day following an event occurring that subjects the Executive to the Excise Tax; provided, however, that if the amount of such Gross-Up Payment or portion thereof cannot be reasonably determined on or before such day, the Employer shall pay to the Executive the amount of the Gross-Up Payment no later than 10 days following the determination of the Gross-Up Payment by the Accountants.  Notwithstanding the foregoing, the Gross-Up Payment shall be paid to or for the benefit of the Executive no later than 15 business days prior to the date by which the Executive is required to pay the Excise Tax or any portion of the Gross-Up Payment to any federal, state or local taxing authority, without regard to extensions and shall be subject to any delay required by Section 15.

(iv)           In the event that the Excise Tax is subsequently determined by the Accountants to be less than the amount taken into account hereunder at the time the Gross-Up Payment is made, the Executive shall repay to the Employer, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the prior Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and U.S. federal, state and local income tax imposed on the portion of the Gross-Up Payment being repaid by the Executive if such repayment results in a reduction in Excise Tax or a U.S. federal, state and local income tax deduction), plus interest on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of the Code.  Notwithstanding the foregoing, in the event any portion of the Gross-Up Payment to be refunded to the Employer has been paid to any U.S. federal, state and local tax authority, repayment thereof (and related amounts) shall not be required until actual refund or credit of such portion has been made to the Executive and interest payable to the Employer shall not exceed the interest received or credited to the Executive by such tax authority for the period it held such portion.  The Executive and the Employer shall cooperate in good faith in determining the course of action to be pursued (and the method of allocating the expense thereof) if the Executive’s claim for refund or credit is denied.  However, if agreement cannot be reached, the Employer shall decide the appropriate course of action to pursue provided that the action does not adversely affect any issues the Executive may have with respect to his tax return, other than the Excise Tax.

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(v)           In the event that the Excise Tax is later determined by the Accountants or the IRS to exceed the amount taken into account hereunder at the time the Gross-Up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Employer shall make an additional Gross-Up Payment to or for the benefit of the Executive in respect of such excess (plus any interest or penalties payable with respect to such excess) at the time that the amount of such excess is finally determined; provided, that such payment shall be made no later than the end of Executive’s taxable year next following the Executive’s taxable year in which the Executive remits the related taxes to any federal, state or local taxing authority.

(vi)           In the event of any controversy with the IRS (or other taxing authority) with regard to the Excise Tax, the Executive shall permit the Employer to control issues related to the Excise Tax (at its expense), provided that such issues do not potentially materially adversely affect the Executive.  In the event issues are interrelated, the Executive and the Employer shall in good faith cooperate so as not to jeopardize resolution of either or any issue.  In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, the Executive shall permit the representative of the Employer to accompany the Executive, and the Executive and the Executive’s representative shall cooperate with the Employer and its representative.

(vii)           The Employer shall be responsible for all charges of the Accountant.  Any amounts paid pursuant to this Section 5(f)(vii) shall be made no later than the last day of the calendar year following the year in which the expenses were incurred.  In no event shall the amount of expenses eligible for payment by the Company under this Section 5(f)(vii) for any calendar year affect the expenses eligible for payment in another calendar year, and in no event may the right to payments under this paragraph be liquidated or exchanged for any other right or benefit.

(viii)           The Employer and the Executive shall promptly deliver to each other copies of any written communications, and summaries of any oral communications, with any taxing authority regarding the Excise Tax.

6.           Covenant Not to Compete.   For a period commencing on the date hereof and continuing until (i) one year after the date of expiration of the Employment Term or the date that any termination of Executive’s employment under this Agreement becomes effective or (ii) the last day of the period after the date that any termination of the Executive’s employment under this Agreement becomes effective in which the Executive is entitled to receive any Base Salary pursuant to Section 4 hereof, whichever is later, the Executive will not, without the written consent of FNB or the Bank, directly or indirectly:

(a)           own any interest in, manage, operate, control, be employed by, render consulting or advisory services to, or participate in or be connected with the management or control of any business that is then engaged, or proposing to engage, in the operation of a bank, savings bank, credit union, mortgage company, savings and loan association or similar financial institution that conducts any of its operations within the counties in North Carolina in which the Employer or any affiliate conducts operations as of the Effective Date and within any other counties in North Carolina or in any other states added during the Employment Term by the

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Employer’s, or any affiliate’s, conducting operations therein; provided, however, that the Executive may, without violating this Agreement, own as a passive investment not in excess of three percent (3%) of the outstanding capital stock of any such business whose stock is publicly traded or quoted on the NASDAQ over-the-counter market, the New York Stock Exchange, the American Stock Exchange, the National Daily Quotation System “Pink Sheets” or the OTC Bulletin Board;

(b)           influence or attempt to influence any customer of the Employer or any affiliate to discontinue its use of the Employer’s (or such affiliate’s) services or to divert such business to any other person, firm or corporation;

(c)           interfere with, disrupt or attempt to disrupt the relationship, contractual or otherwise, between the Employer or any affiliate and any of its respective customers, suppliers, principals, distributors, lessors or licensors; and

(d)           solicit any officer or executive of the Employer or any affiliate, whose base annual salary at the time of the Executive’s termination was $20,000 or more, to work for any other person, firm or corporation.

It is expressly agreed that the provisions and covenants in this Section 6 shall not apply and shall be of no force or effect in the event that (i) the Employer fails to honor its obligations under this Agreement after termination of the Executive’s employment, or (ii) the Executive’s employment hereunder is terminated within 24 months after a Change in Control either by the Employer other than for Cause or by the Executive with Good Reason.

In the event the Executive breaches any of the provisions contained herein and the Employer seeks compliance with such provisions by judicial proceedings, the time period during which the Executive is restricted by such provisions shall be extended by the time during which the Executive has actually competed with the Employer or been in violation of any such provision and any period of litigation required to enforce the Executive’s obligations under this Agreement.

The Executive and the Employer intend that Section 6 of this Agreement be enforced as written.  However, if one or more of the provisions contained in Section 6 shall for any reason be held to be unenforceable because of the duration or scope of such provision or the area covered thereby, the Executive and the Employer agree that the court making such determination shall have the full power to reform, by “blue penciling” or any other means, the duration, scope and/or area of such provision and in its reformed form such provision shall then be enforceable and shall be binding on the parties.

7.           Covenant Not to Disclose Confidential Information.   The Executive hereby acknowledges and agrees that (i) in the course of his service as an executive of the Employer, he has and will gain substantial knowledge of and familiarity with the Employer’s customers and its dealings with them, and other information concerning the business of the Employer, all of which constitute valuable assets and privileged information that is particularly sensitive due to the fiduciary responsibilities inherent in the Employer’s business; and (ii) to protect the interest in and to assure the benefit of the business of the Employer, it is reasonable and necessary to place

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certain restrictions on the Executive’s ability to disclose information about the business and customers of the Employer.  For that purpose, and in consideration of the agreements contained herein, the Executive covenants and agrees that any and all data, figures, projections, estimates, lists, files, records, documents, manuals or other such materials or information (financial or otherwise) relating to the Employer and its business, regulatory examinations, financial results and condition, lending and deposit operations, customers (including lists of the customers and information regarding their accounts and business dealings with the Employer), policies and procedures, computer systems and software, shareholders, executives, officers and directors (herein referred to as “Confidential Information”) are proprietary to the Employer and are valuable, special and unique assets of the business to which the Executive will have access during his employment hereunder.  The Executive shall consider, treat and maintain all Confidential Information as the confidential, private and privileged records and information of the Employer.  Further, at all times during the term of his employment and following the termination of his employment under this Agreement for any reason, and except as shall be required in the course of the performance by the Executive of his duties on behalf of the Employer or otherwise pursuant to the direct, written authorization of the Employer, the Executive will not divulge any Confidential Information to any other person, firm, corporation, employer, bank or similar financial institution, remove any such Confidential Information in written or other recorded form from the Employer’s premises, or make any use of the Confidential Information for his own purposes or for the benefit of any person, firm, corporation, employer, bank or similar financial institution other than the Employer.  However, following the termination of the Executive’s employment with the Employer, this Section 7 shall not apply to any Confidential Information which then is in the public domain (provided that the Executive was not responsible, directly or indirectly, for permitting such Confidential Information to enter the public domain without the Employer’s consent), or which is obtained by the Executive from a third party which or who is not obligated under an agreement of confidentiality with respect to such information.

8.           Acknowledgements.

(a)           Reasonableness.  The Executive hereby acknowledges that the enforcement of Sections 6 and 7 of this Agreement is necessary to ensure the preservation, protection and continuity of the business, trade secrets and goodwill of the Employer, and that the restrictions set forth in Sections 6 and 7 of this Agreement are reasonable as to time, scope and territory and in all other respects.

(b)           Survival of Obligations.  The Executive understands that his obligations under Sections 6 and 7 of this Agreement will continue whether or not his employment with the Employer is terminated voluntarily or involuntarily, or whether for Cause, or other than for Cause, with Good Reason or without Good Reason or not.  The existence of any claim or cause of action by the Executive against the Employer shall not constitute and shall not be asserted as a defense to the enforcement by the Employer of this Agreement.

(c)           Remedies.  The Executive acknowledges that in the event of any breach of the provisions of Sections 6 and 7 hereof by the Executive, the Employer’s remedies at law would be inadequate, and the Employer shall be entitled to an injunction (without any bond or other security being required), restraining such breach, and costs and attorneys' fees relating to

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any such proceeding or any other legal action to enforce the provisions of this Agreement, but nothing herein shall be construed to preclude the Employer from pursuing any other remedies at law or in equity available to it for any such breach.

9.           Assignment and Binding Effect.   This Agreement shall be binding upon, and shall inure to the benefit of, the Executive and the Employer and, as permitted by this Agreement, their respective successors and assigns.  This Agreement is personal to the Executive and, without the prior written consent of the Employer, neither this Agreement nor any right or interest hereunder shall be assignable by the Executive other than by will or the laws of descent and distribution, and any attempt, voluntary or involuntary, to effect any such prohibited assignment (including, without limitation, by transfer, charge, pledge, hypothecation or sale) shall be null, void and of no effect.  The Employer will require any successor (whether direct or indirect, by purchase, merger, consolidation, share exchange or otherwise) to all or substantially all of the business or assets or both of the Employer to assume expressly in writing and agree to perform this Agreement in the same manner and to the same extent that the Employer would be required to perform it if no such succession had taken place.  As used in this Agreement, “the Employer” shall mean the Employer as defined in the preamble and any successor to the business or assets or both of FNB or the Bank as stated above that assumes and agrees to perform this Agreement by operation of law or otherwise.

10.           Complete Agreement.   This Agreement replaces any previous agreement relating to the same or similar subject matter which the Executive and the Employer may have entered into with respect to the Executive's employment by the Employer, including specifically the Agreement entered into between the Executive and the Employer dated January 1, 2006.  The Executive has no oral representations, understandings or agreements with the Employer or any of its officers, directors or representatives covering the same subject matter as this Agreement. This written Agreement is the final, complete and exclusive statement and expression of the Employment Agreement between the Employer and the Executive and of all the terms of this Agreement, and it cannot be varied, contradicted or supplemented by evidence of any prior or contemporaneous oral or written agreements. Except as set forth in Section 15, this written Agreement may not be later modified except by a further writing signed by a duly authorized officer of the Employer and the Executive, and no term of this Agreement may be waived except by writing signed by the party waiving the benefit of such term.

11.           Full Settlement; No Duty to Mitigate.   The Employer’s obligation to make any payment provided for in this Agreement and otherwise to perform its obligations hereunder shall be in lieu and in full settlement of all other severance payments to the Executive under any other severance plan, arrangement or agreement of the Employer and its affiliates, and in full settlement of any and all claims or rights of the Executive for severance, separation or salary continuation payments resulting from the termination of his employment.  In no event shall the Executive be obligated to seek other employment or to take other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and except as specifically provided herein, such amounts shall not be reduced whether or not the Executive obtains other employment.

