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, 2006

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)

(336) 626-8300

(Registrant’s telephone number, including area code)

Securities pursuant to Section 12(g) of the Act:

Common Stock, par value $2.50 per share

(Title of Class)

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

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

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

Indicate by check mark 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 Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in 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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨                    Accelerated filer  x                    Non-accelerated filer  ¨

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

The aggregate market value of common stock held by nonaffiliates of the Registrant, assuming, without admission, that all directors and officers of the Registrant may be deemed affiliates, was $202,249,000 as of June 30, 2006, the last business day of the Registrant’s most recently completed second fiscal quarter.

As of March 1, 2007, the Registrant had 11,319,662 shares of $2.50 par value common stock outstanding.

Portions of the Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held on May 8, 2007 are incorporated by reference in Part III of this report.

CROSS REFERENCE INDEX

			Page
Part I	Item 1	Business	1-11
	Item 1A	Risk Factors	9-11
	Item 1B	Unresolved Staff Comments
		Not applicable
	Item 2	Properties	8-9
	Item 3	Legal Proceedings
		Not applicable.
	Item 4	Submission of Matters to a Vote of Security Holders
		Not applicable.
Part II	Item 5	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	11, 37
	Item 6	Selected Financial Data	12
	Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13-37
	Item 7A	Quantitative and Qualitative Disclosures about Market Risk	23-24
	Item 8	Financial Statements and Supplementary Data
		Report of Independent Registered Public Accounting Firm	38
		Consolidated Balance Sheets at December 31, 2006 and 2005	39
		Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2006	40
		Consolidated Statements of Shareholders’ Equity and Comprehensive Income for each of the years in the three-year period ended December 31, 2006	41
		Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2006	42
		Notes to Consolidated Financial Statements	43-83
		Quarterly Financial Data for 2006 and 2005	37
	Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
		Not applicable.
	Item 9A	Controls and Procedures	84-87
		Management’s Annual Report on Internal Control Over Financial Reporting	85
		Report of Independent Registered Public Accounting Firm	86-87
	Item 9B	Other Information
		Not applicable
Part III	Item 10	Directors and Executive Officers of the Registrant	*
	Item 11	Executive Compensation	*
	Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	*
	Item 13	Certain Relationships and Related Transactions	*
	Item 14	Principal Accountant Fees and Services	*
Part IV	Item 15	Exhibits and Financial Statement Schedules
		(a) Financial Statements (See Item 8 for reference).
		(b) Financial Statement Schedules normally required on Form 10-K are omitted since     they are not applicable.
		(c) Exhibits have been filed separately with the Commission and are available upon     written request.

* Information called for by Part III is incorporated herein by reference to portions of the Registrant’s Proxy Statement for the 2007 Annual Meeting of Shareholders, as follows:

Item 10—See information that appears under the headings “Election of Directors”, “Executive Officers” and “Report of the Audit Committee”.

Item 11—See information that appears under the headings “Compensation Discussion and Analysis” and “Executive Compensation”.

Item 12—See information that appears under the headings “Voting Securities Outstanding and Principal Shareholders” and “Security Ownership of Management”.

Item 13—See information that appears under the heading “Business Relationships and Related Person Transactions”

Item 14 – See information that appears under the heading “Independent Auditors”.

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, First National Bank and Trust Company (“First National Bank”), a national banking association founded in 1907. First National Bank has an operating subsidiary, 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 First National 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 First National Bank. FNB United also owns a mortgage banking subsidiary, Dover Mortgage Company (“Dover”), and is parent to FNB United Statutory Trust I, FNB United Statutory Trust II, Catawba Valley Capital Trust I and Catawba Valley Capital Trust II, the latter two trusts formerly being Integrity subsidiaries. FNB United and its subsidiaries are collectively referred to as the “Corporation”.

First National Bank, which is a full-service bank, currently conducts all of its operations in Alamance, Alexander, Ashe, Catawba, Chatham, Gaston, Guilford, Iredell, Montgomery, Moore, Orange, Randolph, Richmond, Rowan, Scotland, Watauga and Wilkes counties in North Carolina. First National Bank has three offices, including the headquarters office, in the City of Asheboro and forty additional community offices. 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 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. First National Bank also has automated teller machines and is a member of Plus, a national automated teller machine network, and Star, a regional network.

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

As noted above, on November 4, 2005, the Corporation completed a merger for the acquisition of United Financial, Inc, holding company for Alamance Bank, headquartered in Graham, North Carolina. 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 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 $264,000 reduction in goodwill. The consolidated financial statements include the results of operations of United since November 4, 2005.

As additionally noted above, on April 28, 2006, the Corporation 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 that have occurred from April 28, 2006 through December 31, 2006 have amounted to an $81,000 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 as follows:

• To create a banking organization, approximately two-thirds larger in total assets than FNB United prior

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

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

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

In June 2005, First National Bank received regulatory approval for the establishment of a second branch office in Salisbury, North Carolina. The new office, which is a leased facility and also houses regional operations, opened for business in September 2006.

In May 2006, Dover Mortgage Company opened a new mortgage production office in Wrightsville Beach, North Carolina.

In the 2006 fourth quarter, First National Bank significantly expanded its headquarters facilities in Asheboro, North Carolina, adding a separate facility for certain of its executive and administrative functions and an operating center for its loan and deposit operations and certain of its finance 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. Each trust, other than FNB United Statutory Trust I, is a statutory business trust formed under the laws of the State of Delaware. FNB United Statutory Trust I is a statutory business trust formed under the laws of the State of Connecticut. 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 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 on its website at www.MyYesBank.com without charge as soon as reasonably practicable after filing or furnishing them to the Securities and Exchange Commission. In addition, 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.

Competition

The banking industry within First National Bank’s marketing area is extremely competitive. First National Bank faces direct competition in Alamance, Alexander, Ashe, Catawba, Chatham, Gaston, Guilford, Iredell, Montgomery, Moore, Orange, Randolph, Richmond, Rowan, Scotland, Watauga and Wilkes counties from approximately 90 different financial institutions, including commercial banks, savings institutions and credit

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unions. Although no one of these entities is dominant, First National 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 Corporation. Additional information related to regulatory matters is 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, First National 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. First National Bank’s deposits are insured by the FDIC through the Bank Insurance Fund and the Savings Association Insurance Fund. The OCC and the FDIC impose various requirements and restrictions on First National 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, First National 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.

FNB United acquired Alamance Bank, a North Carolina-chartered bank, on November 4, 2005 through its merger with United Financial, Inc. Alamance Bank merged with and into First National Bank on February 1, 2006. Prior to the bank merger, Alamance Bank was regulated by the North Carolina Commissioner of Banks.

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FNB United’s subsidiary, Dover Mortgage Company, is regulated by the North Carolina Commissioner of Banks. Because Dover is a nonbank subsidiary of a bank holding company, it is also regulated by the Federal Reserve Board. 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 Corporation. 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 Corporation.

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 United if the capital of First National 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 First National 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.

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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 First National 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 First National Bank to FNB United, as well as by FNB United to its shareholders.

First National 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 First National 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 First National 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 First National 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

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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. Beginning January 1, 2007, assessments for the DIF can range from 5 to 43 basis points per $100 of assessable deposits, depending on the insured institution’s risk category as described above. This 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 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.

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 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

First National 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 Corporation 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

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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 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 President signed the USA Patriot Act of 2001 into law in October 2001. This act 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 Corporation established anti-money laundering compliance and due diligence programs.

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Sarbanes-Oxley Act of 2002

The President signed into law the Sarbanes-Oxley Act of 2002, which 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.

Future Legislation

Changes to the laws and regulations in the United States and North Carolina can affect the Corporation’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 Corporation.

Employees

As of December 31, 2006, FNB United had five officers, all of whom were also officers of First National Bank. On that same date, First National Bank had 493 full-time employees and 36 part-time employees and Dover had 52 full-time employees and 3 part-time employees. Each subsidiary considers its relationship with its employees to be excellent. The Corporation provides employee benefit programs, including a noncontributory defined benefit pension plan, matching retirement/savings (“401(k)”) plan, group life, health and dental insurance, paid vacations, sick leave, and health care 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 are eligible to enter the plan. Participants who are at least age 40, have earned 10 years of vesting service as an employee of FNB United and remain an active employee as of December 31, 2006 will qualify for continued benefits under 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 will be 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 will have their retirement benefit frozen as of December 31, 2006. Effective January 1, 2007, the 401(k) plan will be enhanced and will be 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 are eligible to enter the plan. Participants who are at least age 40, have earned 10 years of vesting service as an employee of the Corporation and remain an active employee as of December 31, 2006 will qualify under a grandfathering provision. Under the grandfathering provision, the participant will continue to accrue benefits under the plan through December 31, 2011.

Properties

The principal executive and administrative offices of FNB United and First National Bank are located in an office building at 150 South Fayetteville Street, Asheboro, North Carolina. First National Bank also has six other facilities in Asheboro containing three community banking operations and various administrative and operational functions. First National Bank has other community banking offices in Archdale (two offices), Biscoe, Burlington, China Grove, Ellerbe, Graham, Greensboro (two offices), Hillsborough, Kannapolis, Laurinburg, Pinehurst, Ramseur, Randleman, Rockingham (two offices), Salisbury (two offices), Seagrove, Siler City, Southern Pines and Trinity, North Carolina. First National Bank also operates other community banking offices in North Carolina identified as part of the First Gaston Bank division in Belmont, Dallas, Gastonia, Mt. Holly and Stanley; the Catawba Valley Bank division in Hickory (three offices), Mooresville, Newton and Statesville; and the Northwestern Bank division in Boone, Millers Creek, Taylorsville, West Jefferson and Wilkesboro (two

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offices). Nine of the community banking offices are leased facilities, and two such offices are situated on land that is leased. Two of the facilities housing operational functions in Asheboro are leased.

The main offices of Dover are located in Charlotte, North Carolina. Dover also has loan production offices in Carolina Beach, Goldsboro, Greenville, Lake Norman, Leland, Raleigh, Wilmington and Wrightsville Beach, North Carolina. All of the Dover facilities are leased.

Risk Factors

There Is a Limited Market for FNB Common Stock

Although FNB United common stock is traded on The NASDAQ Select Global Market, the volume of trading has historically been low, averaging only a few thousand shares per week. 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.

• permits FNB United’s board of directors to issue, without shareholder approval unless otherwise required by law, nonvoting 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.

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.

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

9

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 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 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 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.

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.

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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.

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 “Forward-Looking Statements” and “Regulation and Supervision” elsewhere in this Annual Report on Form 10-K.

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, 2006 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.

	As of December 31,
	2001		2002		2003		2004		2005		2006
FNB United Corp.	$	100.00	$	132.06	$	147.77	$	137.74	$	141.15	$	140.82
SNL Southeast Bank Index		100.00		110.46		138.72		164.50		168.39		197.45
Russell 3000 Index		100.00		78.46		102.83		115.11		122.16		141.35

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FNB UNITED CORP. AND SUBSIDIARIES

FIVE YEAR FINANCIAL HISTORY

	2006			2005			2004			2003			2002
	(dollars in thousands, except per share data)
Summary of Operations
Interest income	$	103,369		$	54,415		$	40,436		$	40,158		$	39,452
Interest expense		47,155			20,050			12,402			13,144			14,114
Net interest income		56,214			34,365			28,034			27,014			25,338
Provision for loan losses		2,526			2,842			4,030			1,860			1,780
Net interest income after provision for loan losses		53,688			31,523			24,004			25,154			23,558
Noninterest income		19,215			14,926			13,673			13,600			8,268
Noninterest expense		53,441			31,678			28,755			27,159			20,140
Income before income taxes		19,462			14,771			8,922			11,595			11,686
Income taxes		7,275			4,834			2,324			3,195			3,486
Net income	$	12,187		$	9,937		$	6,598		$	8,400		$	8,200
Per Share Data
Net income:
Basic	$	1.27		$	1.73		$	1.17		$	1.50		$	1.63
Diluted		1.25			1.69			1.13			1.43			1.58
Cash dividends declared		.62			.62			.60			.59			.58
Book value		18.39			16.06			14.66			14.32			13.49
Balance Sheet Information
Total assets	$	1,814,905		$	1,102,085		$	862,891		$	773,245		$	754,370
Investment securities		171,815			159,806			125,143			144,259			153,857
Loans		1,322,702			812,666			664,754			551,913			502,342
Goodwill		110,956			31,381			16,335			16,325			12,601
Deposits		1,421,013			841,609			659,544			597,925			592,354
Borrowed funds		167,018			146,567			113,647			86,721			81,815
Shareholders’ equity		207,668			102,315			82,147			81,458			73,090
Ratios (Averages)
Return on assets		0.77	%		1.06	%		.80	%		1.07	%		1.25	%
Return on shareholders’ equity		7.00			11.25			8.00			10.66			12.82
Shareholders’ equity to assets		11.05			9.46			9.99			10.00			9.75
Dividend payout ratio		51.17			36.32			51.36			39.54			36.05
Loans to deposits		93.79			99.26			98.03			92.36			82.00
Net yield on earning assets, taxable equivalent basis		4.20			4.16			3.89			3.94			4.40

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Overview

Description of Operations

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

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

For business segment information related to the financial performance of First National Bank and Dover Mortgage Company, see Note 19 to the Consolidated Financial Statements.

Merger Acquisition of United Financial, Inc. in 2005

On November 4, 2005, the Corporation completed a merger for the acquisition of United Financial, Inc. (“United”), holding company for Alamance Bank, headquartered in Graham, North Carolina. At the date of merger, Alamance Bank operated three offices and, based on estimated fair values, had $163.7 million in total assets, $95.2 million in net loans and $113.0 in deposits. On February 1, 2006, Alamance Bank was merged into First National Bank. Pursuant to the terms of the merger, each share of United common stock was converted, at the election of the shareholder, into either: (1) $14.25 in cash, (2) 0.6828 shares of FNB Corp. common stock, or (3) $4.99 in cash and 0.4438 shares of FNB Corp. common stock, the overall conversion of stock being limited to 65% of United shares. The aggregate purchase price, as adjusted by a reduction of $0.2 million during the one-year period following the date of merger, was $22.5 million, consisting of $8.2 million of cash payments and 728,625 shares of FNB Corp. common stock valued at $14.3 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.

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Merger Acquisition of Integrity Financial Corporation in 2006

On April 28, 2006, the Corporation 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 First National Bank. The primary reasons for the merger were as follows:

• 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 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 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 consolidated financial statements include the results of operations of Integrity since April 28, 2006.

Primary Financial Data for 2006

The Corporation earned $12.2 million in 2006, a 22.6% increase in net income from 2005. Basic earnings per share decreased from $1.73 in 2005 to $1.27 in 2006 and diluted earnings per share decreased from $1.69 to $1.25, for percentage decreases of 26.6% and 26.0%, respectively. As noted above, First Gaston Bank and Alamance Bank were acquired through mergers effective April 28, 2006 and November 4, 2005, 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-date basis between 2006 and 2005 (see Note 19 to the Consolidated Financial Statements for business segment information and also below in “Significant Factors Affecting Earnings in 2006”). The First Gaston Bank acquisition added $728.7 million or approximately 66% to total assets at the time of acquisition, while the Alamance Bank acquisition earlier added $163.7 million or approximately 18% to total assets at the time of acquisition. Largely reflecting the First Gaston Bank acquisition, total assets were $1.81 billion at December 31, 2006, up 65% from year-end 2005. Loans amounted to $1.32 billion at December 31, 2006, increasing 63% from the prior year. Total deposits grew 69% to $1.42 billion in 2005.

Significant Factors Affecting Earnings in 2006

The acquisitions of First Gaston Bank and Alamance Bank have affected the comparability of operating results, as the consolidated financial statements include the results of operations of First Gaston Bank and Alamance Bank since April 28, 2006 and November 4, 2005, respectively, and prior period financial information has not been restated under the purchase method of accounting for business combinations. Consequently, the results of operations for 2006 include the results of the former First Gaston Bank operations for only the last eight months of that period and the results of the Alamance Bank operations for all of that period, while the results of 2005 do not include First Gaston Bank and include Alamance Bank for only the last two months of that

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period. As noted above, the First Gaston Bank acquisition added approximately 66% to total assets at the time of acquisition and the Alamance Bank acquisition added approximately 18%.

Net interest income has continued to be impacted by the tightening measures utilized by the Federal Reserve for monetary policy purposes since mid-2004. These measures have resulted in prime rate increases that have tended to improve the yield on earning assets while similarly increasing the cost of funds. Net interest income increased $21.8 million or 64% in 2006 compared to 2005, reflecting the effect of a 61% increase in the level of average earning assets coupled with an increase in the net interest margin, stated on a taxable equivalent basis, from 4.16% in 2005 to 4.20% in 2006.

The provision for loan losses was $2,526,000 in 2006 compared to $2,842,000 in 2005, a decrease of $316,000, or 11.1%. The 2005 provision was $1,188,000 below the $4,030,000 provision in 2004 when the second quarter provision was $2,780,000 and actual loan charge-offs in that quarter amounted to $2,754,000. Due partially to the continuing evaluation of the quality of the loan portfolio acquired as part of the acquisition of First Gaston Bank, the allowance for loan losses has increased to 1.28% of loans held for investment at December 31, 2006 compared to 1.25% at December 31, 2005 and 1.12% at December 31, 2004.

The amounts reported for the provision for loan losses and also noninterest income have been impacted by the adoption in the second quarter of 2005 of new regulatory guidance on the accounting for courtesy overdraft programs. The initial result from adoption of this guidance was a $324,000 increase in the provision for loan losses in the second quarter of 2005, the effect of which was partially offset by a $156,000 increase in income from service charges on deposit accounts. In periods subsequent to the second quarter of 2005, the regulatory guidance on accounting for courtesy overdraft programs will have a continuing effect on the results of operations by increasing the level of both the provision for loan losses and income from service charges on deposit accounts, although these effects should tend to be offsetting with only a minor impact on net income. The total increase in the provision for loan losses in 2005 due to the new regulatory guidance was $712,000 and for 2006 was $670,000.

Noninterest income was significantly affected in 2006 by the restructuring of the investment portfolio in the third quarter to eliminate certain underperforming investments and to improve the net interest margin in future periods. Approximately $120 million of available-for-sale securities, or approximately 52% of the total carrying value of the investment portfolio, was sold. Portions of the liquidated investments were obtained in the acquisitions of First Gaston Bank and Alamance Bank. The pre-tax loss recognized on this transaction was $557,000.

Noninterest income was additionally impacted in 2006 by the recognition of $826,000 of income in connection with certain SBIC investments that qualify as Community Reinvestment Act investments. A loss of $23,000 was recorded on SBIC investments in 2005. Noninterest income was further augmented in 2006 by the sale in the fourth quarter of $10.4 million of nonperforming and higher risk loans, resulting in a gain of $118,000, and by a $336,000 death benefit from a bank owned life insurance policy insuring a former employee. Partially offsetting these gains was a mortgage servicing rights impairment charge of $250,000.

Noninterest expense was significantly impacted in 2006 by a goodwill impairment charge of $1.6 million related to Dover Mortgage Company as discussed in Note 3 to the Consolidated Financial Statements.

Noninterest expense was generally affected in 2006 by the increased size of the organization following the acquisitions of Alamance Bank and First Gaston Bank, as discussed above, and by the related restructuring/conversion expenses. The February 2006 Alamance Bank merger and the August 2006 First Gaston Bank merger into First National Bank have resulted in restructuring and system conversion expenses, which are estimated to be approximately $1.4 million. These amounts include consulting services, data processing and other records conversion expense, the buyout of various contracts, and legal and accounting fees. The resulting bank, until at least some point in 2007, is continuing to operate under the existing four trade names (First National Bank and

15

Trust Company, First Gaston Bank, Catawba Valley Bank, and Northwestern Bank). The Corporation is in the process of conducting a branding study to determine the advisability of adopting a new bank name in 2007. The YES YOU CAN(R) and YES WE CAN(R) trademarks owned by First National will continue to be utilized. Accordingly, the Corporation anticipates there will be additional merger related expenditures, including replacement of signage, office supplies and some remaining systems conversions. While additional merger related charges may be recognized, synergies from the acquisition of First Gaston Bank are beginning to be realized.

Noninterest expense was also affected in 2006 by the recognition of stock-based compensation. As discussed in Notes 1 and 16 to the Consolidated Financial Statements, effective January 1, 2006, the Corporation adopted Statement of Financial Accounting Standards No. 123R (“SFAS No. 123R”), “Share-Based Payment”, which requires companies to recognize charges to the income statement for the grant-date fair value of stock options, restricted stock and other equity-based compensation issued to employees over the period during which an employee is required to provide service in exchange for the award (presumptively the vesting period). Stock-based compensation for all types of compensation arrangements amounted to $673,000 in 2006 and the related income tax benefit was $92,000. Stock-based compensation related only to stock options amounted to $510,000 in 2006 and the related income tax benefit was $27,000. Prior to the adoption of SFAS No. 123R, the Corporation used the intrinsic value method as prescribed by APB No. 25 and thus recognized no compensation expense for stock options granted with exercise prices equal to the fair market value of the common stock on the date of grant.

Critical Accounting Policies

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

Earnings Review

The Corporation’s net income increased $2.3 million in 2006, up 22.6% over 2005, largely reflecting the significant increase in net interest income. Earnings were positively impacted in 2006 by increases of $21.8 million or 64% in net interest income and $4.3 million in noninterest income and by a $316,000 reduction in the provision for loan losses, which gains were largely offset by a $21.8 million increase in noninterest expense. Certain factors specifically affecting the elements of income and expense and the comparability of operating results on a year-to-date basis between 2006 and 2005 are discussed in the “Overview - Significant Factors Affecting Earnings in 2006”.

The Corporation’s net income increased $3.3 million in 2005, up 50.6% over 2004, largely reflecting the significant increase in net interest income. Earnings were positively impacted in 2005 by increases of $6.3 million or 22.6% in net interest income and $1.3 million in noninterest income and by a $1.2 million reduction in the provision for loan losses, which gains were partially offset by a $2.9 million increase in noninterest expense. Certain factors specifically affecting the elements of income and expense and the comparability of operating results on a year-to-date basis between 2005 and 2004 are discussed in the “Overview - Significant Factors Affecting Earnings in 2006”.

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Return on average assets increased from 0.80% in 2004 to 1.06% in 2005 and decreased to 0.77% in 2006. Return on average shareholders’ equity increased from 8.00% in 2004 to 11.25% in 2005 and decreased to 7.00% in 2006. In 2006, return on tangible assets and equity (calculated by deducting average goodwill and core deposit premiums from average assets and from average equity) amounted to 0.82% and 14.75%, respectively, compared to 1.09% and 14.36% in 2005 and 0.82% and 9.98% in 2004.

Net Interest Income

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

Net interest income was $56.2 million in 2006 compared to $34.4 million in 2005. The increase of $21.8 million or 64% resulted primarily from a 61% increase in the level of average earning assets coupled with an improvement in the net yield on earning assets, or net interest margin, from 4.16% in 2005 to 4.20% in 2006. In 2005, the increase of $6.3 million or 22.6% resulted primarily from a 13.2% increase in the level of average earning assets coupled with an improvement in the net yield on earning assets, or net interest margin, from 3.89% in 2004 to 4.16% in 2005. On a taxable equivalent basis, the increases in net interest income in 2006 and 2005 were $22.2 million and $6.2 million, respectively, reflecting changes in the relative mix of taxable and non-taxable earning assets in each year.