12.           Payment of Legal Fees.   In the event of any litigation or other proceeding between the Employer and the Executive with respect to the subject matter of this Agreement

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and the enforcement of rights hereunder, the Employer shall reimburse the Executive for his reasonable costs and expenses relating to such litigation or other proceeding, including reasonable attorneys’ fees and expenses, provided that such litigation or other proceeding results in any: (i) settlement requiring the Employer to make a payment, continue to make payments or provide any other benefits to the Executive, or (ii) judgment, order or award against the Employer in favor of the Executive or his spouse, legal representative or heirs, unless such judgment, order or award is subsequently reversed on appeal or in a collateral proceeding.  At the request of the Executive, costs and expenses (including reasonable attorneys’ fees) of up to $100,000 incurred in connection with any litigation or other proceeding referred to in this Section shall be paid by the Employer in advance of the final disposition of the litigation or other proceeding referred to in this Section shall be paid by the Employer in advance of the final disposition of the litigation or other proceeding upon receipt of an undertaking by or on behalf of the Executive to repay the amounts advanced if it is ultimately determined that he is not entitled to reimbursement of such costs and expenses by the Employer as set forth in this Section.

13.           Source of Payment.   All payments provided for under this Agreement shall be paid in cash from the general funds of the Employer.  The Employer shall not be required to establish a special or separate fund or other segregation of assets to assure such payments, and, if the Employer shall make any investments to aid it in meeting its obligations hereunder, the Executive shall have no right, title or interest whatever in or to any such investments except as may otherwise be expressly provided in a separate written instrument relating to such investments.  Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship, between the Employer and the Executive or any other person.  To the extent that any person acquires a right to receive payments from the Employer hereunder, such right shall be no greater than the right of an unsecured creditor.

14.           Consultation with Counsel and Interpretation of this Agreement.   The Executive acknowledges and agrees that he has had the assistance of counsel of his choosing in the negotiation of this Agreement, or he has chosen not to have the assistance of his own counsel.  Both parties hereto having participated in the negotiation and drafting of this Agreement, they hereby agree that there shall not be strict interpretation against either party in connection with any review of this Agreement in which interpretation thereof is an issue.

15.           Code § 409A.   It is the intent of the parties that this Agreement and all payments made hereunder shall be in compliance with the requirements of section 409A of the Code and the regulations promulgated thereunder.  If any provision of this Agreement shall not be in compliance with section 409A of the Code and the regulations thereunder, then such provision shall be deemed automatically amended without further action on the part of the Employer or the Executive to the minimum extent necessary to cause such provision to be in compliance and such provision will thereafter be given effect as so amended.  If postponing payment of any amounts or benefits due under this Agreement is necessary for compliance with the requirements of section 409A of the Code and the regulations thereunder to avoid adverse tax consequences to the Executive, then payment of such amounts shall be postponed to comply with section 409A.  Any and all payments that are postponed under this Section 15 shall be paid to the Executive in a lump sum at the earliest time that does not result in adverse tax consequences to the Executive under section 409A.

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16.           Notices.   All notices hereunder shall be (i) delivered by hand, (ii) sent by first-class certified mail, postage prepaid, return receipt requested, (iii) delivered by overnight commercial courier, or (iv) transmitted by telecopy or facsimile machine, to the following address of the party to whom such notice is to be made, or to such other address as such party may designate in the same manner provided herein:

If to the Employer:

FNB United Corp.

Attention:  Compensation Committee

101 Sunset Avenue

Asheboro, North Carolina 27203

With copy to:

Schell Bray Aycock Abel & Livingston PLLC

Attention: Melanie S. Tuttle

230 North Elm Street

1500 Renaissance Plaza

Greensboro, North Carolina 27420

If to the Executive, to his last address as shown on the personnel records of the Employer.

17.           Headings.  The section headings herein are for reference purposes only and are not intended in any way to describe, interpret, define or limit the extent or intent of the Agreement or of any part hereof.

18.           Governing Law.  This Agreement shall in all respects be construed according to the internal laws of the State of North Carolina, without giving effect to any conflict of laws provision or rule.  By entering into this Agreement, the Executive acknowledges that he is subject to the jurisdiction of both the federal and state courts in the State of North Carolina.  Any actions or proceedings instituted under this Agreement shall be brought and tried solely in courts located in Randolph County, North Carolina or in the federal court having jurisdiction in Asheboro, North Carolina.  The Executive expressly waives his rights to have any such actions or proceedings brought or tried elsewhere.

19.           Severability.  In case any one or more of the provisions contained in this Agreement for any reason shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement and each such other provision shall to the full extent consistent with law continue in full force and effect.

20.           Counterparts.  This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument.

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21.           Compliance with Requirements of Troubled Assets Relief Program. Notwithstanding anything herein to the contrary, in the event that the Employer is a participant in the Troubled Assets Relief Program (“TARP”), including, without limitation, the Capital Purchase Program, established under the Emergency Economic Stabilization Act of 2008, then during such time as the United States Department of the Treasury (“Treasury”) holds an equity or debt position in the Employer, the terms of this Agreement shall be deemed automatically amended without further action on the part of the Employer or the Executive to comply with any applicable executive compensation requirements of TARP, including, without limitation, (i) requiring the Executive to relinquish to the Employer any bonus or incentive compensation paid that is based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate; and (ii) if necessary, reducing any compensation of the Executive so as not to receive any excess “golden parachute” payments (based on the applicable Code provision). The Executive shall waive any claims he may have against the Employer or Treasury as a result of any amendments to this Agreement required by TARP.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written.

FNB UNITED CORP.
By	/s/ Thomas A. Jordan
	Thomas A. Jordan
	Chair, Compensation Committee
	of the Board of Directors
COMMUNITYONE BANK, NATIONAL
ASSOCIATION
By	/s/ Thomas A. Jordan
	Thomas A. Jordan
	of the Board of Directors
EXECUTIVE:
/s/ Michael C. Miller
Michael C. Miller

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EX-10.32

EXHIBIT 10.32

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into as of the 31st day of December, 2008, by and between CommunityONE Bank, National Association, a national banking corporation formerly known as First National Bank and Trust Company with its principal office and place of business located in Asheboro, North Carolina (the “Bank”), and R. Larry Campbell (the “Employee”).

W I T N E S S E T H:

WHEREAS, the Employee is currently employed by the Bank pursuant to the terms of an employment agreement between the Employee and the Bank dated as of April 10, 2000, as amended by the first amendment thereto dated as of June 30, 2006 (the “Prior Agreement”); and

WHEREAS, the parties desire to amend and restate the Prior Agreement to bring the Prior Agreement into compliance with Section 409A of the Internal Revenue Code of 1986, as amended from time to time (including corresponding provisions of succeeding law) (the “Code”), the regulations promulgated thereunder, and other guidance issued thereunder by the Department of the Treasury and/or the Internal Revenue Service (“Section 409A”), to extend the term of the Employee’s employment with the Bank, and to induce the Employee to continue employment with the Bank by providing for the payment of compensation to the Employee upon the Employee’s termination following a change in control of the Bank or its parent, FNB United Corp., a North Carolina corporation and registered bank holding company (“FNB”); and

WHEREAS; the parties intend that this Agreement shall supersede the Prior Agreement in its entirety, and that from and after the effective date of this Agreement, the Prior Agreement shall be of no further force and effect; and

WHEREAS, none of the conditions or events included in the definition of the term “golden parachute payment” that is set forth in Section 18(k)(4)(A)(ii) of the Federal Deposit Insurance Act [12 U.S.C. 1828(k)(4)(A)(ii) and in Federal Deposit Insurance Corporation Rule 359.1(f)(1)(ii)[12 CFR 359.1(f)(1)(ii) exists or, to the best knowledge of the Bank, is contemplated insofar as the Bank or any of its affiliates are concerned;

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in consideration of the premises and the mutual covenants and obligations herein contained, the parties hereto agree as follows:

1.           Employment.  The Bank hereby employs the Employee, and the Employee hereby accepts employment with the Bank, for the term set forth in Section 2 below, in the position and with the duties and responsibilities set forth in Section 3 below, and upon the other terms and conditions hereinafter stated.

2.           Term.  The term of this Agreement shall commence as of the date hereof and shall continue until December 31, 2010 (the “Term”).

3.           Position and Responsibilities.  The Employee shall serve as an Executive Vice President of the Bank, or in such other appropriate position and with such duties as the Bank may in the future designate.  In such capacity, the Employee shall at all times report to, and his activities shall at all times be subject to the direction and control of, the principal executive officer of the Bank or his designee.  The Employee shall devote substantially all of his business time, attention and services to discharge faithfully and diligently his duties and responsibilities under this Agreement and to use his best efforts for both the successful operation of the Bank’s business and the successful implementation of the policies established by the Bank or FNB.

4.           Compensation and Benefits.  During the term of this Agreement, the Bank shall provide to the Employee the following compensation and benefits:

(a)           Salary.  In consideration of the services to be rendered by the Employee to the Bank and the Employee’s covenants hereunder, the Bank shall pay to the Employee a base salary at the rate of $180,000 per annum (such salary as it may be increased from time to time being hereinafter referred to as the “Base Salary”).  The Employee shall receive from the Bank a formal review of Employee’s performance at least as frequently as annually, and Employee may be considered for merit increases to his Base Salary in accordance with the Bank’s policies and practices for employee compensation as established or modified from time to time.  Except as may otherwise be agreed, the Base Salary shall be payable in accordance with the Bank’s policies and practices for employee compensation as established or modified from time to time; provided that the Base Salary shall be payable not less frequently than monthly.  Salary payments shall be subject to all applicable federal and state withholding, payroll and other taxes.

(b)           Group Benefit Plans and Programs.  The Employee will be entitled to participate, in accordance with the provisions thereof, in any group health, disability and life insurance, and any bonus, pension, retirement and other employee benefit plans and programs made available by the Bank or FNB to their employees generally.   Without limiting the generality of the foregoing, the Employee shall be entitled to participate, in accordance with the provisions thereof, in the Bank’s or FNB’s arrangement for performance compensation for stakeholders (or any successor plan) and the FNB United/CommunityONE Executive Short-Term Incentive Plan (hereinafter together referred to as the “Stakeholders Plan”).

(c)           Supplemental Plans.  The Bank assumed the obligations of Richmond Savings Bank, Inc., SSB  (“Richmond Savings”) with respect to that Employee Income Plan Deferred Compensation Agreement and Split Dollar Agreement each dated January 1, 1987 and subsequently amended January 1, 1992 (collectively, the “Supplemental Plans”) and shall continue the Supplemental Plans in effect in accordance with the terms thereof; provided, however, that nothing herein shall prohibit the Bank from terminating either or both Supplemental Plans upon the Employee’s voluntary termination of employment (other than Employee’s termination in connection with a Change in Control pursuant to Section 5(f)(ii)) or upon a termination for Cause (as defined below).

(d)           Club Dues.  The Bank shall pay or reimburse the Employee for the monthly dues and assessments necessary for Employee to maintain the status of an active member of the Beacon Country Club or such other clubs as are reasonably necessary to the

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conduct of the Bank’s business and as the principal executive of the Bank may from time to time approve.

(e)           Vacation.  The Employee shall be entitled to such vacation and other leave as may be provided by the Bank or FNB to their employees in similar positions generally; provided, however, that, to the extent that the amount of vacation and other leave to which the Employee is entitled is related to the Employee’s years of service to the Bank or FNB, the Employee shall be given credit for each year of service as an employee of Richmond Savings.

(f)           Automobile.  The Bank shall provide the Employee with a suitable vehicle for his exclusive use in the discharge of his duties hereunder and shall pay all operating and service expenses, including automobile insurance, related to such vehicle.  Any personal use of such vehicle by the Employee will be appropriately accounted for and reported as additional compensation.

(g)           Business Expenses.  The Bank shall reimburse the Employee for any reasonable out-of-pocket business and travel expenses incurred by the Employee in the ordinary course of performing his duties for the Bank upon presentation by the Employee, from time to time, of appropriate documentation therefor and in accordance with the Bank’s policies and practices as established or modified from time to time.