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

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Table 1

Average Balances and Net Interest Income Analysis

	2006						2005						2004
	Average Balance		Interest Income  / Expense		Average Rates Earned  / Paid		Average Balance		Interest Income  / Expense		Average Rates Earned/ Paid		Average Balance		Interest Income  / Expense		Average Rates Earned/   Paid
	(taxable equivalent basis, dollars in thousands)
EARNING ASSETS
Loans (1) (2)	$	1,142,350	$	92,746	8.12	%	$	711,431	$	48,718	6.85	%	$	612,217	$	35,308	5.77	%
Investment securities (1):
Taxable income		138,225		7,065	5.11			85,082		3,860	4.54			81,253		3,556	4.38
Non-taxable income		54,831		3,225	5.88			44,731		2,595	5.80			47,630		2,725	5.72
Other earning assets		41,015		1,932	4.71			13,129		445	3.39			13,602		161	1.19
Total earning assets		1,376,421		104,968	7.63			854,373		55,618	6.51			754,702		41,750	5.53
Cash and due from banks		27,864						18,642						16,945
Goodwill and core deposit premiums		91,495						20,216						16,462
Other assets, net		79,527						42,676						37,081
TOTAL ASSETS	$	1,575,307					$	933,907					$	825,190
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Demand deposits	$	156,837		2,592	1.65		$	97,623		733	.75		$	89,827		362	.40
Savings deposits		52,827		182	.34			51,483		165	.32			54,298		168	.31
Money market deposits		180,513		6,766	3.75			75,948		1,504	1.98			75,824		798	1.05
Certificates and other time deposits		685,270		29,025	4.24			407,303		12,917	3.17			329,812		7,646	2.32
Retail repurchase agreements		21,134		923	4.37			17,770		503	2.83			15,890		158	.99
Federal Home Loan Bank advances		80,410		3,387	4.21			71,152		2,766	3.89			69,490		2,546	3.66
Federal funds purchased		696		40	5.71			342		9	2.53			4,181		71	1.70
Other borrowed funds		64,266		4,240	6.60			31,044		1,453	4.68			22,306		653	2.93
Total interest-bearing liabilities		1,241,953		47,155	3.80			752,665		20,050	2.66			661,628		12,402	1.87
Noninterest-bearing demand deposits		142,624						84,393						74,741
Other liabilities		16,595						8,481						6,389
Shareholders’ equity		174,135						88,368						82,432
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,575,307					$	933,907					$	825,190
NET INTEREST INCOME AND SPREAD			$	57,813	3.83	%			$	35,568	3.85	%			$	29,348	3.66	%
NET YIELD ON EARNING ASSETS					4.20	%					4.16	%					3.89	%

(1) Interest income and yields related to certain investment securities and loans exempt from both federal and state income tax or from state income tax alone are stated on a fully taxable equivalent basis, assuming a federal tax rate of 35% in 2006 and 34% in 2005 and 2004 and applicable state tax rate, reduced by the nondeductible portion of interest expense.

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

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

Following a generally low-rate environment for interest rates both earned and paid by the Corporation, the Federal Reserve took action to raise the level of interest rates by 25 basis points at the end of June 2004, due to concern about increasing inflationary pressures, causing the prime rate to increase to 4.25% in July 2004. Four additional rate increases of 25 basis points each during the second six months of 2004, eight more such rate increases in 2005 and four more in 2006 have raised the prime rate to the 8.25% level at December 31, 2006. The prime rate averaged 4.33% in 2004, rising to 6.15% in 2005 and 7.94% in 2006.

In 2006, the net interest spread decreased by 2 basis points from 3.85% in 2005 to 3.83% in 2006, reflecting the effect of an increase in the average total yield on earning assets that was more than offset by the increase in the average rate paid on interest-bearing liabilities, or cost of funds. The yield on earning assets increased by 112 basis points from 6.51% in 2005 to 7.63% in 2006, while the cost of funds increased by 114 basis points from 2.66% to 3.80%. In 2005, the 18 basis points increase in net interest spread resulted from a 98 basis points increase in the yield on earning assets as partially offset by a 79 basis points increase in the cost of funds.

The 2006 and 2005 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

	2006 Versus 2005						2005 Versus 2004
	Variance due to (1)						Variance due to (1)
	Volume		Rate		Net Change		Volume			Rate		Net Change
	(taxable equivalent basis, in thousands)
Interest Income
Loans (2)	$	33,710	$	10,318	$	44,028	$	6,223		$	7,187	$	13,410
Investment securities (2):
Taxable income		2,669		536		3,205		171			133		304
Non-taxable income		594		36		630		(168	)		38		(130	)
Other earning assets		1,257		230		1,487		(6	)		290		284
Total interest income		38,230		11,120		49,350		6,220			7,648		13,868
Interest Expense
Interest-bearing deposits:
Demand deposits		624		1,235		1,859		33			338		371
Savings deposits		5		12		17		(9	)		6		(3	)
Money market deposits		3,190		2,072		5,262		1			705		706
Certificates and other time deposits 10,778		5,330		16,108		2,060		3,211			5,271
Retail repurchase agreements		108		312		420		21			324		345
Federal Home Loan Bank advances		380		241		621		61			159		220
Federal funds purchased		14		17		31		(86	)		24		(62	)
Other borrowed funds		2,015		772		2,787		317			483		800
Total interest expense		17,114		9,991		27,105		2,398			5,250		7,648
Net Interest Income	$	21,116	$	1,129	$	22,245	$	3,822		$	2,398	$	6,220

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

(2) Interest income related to certain investment securities and loans exempt from both federal and state income tax or from state income tax alone is stated on a fully taxable equivalent basis, assuming a federal tax rate of 35% in 2006 and 34% in 2005 and 2004 and applicable state tax rate, reduced by the nondeductible portion of interest expense.

Provision for Loan Losses

This provision is the charge against earnings to provide an allowance or reserve for probable losses inherent in the loan portfolio. The amount of each 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. Earnings were positively impacted in 2006 and 2005 by reductions in the provision for loan losses of $316,000 and $1,188,000, respectively. For additional information concerning the provision for loan losses, see the discussion in the “Overview – Significant Factors Affecting Earnings in 2006”.

The allowance for loan losses, as a percentage of loans held for investment, amounted to 1.28% at December 31, 2006, 1.25% at December 31, 2005 and 1.12% at December 31, 2004. The allowance percentage has increased based on the results from application of the allowance model that assigns reserves to various components of the loan portfolio in order to provide for probable inherent losses and also from the continuing evaluation of the quality of the loan portfolio acquired as part of the acquisition of First Gaston Bank, as discussed in the “Overview”.

Noninterest Income

Noninterest income increased $4.3 million or 29% in 2006, due primarily to the effects of the acquisition of First Gaston Bank on April 28, 2006 as discussed in the “Overview”. This acquisition largely resulted in the $2.2 million or 36% increase in service charges on deposit accounts, although there was an additional impact from the adoption in the second quarter of 2005 of new regulatory guidance on the accounting for courtesy overdraft programs. Additional information concerning factors which specifically affected noninterest income in 2006 is discussed in the “Overview—Significant Factors Affecting Earnings in 2006”.

Noninterest income increased $1.3 million or 9.2% in 2005, due primarily to increases of $610,000 in income from mortgage loan sales and $638,000 in service charges on deposit accounts.

Noninterest Expense

Noninterest expense was $21.8 million or 69% higher in 2006. This increase resulted primarily from the increased size of the organization following the acquisitions of Alamance Bank and First Gaston Bank, from a $1.6 million goodwill impairment charge and from the initial recognition of stock-based compensation, all as discussed in the “Overview—Significant Factors Affecting Earnings in 2006”.

Noninterest expense was $2.9 million or 10.2% higher in 2005. This increase resulted primarily from a higher level of compensation expense, due in part to increased incentive compensation, the higher level of mortgage loan sales activity and the acquisition of Alamance Bank on November 4, 2005 as discussed in the “Overview”.

Income Taxes

The effective income tax rate increased from 32.7% in 2005 to 37.4% in 2006 due principally to a higher level of nondeductible expenses in 2006, including much of the stock-based compensation initially recognized in

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2006 and the $1.6 million goodwill impairment charge. Additionally, the Corporation’s federal income tax rate increased from 34% to 35% in 2006. The effective income tax rate increased from 26.0% in 2004 to 32.7% in 2005 due principally to the significant increase in the ratio of taxable to tax-exempt income.

Liquidity

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

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

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

Contractual Obligations

Under existing contractual obligations, the Corporation 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, 2006. Transaction deposit accounts with indeterminate maturities have been classified as having payments due in one year or less. Benefit plan payments cover estimated amounts due through 2016.

Table 3

Contractual Obligations

	Payments Due by Period at December 31, 2006
	One Year or Less		One to Three Years		Three to Five Years		Over Five Years		Total
	(dollars in thousands)
Deposits	$	1,336,004	$	75,173	$	9,035	$	801	$	1,421,013
Retail repurchase agreements		23,161		—		—		—		23,161
Federal Home Loan Bank advances		3,750		15,000		9,000		38,075		65,825
Other borrowed funds		16,287		—		—		61,745		78,032
Lease obligations		1,225		2,188		1,824		9,613		14,850
Estimated benefit plan payments:
Pension		399		1,011		1,167		3,670		6,247
Other		107		286		290		965		1,648
Pension plan contribution expected in 2007		—		—		—		—		—
Total contractual cash obligations	$	1,380,933	$	93,658	$	21,316	$	114,869	$	1,610,776

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Commitments, Contingencies and Off-Balance Sheet Risk

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

Commitments by First National Bank to extend credit and undisbursed advances on customer lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. At December 31, 2006, total commitments to extend credit and undisbursed advances on customer lines of credit amounted to $303.5 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 Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on the credit evaluation of the borrower.

First National Bank issues standby letters of credit whereby it guarantees the performance of a customer to a third party if a specified triggering event or condition occurs. The guarantees generally expire within one year and may be automatically renewed depending on the terms of the guarantee. All standby letters of credit provide for recourse against the customer on whose behalf the letter of credit was issued, and this recourse may be further secured by a pledge of assets. The maximum potential amount of undiscounted future payments related to standby letters of credit was $6.6 million at December 31, 2006 and $7.8 million at December 31, 2005. Due to insignificance, the Corporation has recorded no liability at December 31, 2006 for the current carrying amount of the obligation to perform as a guarantor.

Dover Mortgage Company 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 Corporation is subject to variability in market prices related to these commitments. The Corporation believes that it is prudent to limit the variability of expected proceeds from the future sales of these loans by entering into forward sales commitments and commitments to deliver loans into a mortgage-backed security. The commitments to originate residential mortgage loans and the forward sales commitments are freestanding derivative instruments. They do not qualify for hedge accounting treatment so their fair value adjustments are recorded through the income statement in income from mortgage loan sales. The commitments to originate residential mortgage loans totaled $19.3 million at December 31, 2006, and the related forward sales commitments totaled $19.3 million. Loans held for sale by Dover Mortgage Company totaled $16.3 million at December 31, 2006, and the related forward sales commitments totaled $16.3 million.

First National Bank had loans held for sale of $4.6 million at December 31, 2006. Binding commitments of First National Bank for the origination of mortgage loans intended to be held for sale at December 31, 2006 were not material.

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

Asset/Liability Management and Interest Rate Sensitivity

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

The Corporation’s balance sheet was asset-sensitive at December 31, 2006. An asset-sensitive position means that, for cumulative gap measurement periods of one year or less, there are more assets than liabilities

22

subject to immediate repricing as market rates change. Because immediately rate sensitive assets exceed rate sensitive interest-bearing liabilities, the earnings position could improve in a rising rate environment and could deteriorate in a declining rate environment, depending on the correlation of rate changes in these two categories. Included in interest-bearing liabilities subject to rate changes within 90 days is a portion of the interest-bearing demand, savings and money market deposits. These types of deposits historically have not repriced coincidentally with or in the same proportion as general market indicators.

Table 4 presents information about the periods in which the interest-sensitive assets and liabilities at December 31, 2006 will either mature or be subject to repricing in accordance with market rates, and 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, 2006
	Rate Maturity in Days									Beyond One Year			Total
	1-90			91-180			181-365
	(dollars in thousands)
Earning Assets
Loans	$	836,576		$	23,815		$	56,241		$	396,070		$	1,322,702
Investment securities		53,038			14,125			21,993			82,659			171,815
Interest-bearing bank balances		42,929			—			—			—			42,929
Federal funds sold		30,186			—			—			—			30,186
Total earning assets		962,729			37,940			78,234			488,729			1,567,632
Interest-Bearing Liabilities
Interest-bearing deposits:
Demand deposits		88,749			—			—			88,749			177,498
Savings deposits		25,258			—			—			25,259			50,517
Money market deposits		117,670			—			—			117,670			235,340
Time deposits of $100,000 or more		148,882			108,239			81,266			27,383			365,770
Other time deposits		113,963			139,507			126,722			52,758			432,950
Retail repurchase agreements		23,161			—			—			—			23,161
Federal Home Loan Bank advances		8,538			1,250			2,500			53,537			65,825
Other borrowed funds		72,988			—			—			5,044			78,032
Total interest-bearing liabilities		599,209			248,996			210,488			370,400			1,429,093
Interest Sensitivity Gap	$	363,520		$	(211,056	)	$	(132,254	)	$	118,329		$	138,539
Cumulative gap	$	363,520		$	152,464		$	20,210		$	138,539		$	138,539
Ratio of interest-sensitive assets to interest-sensitive liabilities		161	%		15	%		37	%		132	%		110	%

Market Risk

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

The Corporation’s market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities. The structure of the Corporation’s loan and deposit portfolios is such that a significant decline

23

in interest rates may adversely impact net market values and net interest income. The Corporation does not maintain a trading account nor is the Corporation subject to currency exchange risk or commodity price risk. Interest rate risk is monitored as part of the Corporation’s asset/liability management function, which is discussed in “Asset/Liability Management and Interest Rate Sensitivity” above. The use of an interest rate swap 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 fair values of financial instruments considered market risk sensitive at December 31, 2006.

Table 5

Market Risk Analysis of Financial Instruments

	Contractual Maturities at December 31, 2006
	2007		2008		2009		2010		2011		Beyond Five Years		Total		Average Interest Rate (1)	Estimated Fair Value
	(dollars in thousands)
Financial Assets
Debt Securities:
Fixed rate	$	76,390	$	17,503	$	7,699	$	14,198	$	11,311	$	27,102	$	154,203	5.21	$	153,759
Variable rate		—		—		—		—		5,000		—		5,000	6.45		5,000
Equity securities		—		—		—		—		—		12,034		12,034	—		12,051
Loans:
Fixed rate		130,247		91,750		80,811		59,546		58,853		80,075		501,264	7.17		502,399
Variable rate		390,269		147,005		96,506		42,116		36,949		108,593		821,438	8.32		881,553
Interest-bearing bank balances		42,929		—		—		—		—		—		42,929	5.25		42,929
Federal funds sold		30,186												30,186	5.25		30,186
Total	$	670,021	$	256,258	$	185,016	$	115,860	$	112,113	$	227,804	$	1,567,054	7.43	$	1,627,877
Financial Liabilities
Interest-bearing demand deposits	$	—	$	—	$	—	$	—	$	—	$	—	$	177,498	1.68	$	177,498
Savings deposits		—		—		—		—		—		—		50,517	0.29		50,517
Money market deposits		—		—		—		—		—		—		235,340	4.09		235,340
Time deposits:
Fixed rate		704,526		61,280		9,215		6,342		2,693		801		784,857	4.70		784,293
Variable rate		9,183		4,086		592								13,861	5.29		13,894
Retail repurchase agreements		—		—		—		—		—		—		23,161	4.50		23,155
Federal Home Loan
Bank advances:
Fixed rate		3,750		1,500		13,500		9,000		—		38,075		65,825	3.87		62,805
Variable rate
Other borrowed funds		16,287		—		—		—		—		61,745		78,032	6.88		78,032
Total	$	733,746	$	66,866	$	23,307	$	15,342	$	2,693	$	100,621	$	1,429,091	4.15	$	1,425,534

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

Capital Adequacy

Under guidelines established by the Board of Governors of the Federal Reserve System, capital adequacy is currently measured for regulatory purposes by certain risk-based capital ratios, supplemented by a leverage capital ratio. The risk-based capital ratios are determined by expressing allowable capital amounts, defined in terms of Tier 1, Tier 2 and Tier 3, as a percentage of risk-weighted assets, which are computed by measuring the relative credit risk of both the asset categories on the balance sheet and various off-balance sheet exposures. Tier 1 capital consists primarily of common shareholders’ equity and qualifying perpetual preferred stock and trust preferred securities, net of goodwill and other disallowed intangible assets. Tier 2 capital, which is limited to the total of Tier 1 capital, includes allowable amounts of subordinated debt, mandatory convertible debt, preferred stock, trust preferred securities and the allowance for loan losses. Tier 3 capital, applicable only to financial institutions subject to certain market risk capital guidelines, is capital allocated to support the market risk related to a financial institution’s ongoing trading activities. At December 31, 2006, FNB United Corp. and First National Bank were not subject to the market risk capital guidelines and, accordingly, had no Tier 3 capital allocation. Total capital, for risk-based purposes, consists of the sum of Tier 1, Tier 2 and Tier 3 capital. Under current requirements, the minimum total capital ratio is 8.00% and the minimum Tier 1 capital ratio is 4.00%. At December 31, 2006, FNB United Corp. and First National Bank had total capital ratios of 11.53% and 11.30%, respectively, and Tier 1 capital ratios of 8.36% and 10.14%.

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, 2006, FNB United Corp. and First National Bank had leverage capital ratios of 7.16% and 8.72%, respectively.

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

Balance Sheet Review

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%.

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Investment Securities

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 6 presents information, on the basis of selected maturities, about the composition of the investment securities portfolio for each of the last three years.

Table 6

Investment Securities Portfolio Analysis

	December 31
	2006						2005		2004
	Amortized Cost		Estimated Fair Value		Taxable Equivalent Yield (1)		Carrying Value		Carrying Value
	(dollars in thousands)
Available for Sale
U.S. Government agencies and corporations:
Within one year	$	21,349	$	21,375	4.77	%	$	3,430	$	1,262
One to five years		47,356		47,346	5.17			16,895		13,078
Five to ten years		5,637		5,700	5.48			22,421		15,583
Over ten years		—		—	—			—		2,002
Total		74,342		74,421	4.85			42,746		31,925
Mortgage-backed securities		751		759	5.04			28,628		8,392
State, county and municipal:
Within one year		536		539	7.25			636		866
One to five years		11,988		12,072	6.79			4,114		4,038
Five to ten years		13,479		13,820	6.96			10,978		10,292
Over ten years		10,237		10,283	6.34			11,159		6,793
Total		36,240		36,714	6.73			26,887		21,989
Other debt securities:
One to five years		—		—	2,489			3,138
Over ten years		5,000		5,000	6.45			3,215		2,657
Total		5,000		5,000	6.45			5,704		5,795
Total debt securities		116,332		116,894	5.59			103,965		68,101
Equity securities		12,034		12,051	6,953			5,662
Total available-for-sale securities	$	128,367	$	128,945			$	110,918	$	73,763
Held to Maturity
U.S. Government agencies and corporations:
Within one year	$	4,490	$	4,439	3.00		$	4,011	$	2,001
One to five years		12,119		11,713	3.63			16,726		13,912
Five to ten years		—		—	—			—		7,000
Total		16,610		16,152	3.46			20,737		22,913
Mortgage-backed securities		4,517		4,471	5.46			3,190		1,270
State, county and municipal:
Within one year		2,115		2,101	2.75			2,059		2,151
One to five years		6,435		6,203	3.74			7,504		8,078
Five to ten years		7,419		7,276	5.37			7,244		7,307
Over ten years		4,774		4,692	6.02			6,154		7,661
Total		20,743		20,272	4.74			22,961		25,197
Other debt securities:
Within one year		—		—	—			1,000		—
One to five years		1,000		969	4.70			—		1,000
Five to ten years		—		—	—			1,000		1,000
Total		1,000		969	4.70			2,000		2,000
Total held-to-maturity securities	$	42,870	$	41,865	4.32		$	48,888	$	51,380

26

(1) Yields 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. In 2006, the level of investment securities was significantly impacted by two factors: the net increase of $84.4 million from the First Gaston Bank acquisition on April 26, 2006, as discussed in the “Balance Sheet Review”, and the sale in the third quarter of approximately $120 million of available-for-sale securities, or approximately 52% of the total carrying value of the investment portfolio, as discussed in the “Overview—Significant Factors Affecting Earnings in 2006”. Since only a portion of the proceeds from the sale was reinvested in securities in the 2006 fourth quarter, the net increase in the level of investment securities in 2006, taking into account the addition to the portfolio from the First Gaston Bank acquisition, was only $12.0 million or 7.5%. In 2005, there was a net increase of $34.7 million, or 28% in the level of investment securities, due primarily to the addition of $34.7 million in investment securities from the Alamance Bank acquisition on November 4, 2005.

Investable funds not otherwise utilized are temporarily invested on an overnight basis as federal funds sold or as interest-bearing balances at other banks, the level of which is affected by such considerations as near-term loan demand and liquidity needs. As noted above, only a portion of the proceeds from the sale of investment securities in the 2006 third quarter was reinvested in the fourth quarter, resulting in a $73.1 million total balance of federal funds sold and interest-bearing bank balances at December 31, 2006 compared to a $22.5 million total balance at December 31, 2005. These liquid funds at year-end 2006 will be used, as appropriate, to fund loan originations and investment securities purchases or to liquidate borrowed funds.

Loans

The Corporation’s primary source of revenue and largest component of earning assets is the loan portfolio. 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, as noted in the “Overview—Significant Factors Affecting Earnings in 2006”. Average loans increased $430.9 million or 61% in 2006 and $99.2 million or 12% in 2005. The ratio of average loans to average deposits decreased from 99.3% in 2005 to 93.8% in 2006. The ratio of loans to deposits at December 31, 2006 was 93.1%.

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Table 7 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, 2006 are presented in Table 8.

Table 7

Loan Portfolio Composition

	December 31
	2006			2005			2004			2003			2002
	Amount		%	Amount		%	Amount		%	Amount		%	Amount		%
	(dollars in thousands)
Commercial and agricultural	$	315,184	24.2	$	176,286	22.2	$	196,846	30.1	$	215,036	39.6	$	198,085	39.6
Real estate—construction		278,124	21.4		142,096	17.9		83,433	12.8		36,357	6.7		29,553	5.9
Real estate—mortgage:
1-4 family residential		319,182	24.5		231,071	29.1		197,855	30.3		184,881	34.0		188,764	37.8
Commercial and other		350,261	26.9		221,457	27.8		154,024	23.6		86,734	15.9		59,760	12.0
Consumer		39,089	3.0		24,141	3.0		20,899	3.2		19,973	3.7		21,550	4.3
Leases		—	—		—	—		49	—		365	.1		1,843	.4
Loans held for investment		1,301,840	100.0		795,051	100.0		653,106	100.0		543,346	100.0		499,555	100.0
Loans held for sale		20,862			17,615			11,648			8,567			2,787
Gross loans	$	1,322,702		$	812,666		$	664,754		$	551,913		$	502,342

Table 8

Selected Loan Maturities

	December 31, 2006
	One Year or Less		One to Five Years		Over Five Years		Total
	(in thousands)
Commercial and agricultural	$	131,746	$	145,928	$	37,511	$	315,184
Real estate—construction		137,185		124,980		15,959		278,124
Total selected loans	$	268,931	$	270,908	$	53,469	$	593,308
Sensitivity to rate changes:
Fixed interest rates	$	23,556	$	101,376	$	26,846	$	151,778
Variable interest rates		245,375		169,532		26,623		441,530
Total	$	268,931	$	270,908	$	53,469	$	593,308

In 2006, loan growth, including the loans added by the First Gaston Bank acquisition, was significant in all types of loans, with the largest percentage increase being related to the portfolio of construction loans. In 2005, loan growth through internal generation continued at a high level as in 2004 and 2003, following an extended period in which the level of the entire loan portfolio had been adversely impacted by the general slowdown of the economy. In particular, considering only growth through internal generation in both 2005 and 2004, the portfolios related to construction loans and commercial and other real estate loans experienced significant gains in each year, while the commercial and agricultural loan portfolio declined. The balance of the 1-4 family residential mortgage loan portfolio considered “held for investment” also experienced growth in both 2005 and 2004, due primarily to home equity lines of credit in 2004. In 2005, there was a modest decline in the balance of home equity lines of credit.