(h)           Convention Attendance.  The Bank shall pay all registration, travel, accommodation and meal expenses for the Employee and his spouse to attend the annual convention of the North Carolina Bankers Association each year.

5.           Termination.  The Employee’s term of employment under this Agreement may be terminated before the end of the Term as set forth in this Section 5.  Notwithstanding anything contained herein to the contrary, the Employee’s employment with the Bank shall not be considered to have terminated for purposes of the Employee’s receiving any compensation or other benefits otherwise provided under this Agreement unless (i) he would be considered to have incurred a “separation from service” within the meaning of Section 409A from the Bankand any other entity that, along with the Bank, would be considered a “service recipient” within the meaning of Section 409A or (ii) the payment of such compensation or such other benefits would not be subject to Section 409A.

(a)           Death.  In the event of the death of the Employee during his employment under this Agreement, this Agreement shall be terminated as of the date of death.  In such event, the Bank shall pay the Employee’s Base Salary, at the rate in effect at the time of his death and through the last day of the calendar month in which such death occurs, to the Employee’s designated beneficiary, or, in the absence of such designation, to the estate or other legal representative of the Employee.  Any rights and benefits the Employee’s estate or any other person may have under employee benefit plans and programs of the Bank, or any benefit plans or agreements of Richmond Savings or its parent, Carolina Fincorp, Inc. (“Carolina”), that were assumed by the Bank or FNB in connection with FNB’s acquisition of Carolina, in the event of the Employee’s death shall be determined in accordance with the terms of such plans and programs.

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(b)           Long-Term Disability.  If the Employee suffers any disability while employed under this Agreement that prevents him from performing his duties under this Agreement for a period of 90 consecutive days, then, unless otherwise then agreed in writing by the parties hereto, the employment of the Employee under this Agreement shall, at the election of the Bank, be terminated effective as of the ninetieth day of such period.  Upon termination of the Employee’s employment by reason of disability under this Section 5(b), the Employee shall be entitled to receive his Base Salary, at the rate in effect on the date of such termination, less any disability insurance payments paid to the Employee on a policy maintained for the benefit of the Employee by the Bank or FNB, through the end of the then current term of this Agreement.  Such salary continuation shall be subject to all applicable federal and state withholding taxes and any postponement of payment that may be required pursuant to Section 20 below.  Any rights and benefits the Employee may have under employee benefit plans and programs of the Bank, or any benefit plans or agreements of Richmond Savings or Carolina that were assumed by the Bank or FNB in connection with FNB’s acquisition of Carolina, in the event of the Employee’s disability, including rights and benefits under retirement plans and programs, shall be determined in accordance with the terms of such plans and programs.

For purposes of this Agreement, “disability” shall mean the inability, by reason of bodily injury or physical or mental disease, or any combination thereof, of the Employee to perform his customary or other comparable duties with the Bank.  In the event that the Employee and the Bank are unable to agree as to whether the Employee is suffering a disability, the Employee and the Bank shall each select a physician and the two physicians so chosen shall make the determination or, if they are unable to agree, they shall select a third physician, and the determination as to whether the Employee is suffering a disability shall be based upon the determination of a majority of the three physicians.  The Bank shall pay the reasonable fees and expenses of all physicians selected pursuant to this Section 5(b).

(c)           Termination for Cause.  Nothing herein shall prevent the Bank from terminating the Employee’s employment at any time for Cause (as hereinafter defined).  Upon termination for Cause, the Employee shall receive his Base Salary only through the date that such termination becomes effective.  Neither the Employee nor any other person shall be entitled to any further payments from the Bank, for salary or any other amounts.  Notwithstanding the foregoing, any rights and benefits the Employee may have under employee benefit plans and programs of the Bank, or any benefit plans or agreements of Richmond Savings or Carolina that were assumed by the Bank or FNB in connection with FNB’s acquisition of Carolina, following a termination of the Employee’s employment for Cause shall be determined in accordance with the terms of such plans, agreements and programs.

For purposes of this Agreement, termination for Cause shall mean termination by the Bank of the Employee’s employment as a result of (i) an intentional, willful and continued failure by the Employee to perform his duties in the capacities indicated above (other than due to disability); (ii) an intentional, willful and material breach by the Employee of his fiduciary duties of loyalty and care to the Bank; (iii) an intentional, willful and knowing violation by the Employee of any provision of this Agreement; (iv) a conviction of, or the entering of a plea of nolo contendere by the Employee for any felony or any crime involving fraud or dishonesty, or (v) a willful and knowing violation of any material federal or state banking law or regulation applicable to the Bank or the occurrence of any event described in Section 19 of the Federal

4

Deposit Insurance Act or any other act or event as a result of which the Employee becomes unacceptable to, or is removed, suspended or prohibited from participating in the conduct of the Bank’s affairs by any regulatory authority having jurisdiction over the Bank or FNB.

(d)           Termination Other Than For Cause and Not in Connection with a Change in Control.  The Bank may terminate the Employee’s employment under this Agreement at any time upon 90 days written notice to the Employee for whatever reason it deems appropriate, or for no reason.  In the event such termination by the Bank occurs and is not (i) due to death as provided in Section 5(a) above, (ii) due to disability as provided in Section 5(b) above, (iii) for Cause as provided in Section 5(c) above, or (iv) in connection with or within 24 months after a Change in Control as provided in Section 5(f), the Bank shall continue the Employee’s Base Salary, at the rate in effect at the time of such termination through the end of the Term of this Agreement.  In addition, the Bank shall pay to the Employee for the year of termination and for each subsequent calendar year or portion thereof through the end of the Term of this Agreement an amount (prorated in the case of any partial year) equal to the average bonuses paid to the Employee under the Stakeholders Plan for the three calendar years immediately preceding the year of termination, such payments to be made at the normal times for payment of bonuses under the Stakeholders Plan.  All compensation continuation shall be subject to all applicable federal and state withholding taxes and any postponement of payment that may be required pursuant to Section 20 below.  Any rights and benefits the Employee may have under employee benefit plans and programs of the Bank or FNB, or under any benefit plans or agreements of Richmond Savings or Carolina that were assumed by the Bank or FNB in connection with FNB’s acquisition of Carolina, following a termination of the Employee’s employment pursuant to this Section 5(d), including rights and benefits under retirement plans and programs, shall be determined in accordance with the terms of such plans, agreements and programs.

In addition to the foregoing, in the event of a termination pursuant to this Section 5(d) and provided the Employee properly elects coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), the Bank shall reimburse the Employee for one hundred percent (100%) of all applicable premiums for continuation coverage for the Employee under the group health plan of the Bank in which the Employee was a participant at the time of the termination of his employment.  On a monthly basis following a termination pursuant to this Section 5(d), the Bank shall pay to Employee a cash payment that shall equal the premium costs that the Employee paid on an after-tax basis over the preceding month period for such COBRA coverage until the earlier of (x) the end of the term remaining under this Agreement at the time the Employee’s employment is terminated, (y) the date on which the Employee is eligible to participate in a group health plan of another employer as a full-time employee, or (z) the Employee’s death; provided, however that, as of the nineteenth month following a termination pursuant to this Section 5(d), the Employee shall not be entitled to further reimbursement for premium costs for such COBRA coverage.

In the event the Employee is eligible to be covered by the Postretirement Medical and Life Insurance Benefits Plan, or any successor or similar plan, of the Bank at the time of his termination pursuant to this Section 5(d), the Employee may elect, in lieu of electing COBRA continuation coverage under the provisions of the immediately preceding paragraph, to participate in such Postretirement Medical and Life Insurance Benefits Plan of the Bank. On a monthly basis following a termination pursuant to this Section 5(d), the Bank shall pay to the

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Employee a cash payment that shall equal the premium costs that the Employee paid on an after-tax basis over the month period for coverage under such Postretirement Medical and Life Insurance Benefits Plan, as adjusted to reflect the Bank’s subsidized cost-sharing arrangement, if any, that is otherwise provided to all similarly situated employees based on their years of service with the Bank until the earlier of (x) the end of the term remaining under this Agreement at the time the Employee’s employment is terminated, (y) the date on which the Employee is eligible to participate in a group health plan of another employer as a full-time employee, or (z) the Employee’s death; provided, however that, as of the nineteenth month following the Employee’s termination pursuant to this Section 5(d), the Employee shall not be entitled to further reimbursement for premium costs for coverage under such Postretirement Medical and Life Insurance Benefits Plan. After the 18th month following a termination pursuant to this Section 5(d), the Employee shall continue to be entitled to participate in the Postretirement Medical and Life Insurance Benefits Plan of the Bank and to receive the Bank’s subsidized cost-sharing arrangement, if any, that is otherwise provided to all similarly situated employees based on their years of service with the Bank.

In addition to the foregoing, in the event of a termination pursuant to this Section 5(d) the Bank shall reimburse the Employee for one hundred percent (100%) of all applicable premiums actually paid by the Employee for disability insurance and, if the Employee does not elect to participate in the Postretirement Medical and Life Insurance Benefits Plan of the Bank pursuant to the immediately preceding paragraph, life insurance policies following termination of employment not to exceed, in scope or benefit, any group disability or life insurance plan made available by the Bank to similarly situated employees in which the Employee was a participant at the time of his termination of employment.  On a monthly basis following a termination pursuant to this Section 5(d), the Bank shall pay to the Employee a cash payment that shall equal the premium costs that the Employee paid on an after-tax basis over the month period for coverage under such disability and, if applicable, life insurance policies until the earlier of (x) the end of the term remaining under this Agreement at the time the Employee’s employment is terminated, (y) the date on which the Employee is eligible to participate in a group disability and, if applicable, life insurance plan of another Bank as a full-time employee, or (z) the Employee’s death; provided, however that, as of the nineteenth month following the Employee’s termination pursuant to this Section 5(d), the Employee shall not be entitled to further reimbursement for premium costs for coverage under such disability and, if applicable, life insurance policies.

In no event shall the amount of expenses eligible for reimbursement under this Section 5(d) for any calendar year affect the expenses eligible for reimbursement in another calendar year.  In no event shall any reimbursement made pursuant to the two immediately preceding paragraphs be made later than the last day of the calendar year following the year in which the Employee incurred the expenses being reimbursed.  Any reimbursement payments made pursuant to either of the two immediately preceding paragraphs shall be subject to any postponement of payment that may be required by Section 20.  In the event a termination by the Bank of the Employee’s employment under this Agreement occurs within 24 months following a Change in Control (as defined in Section 5(f)(iv)) and is not due to death as provided in Section 5(a) above, disability as provided in Section 5(b) above, or for Cause as provided in Section 5(c) above, then the Employee’s rights to compensation shall be governed by Section 5(f).

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(e)           At the Employee’s Option.  The Employee may terminate his employment at any time upon at least 60 days advance written notice to the Bank; provided, however, that the Bank, in its discretion, may cause such termination to be effective at any time during such notice period.  Except as provided pursuant to Section 5(f) below, in the event of such a voluntary termination of employment, the Employee will be entitled to receive only any earned but unpaid Base Salary and the other benefits of this Agreement through the date on which the Employee's termination becomes effective.  Notwithstanding the foregoing, any rights and benefits the Employee may have under employee benefit plans and programs of the Bank, or any benefit plans or agreements of Richmond Savings or Carolina that were assumed by the Bank or FNB in connection with FNB’s acquisition of Carolina, following a voluntary termination of the Employee’s employment pursuant to this Section 5(e), including rights and benefits under retirement plans and programs, shall be determined in accordance with the terms of such plans, agreements and programs.

(f)           Termination in Connection with a Change of Control.

(i)           In the event of a termination of the Employee's employment by the Bank in connection with, or within twenty-four (24) months after, a "Change of Control" (as defined in Section 5(f)(iv) below) of FNB or the Bank, for reasons other than for Cause (as defined in Section 5(c)), death or disability (as defined in Section 5(b)), the Employee shall be entitled to receive the sum and benefits set forth in Section 5(f)(iii) below.  The termination of the Employee’s employment by the Bank shall be deemed a Termination Event for purposes of Section 5(f)(iii) below.