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Asset Quality

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

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

At December 31, 2006, the Corporation had impaired loans which totaled $9.3 million. Of the $9.3 million, $1.6 million had an allowance for loan losses of $388,000 and $7.7 million had no allowance for loan losses. At December 31, 2005, the Corporation had impaired loans which totaled $6.0 million, all of which had an allowance for loan losses which amounted to $1.1 million.

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

The allowance for loan losses, as a percentage of loans held for investment, amounted to 1.28% at December 31, 2006, 1.25% at December 31, 2005 and 1.12% at December 31, 2004. The allowance percentage has increased based on the results from application of the allowance model that assigns reserves to various components of the loan portfolio in order to provide for probable inherent losses and also from the continuing evaluation of the quality of the loan portfolio acquired as part of the acquisition of First Gaston Bank, as discussed in the “Overview”.

Management believes the allowance for loan losses of $16.6 million at December 31, 2006 is adequate to cover probable losses in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires considerable judgment.

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

Table 9 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. Information about management’s allocation of the allowance for loan losses by loan category is presented in Table 10.

Table 9

Allowance for Loan Losses and Nonperforming Assets

	2006			2005			2004			2003			2002
	(dollars in thousands)
Allowance for Loan Losses
Balance at beginning of year	$	9,945		$	7,293		$	6,172		$	6,109		$	4,417
Charge-offs:
Commercial and agricultural		1,817			747			2,007			1,165			502
Real estate—construction		499			—			—			133			—
Real estate—mortgage		210			449			943			244			101
Consumer (1)		2,104			1,420			211			332			538
Leases		—			—			106			26			243
Total charge-offs		4,630			2,616			3,267			1,900			1,384
Recoveries:
Commercial and agricultural		1,123			427			158			14			116
Real estate—construction		120			—			1			—			—
Real estate—mortgage		268			7			36			—			1
Consumer (1)		1,231			522			94			85			76
Leases		3			65			114			4			64
Total recoveries		2,745			1,021			403			103			257
Net loan charge-offs		1,885			1,595			2,864			1,797			1,127
Provision for loan losses (1)		2,526			2,842			4,030			1,860			1,780
Purchase accounting acquisition		6,038			1,405			—			—			1,039
Allowance adjustment for loans sold		(4	)		—			(45	)		—			—
Balance at end of year	$	16,620		$	9,945		$	7,293		$	6,172		$	6,109
Nonperforming Assets, at end of year
Nonaccrual loans	$	8,282		$	5,398		$	3,952		$	5,235		$	4,944
Accruing loans past due 90 days or more		2,852			648			1,275			758			1,268
Total nonperforming loans		11,134			6,046			5,227			5,993			6,212
Foreclosed assets		196			108			77			65			61
Other real estate owned		3,361			929			543			1,008			414
Total nonperforming assets	$	14,961		$	7,083		$	5,847		$	7,066		$	6,687
Ratios
Net loan charge-offs to average loans		.16	%		.22	%		.47	%		.33	%		.26	%
Net loan charge-offs to allowance for loan losses		11.34			16.03			39.27			29.12			18.45
Allowance for loan losses to loans held for investment		1.28			1.25			1.12			1.14			1.22
Total nonperforming loans to loans held for investment		.86			.76			.80			1.10			1.24

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(1) Includes activity related to an overdraft protection program commencing in mid-2005. Charge-offs and recoveries related to the overdraft protection program were $1.6 million and $784,000, respectively, in 2006 and $1.1 million and $461,000, respectively, in 2005. The provision for loan losses associated with this program was $670,000 in 2006 and $712,000 in 2005.

Table 10

Allocation of Allowance For Credit Losses

	December 31
	2006		2005		2004		2003		2002
	(in thousands)
Commercial and agricultural	$	5,151	$	3,165	$	2,953	$	3,440	$	2,939
Real estate—construction		3,829		1,939		1,015		118		128
Real estate—mortgage		5,745		3,892		2,401		1,395		1,539
Consumer		1,895		707		592		756		911
Leases		—		—		—		21		194
Unallocated		—		242		332		442		398
Total allowance for loan losses	$	16,620	$	9,945	$	7,293	$	6,172	$	6,109

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 2006, deposits increased $579.4 million or 69%, due primarily to the addition of $563.3 million in deposits from the First Gaston Bank acquisition on April 28, 2006, as discussed in the “Balance Sheet Review”. Similarly in 2005, deposits increased $182.1 million or 28%, due largely to the addition of $113.0 million in deposits from the Alamance Bank acquisition on November 4, 2005.

The level and mix of the various deposit categories has been significantly affected in 2006 and 2005 by the merger acquisitions. Information concerning the significant increases that occurred in almost all deposit categories, except for savings deposits, is contained in Table 11.

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Table 11 shows the year-end and average deposit balances for the years 2006, 2005 and 2004 and the changes in 2006 and 2005.

Table 11

Analysis of Deposits

	2006							2005							2004
	Balance		Change from Prior Year					Balance		Change from Prior Year					Balance
			Amount			%				Amount			%
	(dollars in thousands)
Year-End Balances
Interest-bearing deposits:
Demand deposits	$	177,498	$	60,939		52.3		$	116,559	$	23,180		24.8		$	93,379
Savings deposits		50,517		(246	)	(0.5	)		50,763		(2,403	)	(4.5	)		53,166
Money market deposits		235,340		149,807		175.1			85,533		12,110		16.5			73,423
Total		463,355		210,500		83.2			252,855		32,887		15.0			219,968
Certificates and other time deposits		798,720		310,431		63.6			488,289		124,123		34.1			364,166
Total interest-bearing deposits		1,262,075		520,931		70.3			741,144		157,010		26.9			584,134
Noninterest-bearing demand deposits		158,938		58,473		58.2			100,465		25,055		33.2			75,410
Total deposits	$	1,421,013	$	579,404		68.8		$	841,609	$	182,065		27.6		$	659,544
Average Balances
Interest-bearing deposits:
Demand deposits	$	156,837	$	59,214		60.7		$	97,623	$	7,796		8.7		$	89,827
Savings deposits		52,827		1,344		2.6			51,483		(2,815	)	(5.2	)		54,298
Money market deposits		180,513		104,565		137.7			75,948		124		.2			75,824
Total		390,177		165,123		73.4			225,054		5,105		2.3			219,949
Certificates and other time deposits		685,270		277,967		68.2			407,303		77,491		23.5			329,812
Total interest-bearing deposits		1,075,447		443,090		70.1			632,357		82,596		15.0			549,761
Noninterest-bearing demand deposits		142,624		58,231		69.0			84,393		9,652		12.9			74,741
Total deposits	$	1,218,071	$	501,321		69.9		$	716,750	$	92,248		14.8		$	624,502

Business Development Matters

As discussed in the “Overview” and in Note 2 to the Consolidated Financial Statements, on November 4, 2005, the Corporation completed a merger for the acquisition of United Financial, Inc., holding company for Alamance Bank, headquartered in Graham, North Carolina, in a transaction accounted for using the purchase method of accounting for business combinations. On February 1, 2006, Alamance Bank was merged with and into First National Bank.

As discussed in the “Overview” and in Note 2 to the Consolidated Financial Statements, on April 28, 2006, the Corporation completed a merger for the acquisition of Integrity Financial Corporation (“Integrity”), headquartered in Hickory, North Carolina and the holding company for First Gaston Bank, in a transaction accounted for using the purchase method of accounting for business combinations. On August 1, 2006, First Gaston Bank was merged with and into First National Bank.

In conjunction with the completion of the Integrity merger, FNB United’s wholly owned and newly formed subsidiary, FNB United Statutory Trust II, issued $30,000,000 of trust preferred securities on April 27, 2006. The

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proceeds of the trust preferred securities, along with the proceeds of $928,000 received by the trust from the issuance of its common securities to FNB United, were used to purchase $30,928,000 of FNB United’s junior subordinated debt securities. The proceeds of FNB United’s junior subordinated debt securities were primarily used to fund the cash portion of the merger consideration to the former Integrity shareholders. The trust preferred securities bear interest at a variable rate based on the three-month LIBOR rate plus 1.32% and mature on June 30, 2036, but may be redeemed at the option of FNB United beginning on June 30, 2011.

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

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

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

In June 2005, First National Bank received regulatory approval for the establishment of a second branch office in Salisbury, North Carolina. The new office, which is a leased facility, opened for business in September 2006.

In May 2006, Dover Mortgage Company opened a new mortgage production office in Wrightsville Beach, North Carolina.

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

Accounting Pronouncement Matters

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155 (“SFAS No. 155), “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140”, which is effective for all financial instruments acquired or issued after the beginning of fiscal years beginning after September 15, 2006. SFAS No. 155 was issued to clarify the application of SFAS No. 133 to beneficial interests in securitized financial assets and to improve the consistency of accounting for similar financial instruments, regardless of the form of the instruments. SFAS No. 155 provides relief from the requirement to separately determine the fair value of an embedded derivative that would otherwise be bifurcated from the host contract under SFAS No. 133 and allows an irrevocable election on an instrument-by-instrument basis to measure such a hybrid financial instrument at fair value. The Corporation is currently evaluating SFAS No.155 to determine the potential impact, if any, on its consolidated financial statements.

In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156 (“SFAS No. 156”), “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140”, which is effective for fiscal years beginning after September 15, 2006. SFAS No. 156 was issued to simplify the accounting for servicing rights and to reduce the volatility that results from using different measurement attributes. SFAS No. 156 requires that all separately recognized servicing assets and liabilities be initially measured at fair value and permits (but does not require) subsequent measurement of servicing assets and liabilities at fair value. The Corporation is currently evaluating SFAS No. 156 to determine the potential impact, if any, on its consolidated financial statements.

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

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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 Corporation is currently evaluating the impact of FIN 48 on its consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS No. 157”), “Fair Value Measurements”, which is effective for fiscal years beginning after November 15, 2007. 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 FAS 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. The Corporation has not determined the impact of adopting SFAS No. 157 on its consolidated financial statements.

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 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 Corporation adopted the provisions of SFAS NO. 158 that require recognition of the funded status of a benefit plan and related disclosures. The Corporation is currently evaluating the remaining requirements of SFAS No. 158 to determine the potential impact, if any, on its consolidated financial statements.

The Emerging Issues Task Force (“EITF”) reached a consensus at its September 2006 meeting regarding EITF 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”. The scope of EITF 06-4 is limited to the recognition of a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to postretirement periods. Therefore, this EITF would not apply to a split-dollar life insurance arrangement that provides a specified benefit to an employee that is limited to the employee’s active service period with an employer. This EITF 06-4 is effective for fiscal years beginning after December 15, 2007, with earlier application permitted. The Corporation has not determined the impact of adopting EITF 06-4 on its consolidated financial statements.

The EITF reached a consensus at its September 2006 meeting regarding EITF 06-5, “Accounting for Purchases of Life Insurance Determining the Amount That Could be Realized in Accordance with FASB Technical Bulletin No. 85-5”. The scope of EITF 06-5 is limited to the determination of net cash surrender value

34

of a life insurance contract in accordance with Technical Bulletin 85-4. This EITF outlines when contractual limitations of the policy should be considered when determining the net realizable value of the contract. EITF 06-5 is effective for fiscal years beginning after December 15, 2006, with earlier application permitted. The Corporation is currently evaluating the impact of EITF 06-5 on its consolidated financial statements.

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

Effects of Inflation

The operations of First National Bank and Dover Mortgage Company and, therefore, of the Corporation are subject to the effects of inflation through interest rate fluctuations and changes in the general price level of noninterest operating expenses. Such costs as salaries, fringe benefits and utilities have tended to increase at a rate comparable to or even greater than the general rate of inflation. Broadly speaking, all operating expenses have risen to higher levels as inflationary pressures have increased. Management has responded to this situation by evaluating and adjusting fees charged for specific services and by emphasizing operating efficiencies.

The level of interest rates is also considered to be influenced by inflation, rising whenever inflationary expectations and the actual level of inflation increase and declining whenever the inflationary outlook appears to be improving. Management constantly monitors this situation, attempting to adjust both rates received on earning assets and rates paid on interest-bearing liabilities in order to maintain the desired net yield on earning assets.

Additionally, the level of activity in the origination of 1-4 family residential mortgage loans which directly affects the amount of income from mortgage loan sales, the principal source of revenue for Dover and an important source for First National Bank, is significantly affected by the level of interest rates, increasing as rates decline and decreasing as rates rise. In periods of rising rates, which do not generally benefit from the activity that results from the refinancing of residential mortgage loans, management attempts to increase the volume of originations resulting from traditional purchase mortgage transactions.

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

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

The statements contained in this Annual Report on Form 10-K that are not historical facts are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), which can

35

be identified by the use of forward-looking terminology such as “believes”, “expects”, “plans”, “projects”, “goals”, “estimates”, “may”, “could”, “should”, or “anticipates” or the negative thereof or other variations thereon of comparable terminology, or by discussions of strategy that involve risks and uncertainties. In addition, from time to time, the Corporation or its representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but are not limited to, various filings made by the Corporation with the Securities and Exchange Commission, or press releases or oral statements made by or with the approval of an authorized executive officer of the Corporation. Forward-looking statements are based on management’s current views and assumptions and involve risks and uncertainties that could significantly affect expected results. The Corporation wishes to caution the reader that factors, such as those listed below, in some cases have affected and could affect the Corporation’s actual results, causing actual results to differ materially from those in any forward-looking statement. These factors include, without limitation: (i) expected cost savings from the mergers described in the Overview may not materialize or may not fully materialize within the expected time frame, (ii) revenues following the mergers may not meet expectations, (iii) costs or difficulties related to the integration of the businesses of FNB United, United and Integrity may be greater than anticipated, (iv) competitive pressure in the banking industry or in the Corporation’s markets may increase significantly, (v) changes in the interest rate environment may reduce margins, (vi) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, credit quality deterioration, (vii) changes may occur in banking legislation and regulation, (viii) changes may occur in general business conditions, (ix) changes may occur in the securities markets and (x) any new capital accords adopted by the Basel Committee on Banking Supervision and implemented by U.S. federal bank regulatory agencies will affect the Corporation’s future capital requirements. All forward-looking statements speak only as of the date on which such statements are made, and the Corporation undertakes no obligation to update any statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

36

Table 12

Quarterly Financial Data (Unaudited)

	First		Second		Third		Fourth
	(in thousands, except per share data)
2006
Interest income	$	17,126	$	25,806	$	29,947	$	30,490
Interest expense		7,045		11,429		14,067		14,614
Net interest income		10,081		14,377		15,880		15,876
Provision for loan losses		77		405		1,824		220
Net interest income after provision for loan losses		10,004		13,972		14,056		15,656
Noninterest income		3,510		4,604		5,419		5,682
Noninterest expense		9,415		12,261		15,540		16,225
Income before income taxes		4,099		6,315		3,935		5,113
Income taxes		1,422		2,282		1,456		2,115
Net income	$	2,677	$	4,033	$	2,479	$	2,998
Per share data:
Net income:
Basic	$	.42	$	.42	$	.22	$	.27
Diluted		.42		.41		.22		.27
Cash dividends declared		.15		.15		.15		.17
Common stock price (1):
High		21.25		20.74		19.50		18.93
Low		18.35		17.40		17.54		17.58
2005
Interest income	$	11,814	$	12,682	$	13,713	$	16,206
Interest expense		3,995		4,497		5,093		6,465
Net interest income		7,819		8,185		8,620		9,741
Provision for loan losses		370		864		446		1,162
Net interest income after provision for loan losses		7,449		7,321		8,174		8,579
Noninterest income		3,162		3,960		3,966		3,838
Noninterest expense		7,222		7,937		8,319		8,200
Income before income taxes		3,389		3,344		3,821		4,217
Income taxes		1,083		1,072		1,262		1,417
Net income	$	2,306	$	2,272	$	2,559	$	2,800
Per share data:
Net income:
Basic	$	.41	$	.41	$	.46	$	.46
Diluted		.40		.40		.44		.45
Cash dividends declared		.15		.15		.15		.17
Common stock price (1):
High		21.39		21.85		21.50		19.32
Low		17.80		18.20		18.50		17.35

(1) FNB United Corp. common stock is traded on the Nasdaq Global Select Market under the symbol FNBN. At December 31, 2006, there were 3,925 shareholders of record.

37

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors

FNB United Corp.

Asheboro, North Carolina

We have audited the accompanying consolidated balance sheets of FNB United Corp. (formerly FNB Corp.) and Subsidiaries as of December 31, 2006 and 2005, 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, 2006. 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 Subsidiaries at December 31, 2006 and 2005 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2006 FNB United Corp. adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Shared-based Payment, and, effective December 31, 2006, adopted the recognition and disclosure provisions of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of FNB United Corp.’s internal control over financial reporting as of December 31, 2006, 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 26, 2007 expressed an unqualified opinion on management’s assessment of, and an adverse opinion on the effective operation of the Corporation’s internal control over financial reporting.

Raleigh, North Carolina

March 26, 2007

38

FNB UNITED CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31
	2006			2005
	(in thousands, except share and per share data)
Assets
Cash and due from banks	$	35,225		$	22,389
Interest-bearing bank balances		42,929			2,310
Federal funds sold		30,186			20,180
Investment securities:
Available for sale, at estimated fair value (amortized cost of $128,367 in 2006 and $110,693 in 2005)		128,945			110,918
Held to maturity (estimated fair value of $41,865 in 2006 and $47,508 in 2005)		42,870			48,888
Loans:
Loans held for sale		20,862			17,615
Loans held for investment		1,301,840			795,051
Less allowance for loan losses		(16,620	)		(9,945	)
Net loans		1,306,082			802,721
Premises and equipment, net		45,691			24,670
Goodwill		110,956			31,381
Core deposit premiums		7,378			1,326
Other assets		64,643			37,302
Total Assets	$	1,814,905		$	1,102,085
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing demand deposits	$	158,938		$	100,465
Interest-bearing deposits:
Demand, savings and money market deposits		463,355			252,855
Time deposits of $100,000 or more		365,770			229,910
Other time deposits		432,950			258,379
Total deposits		1,421,013			841,609
Retail repurchase agreements		23,161			21,338
Federal Home Loan Bank advances		65,825			86,225
Other borrowed funds		78,032			39,004
Other liabilities		19,206			11,594
Total Liabilities		1,607,237			999,770
Shareholders’ equity:
Preferred stock, $10.00 par value; authorized 200,000 shares, non issued		—			—
Common stock, $2.50 par value; authorized 50,000,000 shares, issued 11,293,992 shares in 2006 and 6,370,486 shares in 2005		28,235			15,926
Surplus		112,213			23,542
Retained earnings		68,662			62,711
Accumulated other comprehensive income (loss)		(1,442	)		136
Total Shareholders’ Equity		207,668			102,315
Total Liabilities and Shareholders’ Equity	$	1,814,905		$	1,102,085

Commitments (Note 17)

See accompanying notes to consolidated financial statements

39

FNB UNITED CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

	Years Ended December 31
	2006			2005		2004
	(in thousands, except share and per share data)
Interest Income
Interest and fees on loans	$	92,565		$	48,604	$	35,184
Interest and dividends on investment securities:
Taxable income		6,791			3,689		3,369
Non-taxable income		2,081			1,677		1,727
Other interest Income		1,932			445		156
Total interest Income		103,369			54,415		40,436
Interest Expense
Deposits		38,565			15,319		8,974
Retail repurchase agreements		923			503		158
Federal Home Loan Bank advances		3,387			2,766		2,546
Federal funds purchased		40			9		71
Other borrowed funds		4,240			1,453		653
Total interest expense		47,155			20,050		12,402
Net Interest Income		56,214			34,365		28,034
Provision for loan losses		2,526			2,842		4,030
Net Interest Income After Provision for Loan Losses		53,688			31,523		24,004
Noninterest Income
Service charges on deposit accounts		8,214			6,057		5,419
Mortgage loan sales		4,841			4,642		4,032
Cardholder and merchant services income		1,908			1,347		1,078
Trust and investment services		1,529			1,293		1,535
Bank owned life insurance		1,226			597		617
Other service charges, commissions and fees		987			882		843
Gain (loss) on sale of securities, net		(559	)		—		—
Factoring operations		334			—		—
Other income		735			108		149
Total noninterest income		19,215			14,926		13,673
Noninterest Expense
Personnel expense		28,078			18,934		16,755
Occupancy expense		3,774			1,888		1,566
Furniture and equipment expense		3,832			2,241		1,943
Data processing services		2,432			1,473		1,331
Goodwill impairment		1,625			—		—
Other expense		13,700			7,142		7,160
Total noninterest expense		53,441			31,678		28,755
Income Before Income Taxes		19,462			14,771		8,922
Income taxes		7,275			4,834		2,324
Net Income	$	12,187		$	9,937	$	6,598
Net income per common share:
Basic	$	1.27		$	1.73	$	1.17
Diluted	$	1.25		$	1.69	$	1.13
Weighted average number of shares outstanding:
Basic		9,619,870			5,731,966		5,663,173
Diluted		9,715,585			5,869,023		5,822,047

See accompanying notes to consolidated financial statements.

40

FNB UNITED CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREOLDERS’ EQUITY AND COMPREHENSIVE INCOME

	Common Stock					Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
	Shares		Amount
	(in thousands, except share and per share data)
Balance, December 31, 2003	5,686,899		$	14,217		$	12,478		$	53,174		$	1,589		$	81,458
Comprehensive income:
Net income	—			—			—			6,598			—			6,598
Other comprehensive income, net of taxes:
Unrealized securities losses:
Net losses arising during period	—			—			—			—			(481	)		(481	)
Total comprehensive income																6,117
Cash dividends declared, $.60 per share	—			—			—			(3,389	)		—			(3,389	)
Stock options:
Proceeds from options exercised	66,303			166			566			—			—			732
Net tax benefit related to option exercises	—			—			59			—			—			59
Common stock repurchased	(148,100	)		(370	)		(2,460	)		—			—			(2,830	)
Balance, December 31, 2004	5,605,102			14,013			10,643			56,383			1,108			82,147
Comprehensive income:
Net income	—			—			—			9,937			—			9,937
Other comprehensive income, net of taxes:
Unrealized securities losses:
Net losses arising during period	—			—			—			—			(972	)		(972	)
Total comprehensive income																8,965
Cash dividends declared, $.62 per share	—			—			—			(3,609	)		—			(3,609	)
Merger acquisition of subsidiary company:
Common stock issued	728,625			1,822			12,685			—			—			14,507
Stock options:
Proceeds from options exercised	61,559			153			555			—			—			708
Net tax benefit related to option exercises	—			—			96			—			—			96
Common stock repurchased	(24,800	)		(62	)		(437	)		—			—			(499	)
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:
Unrealized securities gains (losses):
Net gains arising during period	—			—			—			—			(123	)		(123	)
Reclassification adjustment for net realized losses	—			—			—			—			338			338
Total comprehensive income																12,402
Cash dividends declared, $.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

See accompanying notes to consolidated financial statements.