(ii)           The Employee shall have the right to resign his employment with the Bank and terminate this Agreement upon the occurrence of any of the following events (the "Termination Events") within twenty-four (24) months following a Change of Control of FNB or the Bank:

(1) The Employee is assigned any duties and/or responsibilities that constitute a material diminution of the Employee’s authority, duties or responsibilities at the time of the Change of Control;

(2) The Employee's annual Base Salary rate is reduced below the annual amount in effect as of the effective date of a Change of Control or as the same shall have been increased from time to time following such effective date;

(3) The Employee's life insurance, medical or hospitalization insurance, disability insurance, stock option plans, stock purchase plans, deferred compensation plans, management retention plans, retirement plans, or similar plans or benefits being provided by the Bank to the Employee as of the effective date of the Change of Control are reduced in their level, scope, or coverage, or any such insurance, plans, or benefits are eliminated, unless such reduction

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or elimination applies proportionately to all salaried employees of the Bank who participated in such benefits prior to such Change of Control;

(4) The Employee is required to transfer performance of his day-to-day services required hereunder to a location which is more than fifty (50) miles from the Employee's current principal work location, without the Employee's express written consent; or

(5) The Bank shall have committed a material breach of this Agreement.

A Termination Event shall be deemed to have occurred on the date such action or event is implemented or takes effect.

(iii)            In the event that the Employee resigns his employment and terminates this Agreement pursuant to Section 5(f)(ii) above or his employment is terminated by the Bank pursuant to Section 5(f)(i) above, the Bank will be obligated: (A) to pay or cause to be paid to the Employee an amount equal to two times the Employee’s total cash compensation, including salary and bonus, paid during the calendar year ended immediately prior to the Change of Control or the Termination Event, whichever is higher, and (B) to provide to the Employee the benefits set forth in the second, third and fourth paragraphs of Section 5(d) above.  The Bank shall also cause the Employee to become fully vested in any qualified and nonqualified plans, programs or arrangements in which the Employee participated if the plan, program or arrangement does not address the effect of a Change of Control; provided, that (x) such vesting does not cause any such plan, program or arrangement that is not otherwise subject to Section 409A to become subject to Section 409A and (y) such vesting does not cause any such plan, program or arrangement that is subject to Section 409A to violate Section 409A.  Subject to the foregoing, any rights and benefits the Employee may have under employee benefit plans and programs of the Bank or FNB, or under any benefit plans or agreements of Richmond Savings or Carolina that were assumed by the Bank or FNB in connection with FNB’s acquisition of Carolina, following a termination of the Employee’s employment other than by the Bank for Cause, including rights and benefits under retirement plans and programs, shall be determined in accordance with the terms of such plans, agreements and programs.

(iv)           For the purposes of this Agreement, the term “Change of Control” shall mean a change in control as defined in Section 409A, including –

(1) Change in ownership: a change in ownership of the Bank occurs on the date any one person, or more than one person acting as a group, acquires ownership of stock of FNB or the Bank, that together with stock of FNB or the Bank held by such person or group, constitutes more than 50% of the total fair market value or total voting power of stock of FNB or the Bank,

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(2) Change in effective control: (x) any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock possessing 30% or more of the total voting power of the stock of FNB or the Bank, or (y) a majority of the board of directors of FNB is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the board of directors of FNB before the date of the appointment or election; provided, however, for purposes of this Section 5(f)(iv)(2), the terms FNB or the Bank shall refer to the relevant corporation identified in Treasury Regulation 1.409A-3(i)(5)(ii) for which no other corporation is a majority shareholder for purposes of that regulation, or

(3) Change in ownership of a substantial portion of assets: a change in ownership of a substantial portion of the assets of the Bank or FNB occurs on the date that any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets of FNB or the Bank having a total gross fair market value equal to or exceeding 40% of the total gross fair market value of all of the assets of FNB or the Bank, as applicable, immediately before the acquisition or acquisitions.  For this purpose, gross fair market value means the value of the assets of FNB or the Bank, as applicable, or the value of the assets being disposed of, determined without regard to any liabilities associated with the assets.

(v)           Except to the extent otherwise provided in Section 20, amounts payable pursuant to this Section 5(f) shall be paid in one lump sum within five business days following the date of the termination of the Employee’s employment.

(vi)           Following a Termination Event that gives rise to the Employee's rights hereunder, the Employee shall have six months from the date of occurrence of the Termination Event to resign his employment, upon 60 days prior written notice to the Bank, and terminate this Agreement pursuant to this Section 5(f)(ii); provided, however that no such resignation and termination of employment shall give rise to any rights under this Section 5(f)(ii) unless the effective date of the resignation and termination is on or before the second anniversary of the date of the Change in Control.  Any such termination shall be deemed to have occurred only upon delivery to FNB or the Bank, or any successors thereto, of written notice of termination, which describes the Change of Control and Termination Event. If the Employee does not so resign his employment and terminate this Agreement within such six-month period, the Employee shall thereafter have no further rights hereunder with respect to that Termination Event, but shall retain rights, if any, hereunder with respect to any other Termination Event as to which

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the 24-month period following the Change of Control has not expired; provided, however that no such resignation and termination of employment shall give rise to any rights under this Section 5(f)(ii) unless the effective date of the resignation and termination is on or before the second anniversary of the date of the Change in Control.

(vii)           It is the intent of the parties hereto that all payments made pursuant to this Agreement be deductible by FNB or the Bank for federal income tax purposes and not result in the imposition of an excise tax on the Employee. Notwithstanding anything contained in this Agreement to the contrary, any payments to be made to or for the benefit of the Employee that are deemed to be "parachute payments" as that term is defined in Section 280G(b)(2) of the Code shall be modified or reduced to the extent deemed to be necessary by the Bank's Board of Directors to avoid the imposition of an excise tax on the Employee under Section 4999 of the Code or the disallowance of a deduction to the Bank under Section 280G(a) of the Code.

6.           No Solicitation of Change in Control.  The Employee will not solicit, counsel or encourage any acquisition, merger or other change in control of FNB or the Bank without the prior written approval of the Board of Directors of the Bank or FNB.  A violation of this Section 6 shall be deemed to constitute a forfeiture by the Employee of all of his rights under Section 5(f) hereof.

7.           Noncompetition Covenant; Nonsolicitation.  For purposes of this Section 7 and the following Sections 8 through 12, “Bank” shall mean the Bank, FNB and/or any of its subsidiaries.

(a)           For a period commencing on the date hereof and continuing until (i) one (1) year after the date of expiration of the term hereof or the date that any termination of the Employee’s employment under this Agreement becomes effective or (ii) the last day of the period after the date that any termination of the Employee’s employment under this Agreement becomes effective in which the Employee is entitled to receive any Base Salary pursuant to Section 5 hereof, whichever is later, the Employee will not, directly or indirectly:

(i)           own any interest in, manage, operate, control, be employed by, render consulting or advisory services to, or participate in or be connected with the management or control of any business that is then engaged in the operation of a bank, savings bank, credit union, mortgage company, savings and loan association or similar financial institution that conducts any of its operations within 60 miles of Rockingham, North Carolina; provided, however, that the Employee may, without violating this Agreement, own as a passive investment not in excess of two percent (2%) of the outstanding capital stock of any such business whose stock is publicly traded or quoted on the NASDAQ over-the-counter market, the New York Stock Exchange, the American Stock Exchange, the National Daily Quotation System “Pink Sheets” or the OTC Bulletin Board;

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(ii)           influence or attempt to influence any customer of the Bank to discontinue its use of the Bank’s services or to divert such business to any other person, firm or corporation;

(iii)           interfere with, disrupt or attempt to disrupt the relationship, contractual or otherwise, between the Bank and any of its respective customers, suppliers, principals, distributors, lessors or licensors; and

(iv)           solicit any officer or employee of the Bank, whose base annual salary at the time of the Employee’s termination was $20,000 or more, to work for any other person, firm or corporation.

(b)           It is expressly agreed that the provisions and covenants in this Section 7 shall not apply and shall be of no force or effect in the event that the Bank fails to honor its obligations hereunder.

(c)           The Employee and the Bank intend that Section 7 of this Agreement be enforced as written.  However, if one or more of the provisions contained in Section 7 shall for any reason be held to be unenforceable because of the duration or scope of such provision or the area covered thereby, the Employee and the Bank agree that the court making such determination shall have the power to reform the duration, scope and/or area of such provision and in its reformed form such provision shall then be enforceable and shall be binding on the parties.

8.           Confidentiality.  The Employee hereby acknowledges and agrees that (i) in the course of his service as an employee of the Bank, he will gain substantial knowledge of and familiarity with the Bank’s customers and its dealings with them, and other information concerning the business of the Bank, all of which constitute valuable assets and privileged information that is particularly sensitive due to the fiduciary responsibilities inherent in the banking business; and (ii) to protect the interest in and to assure the benefit of the business of the Bank, it is reasonable and necessary to place certain restrictions on the Employee’s ability to disclose information about the business and customers of the Bank.  For that purpose, and in consideration of the agreements contained herein, the Employee covenants and agrees that any and all data, figures, projections, estimates, lists, files, records, documents, manuals or other such materials or information (financial or otherwise) relating to the Bank and its business, regulatory examinations, financial results and condition, lending and deposit operations, customers (including lists of the customers and information regarding their accounts and business dealings with the Bank), policies and procedures, computer systems and software, shareholders, employees, officers and directors (herein referred to as “Confidential Information”) are proprietary to the Bank and are valuable, special and unique assets of the business to which the Employee will have access during his employment hereunder.  The Employee shall consider, treat and maintain all Confidential Information as the confidential, private and privileged records and information of the Bank.  Further, at all times during the term of his employment and following the termination of his employment under this Agreement for any reason, and except as shall be required in the course of the performance by the Employee of his duties on behalf of the Bank or otherwise pursuant to the direct, written authorization of the Bank, the Employee will not divulge any Confidential Information to any other person, firm, corporation, bank, savings and loan association or similar financial institution, remove any such Confidential Information in

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written or other recorded form from the Bank’s premises, or make any use of the Confidential Information for his own purposes or for the benefit of any person, firm, corporation, bank, savings and loan association or similar financial institution other than the Bank.  However, following the termination of the Employee’s employment with the Bank, this Section 8 shall not apply to any Confidential Information which then is in the public domain (provided that the Employee was not responsible, directly or indirectly, for permitting such Confidential Information to enter the public domain without the Bank’s consent), or which is obtained by the Employee from a third party which or who is not obligated under an agreement of confidentiality with respect to such information.

9.           Remedies Upon Breach.  Each party agrees that any breach of this Agreement by either party could cause irreparable damage to the other party and that in the event of such breach the other party shall have, in addition to any and all remedies of law, the right to an injunction, specific performance or other equitable relief to prevent the violation of the obligations of the breaching party hereunder, without the necessity of posting a bond, plus the recovery of any and all costs and expenses incurred by the enforcing party, including reasonable attorneys’ fees in connection with the enforcement of this Agreement, provided that the enforcing party shall have been successful on the merits or otherwise in any proceeding related to the enforcement thereof.

10.           Acknowledgments.  The Employee hereby acknowledges that the enforcement of Sections 7 and 8 of this Agreement is necessary to ensure the preservation, protection and continuity of the business, trade secrets and goodwill of the Bank, and that the restrictions set forth in Sections 7 and 8 of this Agreement are reasonable as to time, scope and territory and in all other respects.

11.           Tolling Period.  In the event the Employee breaches any of the provisions contained herein and the Bank seeks compliance with such provisions by judicial proceedings, the time period during which the Employee is restricted by such provisions shall be extended by the time during which the Employee has actually competed with the Bank or been in violation of any such provision and any period of litigation required to enforce the Employee’s obligations under this Agreement.