41

FNB UNITED CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31
	2006			2005			2004
	(in thousands)
Operating Activities
Net Income	$	12,187		$	9,937		$	6,598
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		2,855			1,755			1,619
Provision for loan losses		2,526			2,842			4,030
Deferred income taxes (benefit)		1,735			(502	)		(12	)
Deferred loan fees and costs, net		694			(119	)		229
Premium amortization and discount accretion of investment securities, net		339			453			591
Loss on sale of investment securities		559			—			—
Amortization of core deposit premiums		604			66			55
Stock compensation expense		673			—			—
Income from bank owned life insurance		(1,226	)		(597	)		(617	)
Origination of mortgage loans held for sale		(368,632	)		(334,883	)		(270,484	)
Proceeds from sale of mortgage loans held for sale		370,226			333,558			271,435
Gain on mortgage loan sales		(4,841	)		(4,642	)		(4,032	)
Gain on other loan sales		(118	)		—			—
Mortgage servicing rights capitalized		(701	)		(754	)		(681	)
Mortgage servicing rights amortization and impairment		637			351			303
Goodwill impairment		1,625			—			—
Decrease (increase) in other assets		2,103			(925	)		3,146
Increase (decrease) in other liabilities		(2,779	)		(27	)		324
Net Cash provided by Operating Activities		18,466			6,513			12,504
Investing Activities
Available-for-sale securities:
Proceeds from sales		119,490			—			—
Proceeds from maturities and calls		37,712			6,266			35,659
Purchases		(90,746	)		(10,464	)		(29,858	)
Held-to-maturity securities:
Proceeds from maturities and calls		7,562			4,407			12,812
Purchases		(1,730	)		(2,192	)		(871	)
Net increase in loans held for investment		(41,520	)		(48,411	)		(128,634	)
Proceeds from sales of loans		10,443			—			12,534
Purchases of premises and equipment		(6,293	)		(5,614	)		(3,799	)
Net cash received (paid) in merger transactions		10,256			(447	)		—
Purchases of SBIC investments		(1,050	)		(250	)		(150	)
Net change in other investments		396			399			(18	)
Net Cash Provided by (Used in) Investing Activities		44,520			(56,306	)		(102,325	)
Financing Activities
Net increase in deposits		16,435			69,118			61,619
Increase (decrease) in retail repurchase agreements		(1,735	)		7,466			(998	)
Increase (decrease) in Federal Home Loan Bank advances		(39,018	)		(4,500	)		16,000
Increase (decrease) in federal funds purchased		—			(8,175	)		7,550
Increase in other borrowed funds		27,789			13,319			4,589
Proceeds from exercise of stock options		2,117			804			791
Tax benefit exercise of stock options		279			—			—
Common stock repurchased		—			(499	)		(2,830	)
Cash dividends paid		(5,392	)		(3,370	)		(3,515	)
Net Cash Provided by Financing Activities		475			74,163			83,206
Net Increase (Decrease) in Cash and Cash Equivalents		63,461			24,370			(6,615	)
Cash and Cash Equivalents at Beginning of Year		44,879			20,509			27,124
Cash and Cash Equivalents at End of Year	$	108,340		$	44,879		$	20,509
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest	$	44,844		$	18,871		$	12,344
Income taxes		5,836			5,334			1,172
Noncash transactions:
Foreclosed loans transferred to other real estate		3,393			1,004			1,872
Unrealized securities gains (losses), net of income taxes (benefit)		215			(972	)		(481	)
Initial application of SFAS No. 158, net of income tax benefit		(1,793	)		—			—
Merger acquisition of subsidiary company:
Fair value of assets acquired		728,722			163,668			—
Fair value of common stock issued		98,123			14,507			—
Cash paid		27,717			8,201			—
Liabilities assumed		602,882			140,960			—

See accompanying notes to consolidated financial statements.

42

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 subsidiaries are the First National Bank and Trust Company (“First National Bank”) and Dover Mortgage Company (“Dover”). First National Bank has two wholly owned subsidiaries, First National Investor Services, Inc. and Premier Investment Services, Inc. Through its subsidiaries, FNB United offers a complete line of consumer, mortgage and business banking services, including loan, deposit, cash management, investment management and trust services, to individual and business customers. First National Bank has offices in Alamance, Alexander, Ashe, Catawba, Chatham, Gaston, Guilford, Iredell, Montgomery, Moore, Orange, Randolph, Richmond, Rowan, Scotland, Watauga and Wilkes counties in North Carolina. Dover Mortgage Company operates mortgage production offices in North Carolina at Charlotte, Carolina Beach, Goldsboro, Greenville, Lake Norman, Leland, Raleigh, Wilmington and Wrightsville Beach.

The consolidated financial statements include the accounts of FNB United and its subsidiaries (collectively the “Corporation”). All significant intercompany balances and transactions have been eliminated.

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent 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.

Certain amounts for prior years have been reclassified to conform to the financial statement presentation for 2006. These reclassifications had no effect on net income or shareholders’ equity as previously reported.

Business Segments

The Corporation 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. The Corporation has two reportable business segments, the full-service subsidiary bank, First National Bank, and the mortgage banking subsidiary, Dover Mortgage Company. Business segment information is disclosed in Note 19.

Recently Adopted Accounting Pronouncements

In November 2003, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“EITF 03-01”). EITF 03-01 provided guidance for evaluating whether an investment is other-than-temporarily impaired and requires certain disclosures with respect to these investments. In September 2004, the Financial Accounting Standards Board (“FASB”) issued a FASB Staff Position (“FSP EITF 03-1-b”) to delay the requirement to record impairment losses under EITF 03-1. The guidance also included accounting considerations subsequent to the recognition of an other-than-temporary impairment and requirements for disclosures about unrealized losses that have ot been recognized as other-than-temporary impairments. In November 2005, the FASB issued FSP FAS 115-1 and

43

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—(Continued)

FAS 124-1, which addresses the determination as to when an investment is considered impaired. This FSP nullifies certain requirements of EITF 03-01 and supersedes EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” This FSP is to be applied to reporting periods beginning after December 15. 2005. The Corporation adopted the provisions of FSP FAS 115-1 on January 1, 2006 with no effect on its consolidated financial statements.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R (“SFAS No. 123R”), “Share-Based Payment”, which is a revision of FASB Statement No. 123 “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 “Accounting for Stock Issued to Employees”. SFAS No. 123R requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees over the period during which an employee is required to provide service in exchange for the award (presumptively the vesting period). SFAS No. 123R sets accounting requirements for “share-based” compensation to employees, including employee-stock purchase plans (“ESPPs”). Awards to most nonemployee directors will be accounted for as employee awards. This Statement was to be effective for public companies that do not file as small business issuers as of the beginning of interim or annual reporting periods beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission (“SEC”) issued Release No. 2005-57, which defers the effective date of SFAS No. 123R for many registrants. Registrants that do not file as small business issuers must adopt SFAS No. 123R as of the beginning of their first annual period beginning after June 15, 2005. The Corporation adopted the provisions of SFAS No. 123R on January 1, 2006 as discussed below in Notes 1 and 16.

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

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

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 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

44

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—(Continued)

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 Corporation adopted the provisions of SFAS NO. 158 that require recognition of the funded status of a benefit plan and related disclosures. The Corporation is currently evaluating the remaining requirements of SFAS No. 158 to determine the potential impact, if any, on its consolidated financial statements.

In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108 (“SAB No. 108”), “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in the Current Year Financial Statements”. SAB No. 108 addresses the diversity in practice by registrants when quantifying the effect of an error on the financial statements. SAB No. 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements and is effective for annual periods ending after November 15, 2006. The Corporation adopted the provisions of SAB No. 108 effective December 31, 2006 with no effect on its consolidated financial statements.

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 Corporation 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 Corporation has the positive intent and ability to hold to maturity are reported at amortized cost.

• Trading securities—Debt and equity securities bought and held principally for the purpose of being sold in the near future are reported at fair value, with unrealized gains and losses included in earnings.

• 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.

The Corporation 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 Corporation has the positive intent and ability to hold to maturity, are classified as held-to-maturity securities.

45

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—(Continued)

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 all amounts due according 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 Corporation 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, 2006, the principal balance of and net investment in these loans was immaterial. At December 31, 2005, 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 First National Bank’s market area. For loans determined to be impaired, the allowance is based on discounted cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. 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 amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review First National Bank’s allowance for loan losses. Such agencies may require First National Bank to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examinations.

46

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—(Continued)

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 Corporation 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 fair value of a reporting unit is computed using one or a combination of the following three methods: income, market value or cost method. The income method uses a discounted cash flow analysis to determine fair value by considering a reporting unit’s capital structure and applying a risk-adjusted discount rate to forecast earnings based on a capital asset pricing model. The market value method uses recent transaction analysis or publicly traded comparable analysis for similar assets and liabilities to determine fair value. The cost method assumes the net assets of a recent business combination accounted for under the purchase method of accounting will be recorded at fair value if no event or circumstance has occurred triggering a decline in the value. 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 test will be performed. In the second step, the implied fair value of the reporting unit’s goodwill, 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 at 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 goodwill. Once an impairment loss is recognized, future increases in fair value will not result in the reversal of previously recognized losses.

47

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—(Continued)

Mortgage Servicing Rights (MSRs)

The rights to service mortgage loans for others are included in other assets on the consolidated balance sheet. MSRs are capitalized based on the allocated cost which is determined when the underlying loans are sold. MSRs are amortized using the interest method over the expected life of the underlying loan as an adjustment of servicing income. Impairment reviews of MSRs are 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 Corporation’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 Corporation’s components of accumulated other comprehensive income at December 31, 2006 include unrealized gains (losses) on investment securities classified as available-for-sale and the adjustment to initially apply SFAS No. 158.

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:

	2006			2005			2004
	(in thousands)
Income tax expense (benefit) related to unrealized securities gains (losses):
Arising during the period	$	(81	)	$	(607	)	$	(302	)
Reclassification adjustment for net realized losses		220			—			—
Total	$	139		$	(607	)	$	(302	)
Accumulated other comprehensive income (loss):
Unrealized securities gains	$	351		$	136		$	1,108
Application of SFAS No. 158		(1,793	)		—			—
Total	$	(1,442	)	$	136		$	1,108

48

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—(Continued)

Employee Benefit Plans

The Corporation 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 are at least age 40, have earned 10 years of vesting service as an employee of FNB United and remain an active employee as of December 31, 2006 will qualify 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 will be 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 will have their retirement benefit frozen as of December 31, 2006. Effective January 1, 2007, the 401K plan will be enhanced and will be the primary retirement benefit plan.

The Corporation 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 Corporation 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 are at least age 40, have earned 10 years of vesting service as an employee of the Corporation and remain an active employee as of December 31, 2006 will qualify for a grandfathering provision. Under the grandfathering provision, the participant will continue to accrue benefits under the plan through December 31, 2011.

Stock-Based Compensation

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

49

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—(Continued)

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

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

The effect (increase/(decrease)) of the adoption of SFAS No. 123R for the year ended December 31, 2006 is 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		(.05	)
Diluted		(.05	)

The following illustrates the effect on net income available to common stockholders if the Corporation had applied the fair value recognition provisions of SFAS No. 123 to the results for the years ended December 31, 2005 and 2004:

	2005		2004
	(in thousands, except per share data)
Net income, as reported	$	9,937	$	6,598
Add: Stock-based employee compensation expense included in reported net income, net of related income tax effects		—		—
Less: Stock-based compensation determined under fair value based method of all awards, net of related income taxes		387		340
Net income, pro forma	$	9,550	$	6,258
Net income per share:
Basic:
As reported	$	1.73	$	1.17
Pro forma		1.67		1.11
Diluted:
As reported		1.69		1.13
Pro forma		1.63		1.07

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 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.

50

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES—(Continued)

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

For the twelve months ended December 31, 2006 and 2005, the interest rate swap resulted in a net increase of $125,000 and a net reduction of $1,000, respectively, in the interest expense that would otherwise have been reported for the FHLB advance. The fair value of the swap at December 31, 2006 was recorded on the consolidated balance sheet as a liability in the amount of $244,000, offset by a valuation adjustment in the same amount to the FHLB advance.

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

Dover Mortgage Company 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 Corporation is subject to variability in market prices related to these commitments. The Corporation believes that it is prudent to limit the variability of expected proceeds from the future sales of these loans by entering into forward sales commitments and commitments to deliver loans into a mortgage-backed security. The commitments to originate 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.

NOTE 2—MERGER INFORMATION

United Financial, Inc.

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

Pursuant to the terms of the merger, each share of United common stock was converted, at the election of the shareholder, into either: (1) $14.25 in cash, (2) 0.6828 shares of FNB Corp. common stock, or (3) $4.99 in cash and 0.4438 shares of FNB Corp. common stock, the overall conversion of stock being limited to 65% of United shares. The aggregate purchase price, as adjusted by a reduction of $0.2 million during the one-year period following the date of merger, was $22.5 million, consisting of $8.2 million of cash payments and 728,625 shares of FNB Corp. common stock valued at $14.3 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

51

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 2—MERGER INFORMATION—(Continued)

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.

The estimated fair values of the assets acquired and liabilities assumed at the date of merger on November 4, 2005, and the subsequent adjustments during the one year period from that date, are as follows:

	Initial Amounts			Subsequent Adjustments			Adjusted Amounts
	(in thousands)
Assets
Cash and cash equivalents	$	7,754		$	—		$	7,754
Investment securities, available for sale		34,712			—			34,712
Loans, net		95,219			—			95,219
Premises and equipment		4,139			—			4,139
Goodwill		15,022			(264	)		14,758
Core deposit intangible		1,290			—			1,290
Other assets		5,532			60			5,592
Deposits		(112,961	)		—			(112,961	)
Borrowings		(24,420	)		—			(24,420	)
Other liabilities		(4,083	)		(8	)		(4,091	)
Net assets acquired		22,204			(212	)		21,992
Transaction costs		504			—			504
Total purchase price	$	22,708		$	(212	)	$	22,496

The core deposit intangible will be amortized on the straight-line basis over a ten-year life. The amortization method and valuation of the core deposit intangible are based upon a historical study of the deposits acquired. Goodwill will not be amortized but will be tested for impairment in accordance with SFAS No. 142. None of the goodwill is expected to be deductible for income tax purposes. Premiums and discounts that resulted from recording the United assets and liabilities at their respective fair values are being amortized using methods that approximate an effective yield over the life of the assets and liabilities. The net amortization of premiums and discounts related to this merger increased income before income taxes by $499,000 in 2006 and $88,000 in 2005.

Integrity Financial Corporation

On April 28, 2006, the Corporation 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 First National Bank. The primary reasons for the merger were as follows:

• 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 ten central-North Carolina counties to seventeen counties with forty-two community offices, stretching from the Central and Southern Piedmont to the Foothills

52

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 2—MERGER INFORMATION—(Continued)

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 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 consolidated financial statements include the results of operations of Integrity since April 28, 2006.

The estimated fair values of the assets acquired and liabilities assumed at the date of merger on April 28, 2006, and the subsequent adjustments from that date through December 31, 2006, are as follows:

	Initial Amounts			Subsequent Adjustments			Adjusted Amounts
	(in thousands)
Assets
Cash and cash equivalents	$	37,973		$	—		$	37,973
Investment securities, available for sale		84,373			—			84,373
Loans, net		475,281			—			475,281
Premises and equipment		17,786			193			17,979
Goodwill		81,537			(81	)		81,456
Core deposit intangible		6,656			—			6,656
Other assets		25,050			(46	)		25,004
Deposits		(563,311	)		—			(563,311	)
Borrowings		(32,237	)		—			(32,237	)
Other liabilities		(7,268	)		(66	)		(7,334	)
Net assets acquired		125,840			—			125,840
Transaction costs		1,344			—			1,344
Total purchase price	$	127,184		$	—		$	127,184

The core deposit intangible will be amortized on the straight-line basis over a ten-year life. The amortization method and valuation of the core deposit intangible are based upon a historical study of the deposits acquired. Goodwill will not be amortized but will be tested for impairment in accordance with SFAS No. 142. None of the goodwill is expected to be deductible for income tax purposes. Premiums and discounts that resulted from recording the Integrity assets and liabilities at their respective fair values are being amortized using methods that approximate an effective yield over the life of the assets and liabilities. The net amortization of premiums and discounts related to this merger increased income before income taxes by $1,522,000 in 2006.

The following pro forma financial information presents the combined results of operations of FNB United and Integrity as if the merger had occurred as of the beginning of the year for the years ended December 31, 2006 and 2005, after giving effect to certain adjustments, including amortization of the core deposit intangible and

53

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 2—MERGER INFORMATION—(Continued)

related income tax effects. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had FNB United and Integrity constituted a single entity during these years.

	2006		2005
	(in thousands, except per share data)
Net interest income	$	64,788	$	58,400
Noninterest income		20,780		19,748
Net income		13,655		15,730
Net income per common share:
Basic		1.23		1.51
Diluted		1.21		1.47

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:

	December 31,
	2006		2005
	(in thousands)
Amortized intangible assets:
Core deposit premium related to whole bank acquisitions:
Carrying amount	$	8,202	$	1,546
Accumulated amortization		824		220
Net core deposit premium	$	7,378	$	1,326
Unamortized intangible assets:
Goodwill	$	110,956	$	31,381

Amortization of intangibles totaled $604,000 for core deposit premiums in 2006, $66,000 in 2005 and $55,000 in 2006. The estimated amortization expense for core deposit premiums for each year ending December 31 from 2006 through 2011 is as follows: $814,000 in 2007, $802,000 in 2008, $795,000 in 2009, $795,000 in 2010 and $795,000 in 2011.

The changes in the carrying amount of goodwill in 2006 were as follows:

Balance, December 31, 2005	$	31,381
Acquisition of Integrity Financial Corporation in 2006		81,456
Adjustment of estimated fair values of assets and liabilities of United Financial, Inc., acquired in 2005		(264	)
Payment of additional cash consideration to shareholders of Dover Mortgage Company, acquired in 2003, per terms of merger agreement		8
Recognition of goodwill impairment charge for Dover Mortgage Company		(1,625	)
Balance December 31, 2006	$	110,956

54

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 3—INTANGIBLE ASSETS—(Continued)

The 2006 review for potential impairment of goodwill indicated on a preliminary basis that the goodwill related to the separate FNB United subsidiary of Dover Mortgage Company might be impaired. Further testing of Dover goodwill by an outside consulting company resulted in the determination that there was an impairment loss of approximately $1.6 million.

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 $231.7 million, $202.3 million and $180.2 million at December 31, 2006, 2005 and 2004, respectively.

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

	Years Ended December 31
	2006			2005			2004
	(in thousands)
Balance at beginning of year	$	2,409		$	2,006		$	1,628
Servicing rights capitalized		701			754			681
Amortization expense		(387	)		(351	)		(303	)
Change in valuation allowance		(250	)		—			—
Balance at end of year	$	2,473		$	2,409		$	2,006

The estimated amortization expense for mortgage servicing rights for the years ending December 31 is as follows: $420,000 in 2007, $420,000 in 2008, $420,000 in 2009, $420,000 in 2010, $420,000 in 2011, and $373,000 in 2012. The estimated amortization expense is based on 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.

55

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(in thousands)
Available For Sale
December 31, 2006
U.S. Government agencies and corporations	$	74,342	$	112	$	33	$	74,421
Mortgage-backed securities		751		8		—		759
State, county and municipal		36,240		541		67		36,714
Other debt securities		5,000		—		—		5,000
Equity securities		12,034		17		—		12,051
Total	$	128,367	$	678	$	100	$	128,945
December 31, 2005
U.S. Government agencies and corporations	$	43,340	$	33	$	627	$	42,746
Mortgage-backed securities		28,903		38		313		28,628
State, county and municipal		26,384		550		47		26,887
Other debt securities		5,126		606		28		5,704
Equity securities		6,940		13		—		6,953
Total	$	110,693	$	1,240	$	1,015	$	110,918
Held to Maturity
December 31, 2006
U.S. Government agencies and corporations	$	16,610	$	—	$	458	$	16,152
Mortgage-backed securities		4,517		22		67		4,472
State, county and municipal		20,743		74		545		20,272
Other debt securities		1,000		—		31		969
Total	$	42,870	$	96	$	1,101	$	41,865
December 31, 2005
U.S. Government agencies and corporations	$	20,737	$	—	$	618	$	20,119
Mortgage-backed securities		3,190		—		74		3,116
State, county and municipal		22,961		32		691		22,302
Other debt securities		2,000		—		29		1,971
Total	$	48,888	$	32	$	1,412	$	47,508

56

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 4—INVESTMENT SECURITIES—(Continued)

The amortized cost and estimated fair value of investment securities at December 31, 2006, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to prepay obligations with or without prepayment penalties.

	Available For Sale				Held To Maturity
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(in thousands)
Due in one year or less	$	21,884	$	21,912	$	6,606	$	6,540
Due after one year through five years		62,973		63,102		18,554		17,916
Due after five years through ten years		15,487		15,836		8,419		8,246
Due after ten years		15,238		15,285		4,774		4,691
Total		115,582		116,135		38,353		37,393
Mortgage-backed securities		751		759		4,517		4,472
Equity securities		12,034		12,051		—		—
Total investment securities	$	128,367	$	128,945	$	42,870	$	41,865

Debt securities with an estimated fair value of $59.4 million at December 31, 2006 and $67.2 million at December 31, 2005 were pledged to secure public funds and trust funds on deposit. Debt securities with an estimated fair value of $31.0 million at December 31, 2006 and $29.1 million at December 31, 2005 were pledged to secure retail repurchase agreements. There were no debt securities pledged to secure advances from the Federal Home Loan Bank at December 31, 2006 and debt securities pledged with an estimated fair value of $24.6 million at December 31, 2005. Debt securities with an estimated fair value of and $3.8 million at December 31, 2006 and $8.1 million at December 31, 2005 were pledged for other purposes.

Gross gains and losses recognized on the sale of securities are summarized as follows:

	Years ended December 31,
	2006			2005		2004
	(in thousands)
Gains on sales of investment securities available for sale	$	839		$	—	$	—
Losses on sales of investment securities available for sale		(1,398	)		—		—
Total securities gains (losses)	$	(559	)	$	—	$	—

First National 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, 2006 and 2005, First National Bank owned a total of $6.6 million and $6.0 million, respectively, of FHLB stock. Due to the redemption provisions of FHLB stock, the Corporation estimated that fair value was equal to cost and that this investment was not impaired at December 31, 2006.

First National 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 First National 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

57

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 4—INVESTMENT SECURITIES—(Continued)

market value. At December 31, 2006 and 2005, First National Bank owned a total of $5.2 million and $1.0 million, respectively of FRB stock. Due to the nature of this investment in an entity of the U. S. Government, the Corporation estimated that fair value was equal to cost and that this investment was not impaired at December 31, 2006.

Gross unrealized losses on investment securities and the estimated fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

	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, 2006
Available For Sale
U.S. Government agencies and corporations	$	27,459	$	28	$	1,273	$	5	$	28,732	$	33
State, county and municipal		1,550		10		5,525		57		7,075		67
Total	$	29,009	$	38	$	6,798	$	62	$	35,807	$	100
Held to Maturity
U.S. Government agencies and corporations	$	—	$	—	$	16,152	$	458	$	16,152	$	458
Mortgage-backed securities		—		—		2,884		67		2,884		67
State, county and municipal		—		—		14,215		545		14,215		545
Other debt securities		—		—		969		31		969		31
Total	$	—	$	—	$	34,220	$	1,101	$	34,220	$	1,101
December 31, 2005
Available For Sale
U.S. Government agencies and corporations	$	16,237	$	226	$	17,820	$	412	$	34,057	$	638
Mortgage-backed securities		20,841		260		1,225		42		22,066		302
State, county and municipal		5,419		47		—		—		5,419		47
Other debt securities		—		—		972		28		972		28
Total	$	42,497	$	533	$	20,017	$	482	$	62,514	$	1,015
Held to Maturity
U.S. Government agencies and corporations	$	459	$	8	$	19,660	$	610	$	20,119	$	618
Mortgage-backed securities		2,686		57		430		17		3,116		74
State, county and municipal		6,349		81		12,706		610		19,055		691
Other debt securities		976		24		995		5		1,971		29
Total	$	10,470	$	170	$	33,791	$	1,242	$	44,261	$	1,412

58

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 4—INVESTMENT SECURITIES—(Continued)

Information