12.           Termination of Previous Employment Agreement.  The Employee specifically agrees that the Employment Agreement dated November 22, 1996, as the same may have been amended, by and between the Employee and Richmond Savings was terminated by the Prior Agreement and is of no further force or effect, and the Employee has waived in the Prior Agreement any and all of his rights, and released the Bank and Richmond Savings from any and all obligations, under such agreement.

13.           Severability.  In case any one or more of the provisions contained in this Agreement  for any reason shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement but this Agreement shall be construed as if such invalid, illegal or unenforceable provisions had never been contained herein.

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14.           Consent and Waiver by Third Parties.  The Employee hereby represents and warrants that his employment with the Bank on the terms and conditions set forth herein and his execution and performance of this Agreement do not constitute a breach or violation of any other agreement, obligation or understanding with any third party.  The Employee represents that he is not bound by any agreement or any other existing or previous business relationship which conflicts with, or may conflict with, the performance of his obligations hereunder or prevents the full performance of his duties and obligations hereunder.

15.           Waivers and Modifications.  This Agreement may be modified, and the rights and remedies of any provision hereof may be waived, only in accordance with this Section 15. No waiver by either party of any breach by the other or any provision hereof shall be deemed to be a waiver of any later or other breach thereof or as a waiver of any other provision of this Agreement.  This Agreement sets forth all of the terms of the understandings between the parties with reference to the subject matter set forth herein and may not be waived, changed, discharged or terminated orally or by any course of dealing between the parties, but only by an instrument in writing signed by the party against whom any waiver, change, discharge or termination is sought.

16.           Assignment.  The Employee acknowledges that the services to be rendered by him are unique and personal.  Accordingly, the Employee may not assign any of his rights or delegate any of his duties or obligations under this Agreement.  The Bank shall have the right to assign this Agreement to FNB or any of its subsidiaries or to its successors under law, and the rights and obligations of the Bank under this Agreement shall inure to the benefit of, and shall be binding upon, the successors and permitted assigns of the Bank.

17.           Notices.  All notices hereunder shall be (i) delivered by hand, (ii) sent by first-class certified mail, postage prepaid, return receipt requested, (iii) delivered by overnight commercial courier, or (iv) transmitted by telecopy or facsimile machine, to the following address of the party to whom such notice is to be made, or to such other address as such party may designate in the same manner provided herein:

If to the Bank:

CommunityONE Bank, National Association

Attention:  Mr. Michael C. Miller, President

101 Sunset Avenue

Asheboro, North Carolina 27203

With copy to:

Schell Bray Aycock Abel & Livingston PLLC

Attention: Melanie S. Tuttle

230 North Elm Street

1500 Renaissance Plaza

Greensboro, North Carolina 27420

If to the Employee, to his last address as shown on the personnel records of the Bank.

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18.           Survival of Obligations.  The Employee’s obligations under Sections 7 through 12 of this Agreement shall survive the termination of his employment with the Bank regardless of the manner of such termination and shall be binding upon his heirs, executors and administrators.  The existence of any claim or cause of action by Employee against the Bank or FNB shall not constitute and shall not be asserted as a defense to the enforcement by the Bank of this Agreement.

19.           Governing Law.  This Agreement shall be governed by and construed in accordance with the internal laws of the State of North Carolina.

20.           Code § 409A.  To the extent any payments under this Agreement are subject to Section 409A, it is the intent of the parties that this Agreement and all such payments shall be made in compliance with the requirements of Section 409A of the Code and the regulations promulgated thereunder.  If any provision of this Agreement shall not be in compliance with Section 409A and the regulations thereunder and payment pursuant to such provision is not otherwise exempt from Section 409A, then such provision shall be deemed automatically amended without further action on the part of the Bank or the Employee to the minimum extent necessary to cause such provision to be in compliance with Section 409A and such provision will thereafter be given effect as so amended.  Notwithstanding anything herein to the contrary, if postponing payment of any amounts due under this Agreement is necessary for compliance with the requirements of Section 409A of the Code and the regulations thereunder to avoid adverse tax consequences to the Employee, then payment of such amounts shall be postponed to comply with Section 409A.  Any and all payments that are postponed under this Section 20 shall be paid to the Employee in a lump sum at the earliest time that does not result in adverse tax consequences to the Employee under Section 409A.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

CommunityONE Bank, National Association
By	/s/ Michael C. Miller
	Michael C. Miller, President
/s/ R. Larry Campbell
R. Larry Campbell

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EX-10.34

EXHIBIT 10.34

AMENDMENT TO EXECUTIVE INCOME DEFERRED COMPENSATION AGREEMENT

           THIS AMENDMENT TO EXECUTIVE INCOME DEFERRED COMPENSATIONAGREEMENT (this “Amendment”), made and entered into as of the 31st day of December, 2008, by and between CommunityONE Bank, National Association, a national banking corporation formerly known as First National Bank and Trust Company (the “Bank”), and Robert Larry Campbell (“Executive”), amends the Executive Income Deferred Compensation Agreement dated as of January 1, 1987, by and between Richmond Federal Savings & Loan Association (the predecessor to the Bank) and Executive, as amended by the amendment dated January 1, 1992 (the “Executive Income Agreement”).

WHEREAS, the parties desire to amend the Executive Income Agreement to bring it into compliance with Section 409A of the Internal Revenue Code of 1986, as amended from time to time (including corresponding provisions of succeeding law) (the “Code”), and the regulations promulgated thereunder (“Section 409A”);

NOW, THEREFORE, in consideration of the mutual promises of the parties and other good and valuable consideration, and intending to be legally bound hereby, the parties hereby agree as follows:

1.           Amendment of Executive Income Agreement. The Executive Income Agreement is hereby amended as follows:

(a)           The following is added before the period at the end of the last sentence of Section 1.01:  “, provided that such agreement does not cause a violation under Section 409A of the Internal Revenue Code of 1986, as amended from time to time (including corresponding provisions of succeeding law) (the “Code”), and the regulations promulgated thereunder (“Section 409A”).”

(b)           Section 1.02 is amended by replacing the reference to “Section 5.02” with “Section 4.04” and by adding the following sentence immediately after the first sentence of Section 1.02:

“Each subsequent monthly payment after the first payment date shall be made on the same date of the month as the first payment date, subject to any delay that may be required by Section 12.05.”

(c)           Section 4.04 is amended as follows:

(i) By deleting the second and third sentences of the first paragraph in their entirety.

(ii) By deleting the second paragraph in its entirety and replacing it with the following:

“The first payment date shall be the latter of (i) the Executive’s sixty-fifth (65th) birthday or (ii) subject to any delay that may be required by Section 12.05, the first day of the month following the month in which the Executive has incurred a “separation from service” within the meaning of Section 409A from the Corporationand any other entity that, along with the Corporation, would be considered a “service recipient” within the meaning of Section 409A.”

(d)           The last sentence of Section 5.02(c) is deleted in its entirety.

(e)           The following new Section 12.05 is added to the Executive Income Agreement:

“12.05  Code § 409A.  To the extent any payments under this Agreement are subject to Section 409A, it is the intent of the parties that this Agreement and all such payments shall be made in compliance with the requirements of Section 409A of the Code and the regulations promulgated thereunder.  If any provision of this Agreement shall not be in compliance with Section 409A and the regulations thereunder and payment pursuant to such provision is not otherwise exempt from Section 409A, then such provision shall be deemed automatically amended without further action on the part of the Corporation or the Executive to the minimum extent necessary to cause such provision to be in compliance with Section 409A and such provision will thereafter be given effect as so amended.  Notwithstanding anything herein to the contrary, if postponing payment of any amounts due under this Agreement is necessary for compliance with the requirements of Section 409A of the Code and the regulations thereunder to avoid adverse tax consequences to the Executive, then payment of such amounts shall be postponed to comply with Section 409A.  Any and all payments that are postponed under this Section 12.05 shall be paid to the Executive in a lump sum at the earliest time that does not result in adverse tax consequences to the Executive under Section 409A.”

2.           Entire Agreement.  The Executive Income Agreement as amended hereby forms the entire agreement between the parties hereto with respect to the subject matter contained in the Executive Income Agreement as amended hereby.  The Executive has no oral representations, understandings or agreements with the Bank or any of its officers, directors or representatives covering the same subject matter as the Executive Income Agreement as amended hereby.

3.           Effect of Amendment.  Except as amended by this Amendment, the Executive Income Agreement shall remain in full force and effect and enforceable in accordance with its terms as amended hereby.

[Signature page follows]

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IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written.

COMMUNITYONE BANK,
NATIONAL ASSOCIATION
By	/s/ Michael C. Miller
	Michael C. Miller
	Chairman and President
	/s/ Robert Larry Campbell	(SEAL)
	Robert Larry Campbell

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EX-10.35

EXHIBIT 10.35

AMENDED AND RESTATED CHANGE OF CONTROL AGREEMENT

THIS AMENDED AND RESTATED CHANGE OF CONTROL AGREEMENT (this "Agreement") is entered into as of the 31st day of December, 2008, by and among FNB United Corp., a North Carolina corporation and a registered bank holding company (the "Corporation"), CommunityONE Bank, National Association, a national banking association and a wholly owned subsidiary of the Corporation (the "Bank") (hereinafter the Corporation and the Bank, or their successors, are collectively referred to as the "Company"), and R. Mark Hensley (the "Officer"), an individual residing in Randolph County, North Carolina, and amends and restates and supersedes in its entirety the Amended and Restated Change of Control Agreement dated as of April 7, 2006 by and among the Corporation, the Bank and the Officer.

WHEREAS, the Officer has heretofore been employed by the Company with the title(s) of Executive Vice President and Chief Banking Officer; and

WHEREAS, the services of the Officer, the Officer's experience and knowledge of the affairs of the Company and reputation and contacts in the industry are extremely valuable to the Company; and

WHEREAS, the Company wishes to attract and retain such well-qualified executives and it is in the best interest of the Company and of the Officer to secure the continued services of the Officer notwithstanding any change of control of the Corporation or the Bank; and

WHEREAS, the Company considers the establishment and maintenance of a sound and vital management team to be part of their overall corporate strategy and to be essential to protecting and enhancing the best interests of the Company and its shareholders; and

WHEREAS, the parties desire to enter into this Agreement to provide the Officer with security in the event of a change of control of the Corporation or the Bank to ensure the continued loyalty of the Officer during any change of control in order to maximize shareholder value as well as the continued safe and sound operation of the Company; and

WHEREAS, the Officer and the Company acknowledge and agree that the Officer’s employment with the Company is and will continue to be on an at-will basis and that this Agreement is not an employment agreement but is limited to circumstances giving rise to a change of control of the Corporation or the Bank as set forth herein.

NOW, THEREFORE, for and in consideration of the premises and mutual promises, covenants, and conditions hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereby agree as follows:

1.           Term.  The initial term of this Agreement shall be for the period commencing upon the effective date of this Agreement and ending three calendar years from the effective date of this Agreement.  On each anniversary date of this Agreement, the term automatically shall be extended for an additional one-year period so that the term shall again be three years unless either the Company or the Officer notifies the other of its decision not to continue such annual renewal by written notice given not less than 90 days prior to such anniversary date.

2.           Change of Control.

(a)           In the event of a termination of the Officer's employment by the Company in connection with, or within twenty-four (24) months after, a "Change of Control" (as defined in subparagraph (f) below) of the Corporation or the Bank, for reasons other than for "cause" (as defined in subparagraph (b) below), death or “disability” (as defined in subparagraph (c) below), the Officer shall be entitled to receive the sum set forth and defined in subparagraph (e) below.   The termination of the Officer’s employment by the Company shall be deemed a Termination Event for purposes of subparagraph (e) below.

(b)           For purposes of this Agreement, termination for “cause” shall mean termination by reason of (i) an intentional, willful and continued failure by the Officer to perform his duties as an employee of the Company (other than due to disability); (ii) an intentional, willful and material breach by the Officer of his fiduciary duties of loyalty and care to the Company; (iii) a conviction of, or the entering of a plea of nolo contendere by the Officer for any felony or any crime involving fraud or dishonesty, or (iv) a willful and knowing violation of any material federal or state law or regulation applicable to the Corporation or the Bank or the occurrence of any act or event as a result of which the Officer becomes unacceptable to, or is removed, suspended or prohibited from participating in the conduct of the Company’s affairs by any regulatory authority having jurisdiction over the Corporation or the Bank.

(c)           For purposes of this Agreement, “disability” shall mean the inability, by reason of bodily injury or physical or mental disease, or any combination thereof, of the Officer to perform his customary or other comparable duties with the Company for a period of 90 consecutive days.  In the event that the Officer and the Company are unable to agree as to whether the Officer is suffering a disability, the Officer and the Company shall each select a physician and the two physicians so chosen shall make the determination or, if they are unable to agree, they shall select a third physician, and the determination as to whether the Officer is suffering a disability shall be based upon the determination of a majority of the three physicians.  The Company

2

shall pay the reasonable fees and expenses of all physicians selected pursuant to this subparagraph (c).

(d)           The Officer shall have the right to resign his employment with the Company and terminate this Agreement upon the occurrence of any of the following events (the "Termination Events") within twenty-four (24) months following a Change of Control of the Corporation or the Bank:

(i)           The Officer is assigned any duties and/or responsibilities that constitute a material diminution of the Officer’s authority, duties or responsibilities at the time of the Change of Control;

(ii)           The Officer's annual base salary rate is reduced below the annual amount in effect as of the effective date of a Change of Control or as the same shall have been increased from time to time following such effective date;

(iii)           The Officer's life insurance, medical or hospitalization insurance, disability insurance, stock option plans, stock purchase plans, deferred compensation plans, management retention plans, retirement plans, or similar plans or benefits being provided by the Company to the Officer as of the effective date of the Change of Control are reduced in their level, scope, or coverage, or any such insurance, plans, or benefits are eliminated, unless such reduction or elimination applies proportionately to all salaried employees of the Company who participated in such benefits prior to such Change of Control; or

(iv)           The Officer is required to transfer performance of his day-to-day services required hereunder to a location which is more than fifty (50) miles from the Officer's current principal work location, without the Officer's express written consent.

A Termination Event shall be deemed to have occurred on the date such action or event is implemented or takes effect.

(e)           In the event that the Officer resigns his employment and terminates this Agreement pursuant to subparagraph (d) above, the Company will be obligated to pay or cause to be paid to the Officer an amount equal to two times the Officer’s total cash compensation, including salary and bonus, paid during the calendar year ended immediately prior to the Change of Control or the Termination Event, whichever is higher.

(f)           For the purposes of this Agreement, the term “Change of Control” shall mean a change of control as defined in Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and rules, regulations and guidance of general application thereunder issued by the Department of the Treasury, including --

3

(i)           Change in ownership:  a change in ownership of the Bank occurs on the date any one person, or more than one person acting as a group, acquires ownership of stock of the Corporation or the Bank that, together with stock of the Corporation or the Bank held by such person or group, constitutes more than 50% of the total fair market value or total voting power of the stock of the Corporation or the Bank;

(ii)           Change in effective control:  (x) any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock possessing 30% or more of the total voting power of the stock of the Corporation or the Bank, or (y) a majority of the board of directors of the Corporation is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the board of directors of the Corporation before the date of the appointment or election; provided, however, for purposes of this Paragraph 2(f)(ii), the terms the Corporation or the Bank shall refer to the relevant corporation identified in Treasury Regulation 1.409A-3(i)(5)(ii) for which no other no other corporation is a majority shareholder for purposes of that regulation; or

(iii)           Change in ownership of a substantial portion of assets:  a change in ownership of a substantial portion of the assets of the Corporation or the Bank occurs on the date that any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets of the Corporation or the Bank having a total gross fair market value equal to or exceeding 40% of the total gross fair market value of all of the assets of the Corporation or the Bank, as applicable, immediately before the acquisition or acquisitions.  For this purpose, gross fair market value means the value of the assets of the Corporation or the Bank, as applicable, or the value of the assets being disposed of, determined without regard to any liabilities associated with the assets.

Notwithstanding the other provisions of this Paragraph 2, a transaction or event shall not be considered a Change of Control if, prior to the consummation or occurrence of such transaction or event, the Officer and the Company agree in writing that the same shall not be treated as a Change of Control for purposes of this Agreement.

(g)           Except as otherwise provided in Paragraph 3, amounts payable pursuant to this Paragraph 2 shall be paid in one lump sum within five business days following the date of the termination of the Officer’s employment.

(h)           Following a Termination Event that gives rise to the Officer's rights hereunder, the Officer shall have six months from the date of occurrence of the Termination Event to resign his employment and terminate this Agreement pursuant to

4

subparagraph 2(d) above; provided, however, that no such resignation and termination of employment shall give rise to any rights hereunder unless the effective date of the resignation and termination is on or before the second anniversary of the date of the Change of Control. Any such termination shall be deemed to have occurred only upon delivery to the Corporation or Bank, or any successors thereto, of written notice of termination, which describes the Change of Control and Termination Event. If the Officer does not so resign his employment and terminate this Agreement within such six-month period, the Officer shall thereafter have no further rights hereunder with respect to that Termination Event, but shall retain rights, if any, hereunder with respect to any other Termination Event as to which the 24-month period following the Change of Control has not expired; provided, however, that, no such resignation and termination of employment shall give rise to any rights hereunder unless the effective date of the resignation and termination is on or before the second anniversary of the date of the Change of Control.

(i)           It is the intent of the parties hereto that all payments made pursuant to this Agreement be deductible by the Corporation or the Bank for federal income tax purposes and not result in the imposition of an excise tax on the Officer. Notwithstanding anything contained in this Agreement to the contrary, any payments to be made to or for the benefit of the Officer that are deemed to be "parachute payments," as that term is defined in Section 280G(b)(2) of the Code, shall be modified or reduced to the extent deemed to be necessary by the Company's Board of Directors to avoid the imposition of an excise tax on the Officer under Section 4999 of the Code or the disallowance of a deduction to the Company under Section 280G(a) of the Code.

(j)           In the event any dispute shall arise between the Officer and the Company as to the terms or interpretation of this Agreement, including this Paragraph 2, whether instituted by formal legal proceedings or otherwise, including any action taken by the Officer to enforce the terms of this Paragraph 2 or in defending against any action taken by the Corporation or the Bank, the Bank shall reimburse the Officer for all costs and expenses, proceedings or actions, in the event the Officer prevails in any such action.

(k)           Notwithstanding anything contained herein to the contrary, the Officer’s employment with the Company shall not be considered to have terminated for purposes of the Officer’s receiving any compensation otherwise provided under this Agreement unless (x) the Officer would be considered to have incurred a “separation from service” within the meaning of Section 409A from the Company or (y) the payment of such compensation would not be subject to Section 409A.

3.           Code § 409A.   It is the intent of the parties that this Agreement and all payments made hereunder shall be in compliance with the requirements of Section 409A of the Code and the regulations promulgated thereunder.  If any provision of this Agreement shall not be in compliance with Section 409A of the Code and the regulations thereunder and payment pursuant to such provision is not otherwise exempt from Section 409A, then such provision shall be deemed automatically amended without further action on the part of the Company or the Officer to the minimum extent necessary to cause such provision to be in compliance and such provision will thereafter be given effect as so amended.  If postponing payment of any amounts due under this Agreement is necessary

5

for compliance with the requirements of Section 409A of the Code and the regulations thereunder to avoid adverse tax consequences to the Officer, then payment of such amounts shall be postponed to comply with Section 409A.  Any and all payments that are postponed under this Paragraph 3 shall be paid to the Officer in a lump sum at the earliest time that does not result in adverse tax consequences to the Officer under Section 409A.

4.           Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Corporation or the Bank, which shall acquire, directly or indirectly, by conversion, merger, consolidation, purchase, or otherwise, all or substantially all of the assets of the Corporation or the Bank.

5.           Modification; Waiver; Amendments.  No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Officer, the Company, except as herein otherwise provided. No waiver by any party hereto, at any time, of any breach by any party hereto, or compliance with, any condition or provision of this Agreement to be performed by such party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No amendments or additions to this Agreement shall be binding unless in writing and signed by the parties, except as herein otherwise provided.

6.           Applicable Law.  This Agreement shall be governed in all respects whether as to validity, construction, capacity, performance, or otherwise, by the laws of North Carolina, except to the extent that federal law shall be deemed to apply.

7.           Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision hereof shall not affect the validity or enforceability of the other provision hereof.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written.

CORPORATION:		BANK:
FNB UNITED CORP.		COMMUNITYONE BANK, NATIONAL
		ASSOCIATION
By	/s/ Michael C. Miller	By	/s/ Michael C. Miller
	Name:  Michael C. Miller		Name:  Michael C. Miller
	Title:  Chairman and President		Title:  Chairman and President
		OFFICER:
		/s/ R. Mark Hensley
		R. Mark Hensley

6

EX-10.36

EXHIBIT 10.36

AMENDED AND RESTATED CHANGE OF CONTROL AGREEMENT

THIS AMENDED AND RESTATED CHANGE OF CONTROL AGREEMENT (this "Agreement") is entered into as of the 31st day of December, 2008, by and among FNB United Corp., a North Carolina corporation and a registered bank holding company (the "Corporation"), CommunityONE Bank, National Association, a national banking association and a wholly owned subsidiary of the Corporation (the "Bank") (hereinafter the Corporation and the Bank, or their successors, are collectively referred to as the "Company"), and Mark Anthony Severson (the "Officer"), an individual residing in Randolph County, North Carolina, and amends and restates and supersedes in its entirety the Change of Control Agreement dated as of July 9, 2007 by and among the Corporation, the Bank and the Officer.

WHEREAS, the Officer has heretofore been employed by the Bank with the title(s) of Executive Vice President and Chief Financial Officer; and

WHEREAS, the services of the Officer, the Officer's experience and knowledge of the affairs of the Company and reputation and contacts in the industry are extremely valuable to the Company; and

WHEREAS, the Company wishes to attract and retain such well-qualified executives and it is in the best interest of the Company and of the Officer to secure the continued services of the Officer notwithstanding any change of control of the Corporation or the Bank; and

WHEREAS, the Company considers the establishment and maintenance of a sound and vital management team to be part of their overall corporate strategy and to be essential to protecting and enhancing the best interests of the Company and its shareholders; and

WHEREAS, the parties desire to enter into this Agreement to provide the Officer with security in the event of a change of control of the Corporation or the Bank to ensure the continued loyalty of the Officer during any change of control in order to maximize shareholder value as well as the continued safe and sound operation of the Company; and

WHEREAS, the Officer and the Company acknowledge and agree that the Officer’s employment with the Company is and will continue to be on an at-will basis and that this Agreement is not an employment agreement but is limited to circumstances giving rise to a change of control of the Corporation or the Bank as set forth herein.

NOW, THEREFORE, for and in consideration of the premises and mutual promises, covenants, and conditions hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereby agree as follows:

1.           Term.  The initial term of this Agreement shall be for the period commencing upon the effective date of this Agreement and ending three calendar years from the effective date of this Agreement.  On each anniversary date of this Agreement, the term automatically shall be extended for an additional one-year period so that the term shall again be three years unless either the Company or the Officer notifies the other of its decision not to continue such annual renewal by written notice given not less than 90 days prior to such anniversary date.

2.           Change of Control.

(a)           In the event of a termination of the Officer's employment by the Company in connection with, or within twenty-four (24) months after, a "Change of Control" (as defined in subparagraph (f) below) of the Corporation or the Bank, for reasons other than for "cause" (as defined in subparagraph (b) below), death or “disability” (as defined in subparagraph (c) below), the Officer shall be entitled to receive the sum set forth and defined in subparagraph (e) below.  The termination of the Officer’s employment by the Company shall be deemed a Termination Event for purposes of subparagraph (e) below.

(b)           For purposes of this Agreement, termination for “cause” shall mean termination by reason of (i) an intentional, willful and continued failure by the Officer to perform his duties as an employee of the Company (other than due to disability); (ii) an intentional, willful and material breach by the Officer of his fiduciary duties of loyalty and care to the Company; (iii) a conviction of, or the entering of a plea of nolo contendere by the Officer for any felony or any crime involving fraud or dishonesty, or (iv) a willful and knowing violation of any material federal or state law or regulation applicable to the Corporation or the Bank or the occurrence of any act or event as a result of which the Officer becomes unacceptable to, or is removed, suspended or prohibited from participating in the conduct of the Company’s affairs by any regulatory authority having jurisdiction over the Corporation or the Bank.

(c)           For purposes of this Agreement, “disability” shall mean the inability, by reason of bodily injury or physical or mental disease, or any combination thereof, of the Officer to perform his customary or other comparable duties with the Company for a period of 90 consecutive days.  In the event that the Officer and the Company are unable to agree as to whether the Officer is suffering a disability, the Officer and the Company shall each select a physician and the two physicians so chosen shall make the determination or, if they are unable to agree, they shall select a third physician, and the determination as to whether the Officer is suffering a disability shall be based upon the determination of a majority of the three physicians.  The Company

2

shall pay the reasonable fees and expenses of all physicians selected pursuant to this subparagraph (c).

(d)           The Officer shall have the right to resign his employment with the Company and terminate this Agreement upon the occurrence of any of the following events (the "Termination Events") within twenty-four (24) months following a Change of Control of the Corporation or the Bank:

(i)           The Officer is assigned any duties and/or responsibilities that constitute a material diminution of the Officer’s authority, duties or responsibilities at the time of the Change of Control;

(ii)           The Officer's annual base salary rate is reduced below the annual amount in effect as of the effective date of a Change of Control or as the same shall have been increased from time to time following such effective date;

(iii)           The Officer's life insurance, medical or hospitalization insurance, disability insurance, stock option plans, stock purchase plans, deferred compensation plans, management retention plans, retirement plans, or similar plans or benefits being provided by the Company to the Officer as of the effective date of the Change of Control are reduced in their level, scope, or coverage, or any such insurance, plans, or benefits are eliminated, unless such reduction or elimination applies proportionately to all salaried employees of the Company who participated in such benefits prior to such Change of Control; or

(iv)           The Officer is required to transfer performance of his day-to-day services required hereunder to a location which is more than fifty (50) miles from the Officer's current principal work location, without the Officer's express written consent.

A Termination Event shall be deemed to have occurred on the date such action or event is implemented or takes effect.

(e)           In the event that the Officer resigns his employment and terminates this Agreement pursuant to subparagraph (d) above, the Company will be obligated to pay or cause to be paid to the Officer an amount equal to two times the Officer’s total cash compensation, including salary and bonus, paid during the calendar year ended immediately prior to the Change of Control or the Termination Event, whichever is higher.

(f)           For the purposes of this Agreement, the term “Change of Control” shall mean a change of control as defined in Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and the rules, regulations, and guidance of general application thereunder issued by the Department of the Treasury, including - --

3

(i)           Change in ownership:  a change in ownership of the Bank occurs on the date any one person, or more than one person acting as a group, acquires ownership of stock of the Corporation or the Bank that, together with stock of the Corporation or the Bank held by such person or group, constitutes more than 50% of the total fair market value or total voting power of the stock of the Corporation or the Bank;

(ii)           Change in effective control:  (x) any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock possessing 30% or more of the total voting power of the stock of the Corporation or the Bank, or (y) a majority of the board of directors of the Corporation is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the board of directors of the Corporation before the date of the appointment or election; provided, however, for purposes of this Paragraph 2(f)(ii), the terms the Corporation or the Bank shall refer to the relevant corporation identified in Treasury Regulation 1.409A-3(i)(5)(ii) for which no other no other corporation is a majority shareholder for purposes of that regulation; or

(iii)           Change in ownership of a substantial portion of assets:  a change in ownership of a substantial portion of the assets of the Corporation or the Bank occurs on the date that any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets of the Corporation or the Bank having a total gross fair market value equal to or exceeding 40% of the total gross fair market value of all of the assets of the Corporation or the Bank, as applicable, immediately before the acquisition or acquisitions.  For this purpose, gross fair market value means the value of the assets of the Corporation or the Bank, as applicable, or the value of the assets being disposed of, determined without regard to any liabilities associated with the assets.

Notwithstanding the other provisions of this Paragraph 2, a transaction or event shall not be considered a Change of Control if, prior to the consummation or occurrence of such transaction or event, the Officer and the Company agree in writing that the same shall not be treated as a Change of Control for purposes of this Agreement.

(g)           Except as otherwise provided in Paragraph 3, amounts payable pursuant to this Paragraph 2 shall be paid in one lump sum within five business days following the date of the termination of the Officer’s employment.

(h)           Following a Termination Event that gives rise to the Officer's rights hereunder, the Officer shall have six months from the date of occurrence of the Termination Event to resign his employment and terminate this Agreement pursuant to

4

subparagraph 2(d) above; provided, however, that no such resignation and termination of employment shall give rise to any rights hereunder unless the effective date of the resignation and termination is on or before the second anniversary of the date of the Change of Control. Any such termination shall be deemed to have occurred only upon delivery to the Corporation or Bank, or any successors thereto, of written notice of termination, which describes the Change of Control and Termination Event. If the Officer does not so resign his employment and terminate this Agreement within such six-month period, the Officer shall thereafter have no further rights hereunder with respect to that Termination Event, but shall retain rights, if any, hereunder with respect to any other Termination Event as to which the 24-month period following the Change of Control has not expired; provided, however, that, no such resignation and termination of employment shall give rise to any rights hereunder unless the effective date of the resignation and termination is on or before the second anniversary of the date of the Change of Control.

(i)           It is the intent of the parties hereto that all payments made pursuant to this Agreement be deductible by the Corporation or the Bank for federal income tax purposes and not result in the imposition of an excise tax on the Officer. Notwithstanding anything contained in this Agreement to the contrary, any payments to be made to or for the benefit of the Officer that are deemed to be "parachute payments," as that term is defined in Section 280G(b)(2) of the Code, shall be modified or reduced to the extent deemed to be necessary by the Company's Board of Directors to avoid the imposition of an excise tax on the Officer under Section 4999 of the Code or the disallowance of a deduction to the Company under Section 280G(a) of the Code.

(j)           In the event any dispute shall arise between the Officer and the Company as to the terms or interpretation of this Agreement, including this Paragraph 2, whether instituted by formal legal proceedings or otherwise, including any action taken by the Officer to enforce the terms of this Paragraph 2 or in defending against any action taken by the Corporation or the Bank, the Bank shall reimburse the Officer for all costs and expenses, proceedings or actions, in the event the Officer prevails in any such action.

(k)           Notwithstanding anything contained herein to the contrary, the Officer’s employment with the Company shall not be considered to have terminated for purposes of the Officer’s receiving any compensation otherwise provided under this Agreement unless (x) the Officer would be considered to have incurred a “separation from service” within the meaning of Section 409A from the Company or (y) the payment of such compensation would not be subject to Section 409A.

3.           Code § 409A.   It is the intent of the parties that this Agreement and all payments made hereunder shall be in compliance with the requirements of Section 409A of the Code and the regulations promulgated thereunder.  If any provision of this Agreement shall not be in compliance with Section 409A of the Code and the regulations thereunder and payment pursuant to such provision is not otherwise exempt from Section 409A, then such provision shall be deemed automatically amended without further action on the part of the Company or the Officer to the minimum extent necessary to cause such provision to be in compliance and such provision will thereafter be given effect as so amended.  If postponing payment of any amounts due under this Agreement is necessary

5

for compliance with the requirements of Section 409A of the Code and the regulations thereunder to avoid adverse tax consequences to the Officer, then payment of such amounts shall be postponed to comply with Section 409A.  Any and all payments that are postponed under this Paragraph 3 shall be paid to the Officer in a lump sum at the earliest time that does not result in adverse tax consequences to the Officer under Section 409A.

4.           Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Corporation or the Bank, which shall acquire, directly or indirectly, by conversion, merger, consolidation, purchase, or otherwise, all or substantially all of the assets of the Corporation or the Bank.

5.           Modification; Waiver; Amendments.  No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Officer, the Company, except as herein otherwise provided. No waiver by any party hereto, at any time, of any breach by any party hereto, or compliance with, any condition or provision of this Agreement to be performed by such party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No amendments or additions to this Agreement shall be binding unless in writing and signed by the parties, except as herein otherwise provided.

6.           Applicable Law.  This Agreement shall be governed in all respects whether as to validity, construction, capacity, performance, or otherwise, by the laws of North Carolina, except to the extent that federal law shall be deemed to apply.

7.           Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision hereof shall not affect the validity or enforceability of the other provision hereof.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written.

CORPORATION:		BANK:
FNB UNITED CORP.		COMMUNITYONE BANK, NATIONAL
		ASSOCIATION
By	/s/ Michael C. Miller	By	/s/ Michael C. Miller
	Name:  Michael C. Miller		Name:  Michael C. Miller
	Title:  Chairman and President		Title:  Chairman and President
		OFFICER:
		/s/ Mark Anthony Severson
		Mark Anthony Severson

6

EX-10.37

EXHIBIT 10.37

CHANGE OF CONTROL AGREEMENT

THIS CHANGE OF CONTROL AGREEMENT (this "Agreement") is entered into as of the ___ day of __________, 20__, by and among FNB United Corp., a North Carolina corporation and a registered bank holding company (the "Corporation"), CommunityONE Bank, National Association, a national banking association and a wholly owned subsidiary of the Corporation (the "Bank") (hereinafter the Corporation and the Bank, or their successors, are collectively referred to as the "Company"), and ______________ (the "Officer"), an individual residing in __________ County, North Carolina,

                     WHEREAS, the Officer has heretofore been employed by the Company with the title(s) of _________________________; and

WHEREAS, the services of the Officer, the Officer's experience and knowledge of the affairs of the Company and reputation and contacts in the industry are extremely valuable to the Company; and

WHEREAS, the Company wishes to attract and retain such well-qualified executives and it is in the best interest of the Company and of the Officer to secure the continued services of the Officer notwithstanding any change of control of the Corporation or the Bank; and

WHEREAS, the Company considers the establishment and maintenance of a sound and vital management team to be part of their overall corporate strategy and to be essential to protecting and enhancing the best interests of the Company and its shareholders; and

WHEREAS, the parties desire to enter into this Agreement to provide the Officer with security in the event of a change of control of the Corporation or the Bank to ensure the continued loyalty of the Officer during any change of control in order to maximize shareholder value as well as the continued safe and sound operation of the Company; and

WHEREAS, the Officer and the Company acknowledge and agree that the Officer’s employment with the Company is and will continue to be on an at-will basis and that this Agreement is not an employment agreement but is limited to circumstances giving rise to a change of control of the Corporation or the Bank as set forth herein.

NOW, THEREFORE, for and in consideration of the premises and mutual promises, covenants, and conditions hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the parties hereby agree as follows:

1.           Term.  The initial term of this Agreement shall be for the period commencing upon the effective date of this Agreement and ending three calendar years from the effective date of this Agreement.  On each anniversary date of this Agreement, the term automatically shall be extended for an additional one-year period so that the term shall again be three years unless either the Company or the Officer notifies the other of its decision not to continue such annual renewal by written notice given not less than 90 days prior to such anniversary date.

2.           Change of Control.

(a)           In the event of a termination of the Officer's employment by the Company in connection with, or within twenty-four (24) months after, a "Change of Control" (as defined in subparagraph (f) below) of the Corporation or the Bank, for reasons other than for "cause" (as defined in subparagraph (b) below), death or “disability” (as defined in subparagraph (c) below), the Officer shall be entitled to receive the sum set forth and defined in subparagraph (e) below.  The termination of the Officer’s employment by the Company shall be deemed a Termination Event for purposes of subparagraph (e) below.

(b)           For purposes of this Agreement, termination for “cause” shall mean termination by reason of (i) an intentional, willful and continued failure by the Officer to perform his duties as an employee of the Company (other than due to disability); (ii) an intentional, willful and material breach by the Officer of his fiduciary duties of loyalty and care to the Company; (iii) a conviction of, or the entering of a plea of nolo contendere by the Officer for any felony or any crime involving fraud or dishonesty, or (iv) a willful and knowing violation of any material federal or state law or regulation applicable to the Corporation or the Bank or the occurrence of any act or event as a result of which the Officer becomes unacceptable to, or is removed, suspended or prohibited from participating in the conduct of the Company’s affairs by any regulatory authority having jurisdiction over the Corporation or the Bank.

(c)           For purposes of this Agreement, “disability” shall mean the inability, by reason of bodily injury or physical or mental disease, or any combination thereof, of the Officer to perform his customary or other comparable duties with the Company for a period of 90 consecutive days.  In the event that the Officer and the Company are unable to agree as to whether the Officer is suffering a disability, the Officer and the Company shall each select a physician and the two physicians so chosen shall make the determination or, if they are unable to agree, they shall select a third physician, and the determination as to whether the Officer is suffering a disability shall be based upon the determination of a majority of the three physicians.  The Company shall pay the reasonable fees and expenses of all physicians selected pursuant to this subparagraph (c).

(d)           The Officer shall have the right to resign his employment with the Company and terminate this Agreement upon the occurrence of any of the following

2

events (the "Termination Events") within twenty-four (24) months following a Change of Control of the Corporation or the Bank:

(i)           The Officer is assigned any duties and/or responsibilities that constitute a material diminution of the Officer’s authority, duties or responsibilities at the time of the Change of Control;

(ii)           The Officer's annual base salary rate is reduced below the annual amount in effect as of the effective date of a Change of Control or as the same shall have been increased from time to time following such effective date;

(iii)           The Officer's life insurance, medical or hospitalization insurance, disability insurance, stock option plans, stock purchase plans, deferred compensation plans, management retention plans, retirement plans, or similar plans or benefits being provided by the Company to the Officer as of the effective date of the Change of Control are reduced in their level, scope, or coverage, or any such insurance, plans, or benefits are eliminated, unless such reduction or elimination applies proportionately to all salaried employees of the Company who participated in such benefits prior to such Change of Control; or

(iv)           The Officer is required to transfer performance of his day-to-day services required hereunder to a location which is more than fifty (50) miles from the Officer's current principal work location, without the Officer's express written consent.

A Termination Event shall be deemed to have occurred on the date such action or event is implemented or takes effect.

(e)           In the event that the Officer resigns his employment and terminates this Agreement pursuant to subparagraph (d) above, the Company will be obligated to pay or cause to be paid to the Officer an amount equal to _____________________.

(f)           For the purposes of this Agreement, the term “Change of Control” shall mean a change of control as defined in Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and the rules, regulations, and guidance of general application thereunder issued by the Department of the Treasury, including - --

(i)           Change in ownership:  a change in ownership of the Bank occurs on the date any one person, or more than one person acting as a group, acquires ownership of stock of the Corporation or the Bank that, together with stock of the Corporation or the Bank held by such person or group, constitutes more than 50% of the total fair market value or total voting power of the stock of the Corporation or the Bank;

(ii)           Change in effective control:  (x) any one person, or more than one person acting as a group, acquires (or has acquired during the 12

3

month period ending on the date of the most recent acquisition by such person or persons) ownership of stock possessing 30% or more of the total voting power of the stock of the Corporation or the Bank, or (y) a majority of the board of directors of the Corporation is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the board of directors of the Corporation before the date of the appointment or election; provided, however, for purposes of this Paragraph 2(f)(ii), the terms the Corporation or the Bank shall refer to the relevant corporation identified in Treasury Regulation 1.409A-3(i)(5)(ii) for which no other no other corporation is a majority shareholder for purposes of that regulation; or

(iii)           Change in ownership of a substantial portion of assets:  a change in ownership of a substantial portion of the assets of the Corporation or the Bank occurs on the date that any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets of the Corporation or the Bank having a total gross fair market value equal to or exceeding 40% of the total gross fair market value of all of the assets of the Corporation or the Bank, as applicable, immediately before the acquisition or acquisitions.  For this purpose, gross fair market value means the value of the assets of the Corporation or the Bank, as applicable, or the value of the assets being disposed of, determined without regard to any liabilities associated with the assets.

Notwithstanding the other provisions of this Paragraph 2, a transaction or event shall not be considered a Change of Control if, prior to the consummation or occurrence of such transaction or event, the Officer and the Company agree in writing that the same shall not be treated as a Change of Control for purposes of this Agreement.

(g)           Except as otherwise provided in Paragraph 3, amounts payable pursuant to this Paragraph 2 shall be paid in one lump sum within five business days following the date of the termination of the Officer’s employment.

(h)           Following a Termination Event that gives rise to the Officer's rights hereunder, the Officer shall have six months from the date of occurrence of the Termination Event to resign his employment and terminate this Agreement pursuant to subparagraph 2(d) above; provided, however, that no such resignation and termination of employment shall give rise to any rights hereunder unless the effective date of the resignation and termination is on or before the second anniversary of the date of the Change of Control. Any such termination shall be deemed to have occurred only upon delivery to the Corporation or Bank, or any successors thereto, of written notice of termination, which describes the Change of Control and Termination Event. If the Officer does not so resign his employment and terminate this Agreement within such six-month period, the Officer shall thereafter have no further rights hereunder with respect to that Termination Event, but shall retain rights, if any, hereunder with respect to any other

4

Termination Event as to which the 24-month period following the Change of Control has not expired; provided, however, that, no such resignation and termination of employment shall give rise to any rights hereunder unless the effective date of the resignation and termination is on or before the second anniversary of the date of the Change of Control.

(i)           It is the intent of the parties hereto that all payments made pursuant to this Agreement be deductible by the Corporation or the Bank for federal income tax purposes and not result in the imposition of an excise tax on the Officer. Notwithstanding anything contained in this Agreement to the contrary, any payments to be made to or for the benefit of the Officer that are deemed to be "parachute payments," as that term is defined in Section 280G(b)(2) of the Code, shall be modified or reduced to the extent deemed to be necessary by the Company's Board of Directors to avoid the imposition of an excise tax on the Officer under Section 4999 of the Code or the disallowance of a deduction to the Company under Section 280G(a) of the Code.

(j)           In the event any dispute shall arise between the Officer and the Company as to the terms or interpretation of this Agreement, including this Paragraph 2, whether instituted by formal legal proceedings or otherwise, including any action taken by the Officer to enforce the terms of this Paragraph 2 or in defending against any action taken by the Corporation or the Bank, the Bank shall reimburse the Officer for all costs and expenses, proceedings or actions, in the event the Officer prevails in any such action.

(k)           Notwithstanding anything contained herein to the contrary, the Officer’s employment with the Company shall not be considered to have terminated for purposes of the Officer’s receiving any compensation otherwise provided under this Agreement unless (x) the Officer would be considered to have incurred a “separation from service” within the meaning of Section 409A from the Company or (y) the payment of such compensation would not be subject to Section 409A.

3.           Code § 409A.   It is the intent of the parties that this Agreement and all payments made hereunder shall be in compliance with the requirements of Section 409A of the Code and the regulations promulgated thereunder.  If any provision of this Agreement shall not be in compliance with Section 409A of the Code and the regulations thereunder and payment pursuant to such provision is not otherwise exempt from Section 409A, then such provision shall be deemed automatically amended without further action on the part of the Company or the Officer to the minimum extent necessary to cause such provision to be in compliance and such provision will thereafter be given effect as so amended.  If postponing payment of any amounts due under this Agreement is necessary for compliance with the requirements of Section 409A of the Code and the regulations thereunder to avoid adverse tax consequences to the Officer, then payment of such amounts shall be postponed to comply with Section 409A.  Any and all payments that are postponed under this Paragraph 3 shall be paid to the Officer in a lump sum at the earliest time that does not result in adverse tax consequences to the Officer under Section 409A.

4.           Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Corporation or the Bank, which

5

shall acquire, directly or indirectly, by conversion, merger, consolidation, purchase, or otherwise, all or substantially all of the assets of the Corporation or the Bank.

5.           Modification; Waiver; Amendments.  No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Officer, the Company, except as herein otherwise provided. No waiver by any party hereto, at any time, of any breach by any party hereto, or compliance with, any condition or provision of this Agreement to be performed by such party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No amendments or additions to this Agreement shall be binding unless in writing and signed by the parties, except as herein otherwise provided.

6.           Applicable Law.  This Agreement shall be governed in all respects whether as to validity, construction, capacity, performance, or otherwise, by the laws of North Carolina, except to the extent that federal law shall be deemed to apply.

7.           Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision hereof shall not affect the validity or enforceability of the other provision hereof.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written.

CORPORATION:		BANK:
FNB UNITED CORP.		COMMUNITYONE BANK, NATIONAL
		ASSOCIATION
By		By
	Name:		Name:
	Title:		Title:
		OFFICER:

6

EX-21.01

Exhibit   21.01

Subsidiaries of the Registrant

CommunityOne Bank, National Association -

National banking association headquartered in the State of North Carolina

First National Investor Services, Inc. -

A North Carolina corporation and operating subsidiary

Premier Investment Services, Inc. –

A North Carolina corporation and operating subsidiary

Dover Mortgage Company –

A North Carolina corporation and operating subsidiary

FNB United Statutory Trust I –

A Connecticut statutory business trust

FNB United Statutory Trust II –

A Delaware statutory business trust

Catawba Valley Capital Trust II –

A Delaware statutory business trust

EX-23.10

Exhibit 23.10

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

FNB United Corp.

Asheboro, North Carolina

We consent to the incorporation by reference in the registration statements (Nos. 33-72686, 333-54702, 333-99333, 333-105442, 333-109450, 333-133734, 333-143703,  and 333-144132) on Form S-8 and the registration statement (No. 33-59565) on Form S-3 of FNB United Corp. (“the Corporation”) of our reports dated March 16, 2009, with respect to the consolidated financial statements of FNB United Corp. and Subsidiary, and the effectiveness of internal control over financial reporting, which reports appear in FNB United Corp.’s December 31, 2008 Annual Report on Form 10-K.

Our report, dated March 16, 2009, on the effectiveness of internal control over financial reporting as of December 31, 2008, expresses our opinion that FNB United Corp. did not maintain effective internal control over financial reporting as of December 31, 2008, because of the effect of the material weakness relating to the lack of adequate staffing and segregation of duties in its Accounting Department.

March 16, 2009
Raleigh, North Carolina

EX-31.10

Exhibit 31.10

CERTIFICATIONS PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

Certification:

I, Michael C. Miller, certify that:

1. I have reviewed this Annual Report on Form 10-K of FNB United Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:           March 16, 2009

/s/ Michael C. Miller

Michael C. Miller

Chief Executive Officer

EX-31.11

Exhibit 31.11

CERTIFICATIONS PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

Certification:

I, Mark A. Severson, certify that:

1. I have reviewed this Annual Report on Form 10-K of FNB United Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:           March 16, 2009

/s/ Mark A. Severson

Mark A. Severson

Chief Financial Officer

EX-32

Exhibit 32

FNB UNITED CORP.

Certification of Periodic Financial Report

Pursuant to 18 U.S.C. Section 1350

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officers of FNB United Corp. (the “Company”) certify that the Annual Report on Form 10-K of the Company for the year ended December 31, 2007 fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and information contained in that Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:  March 16, 2009	/s/ Michael C. Miller
	Michael C. Miller
	Chief Executive Officer
Dated:  March 16, 2009	/s/ Mark A Severson
	Mark A. Severson
	Chief Financial Officer

*This certificate is made solely for purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose.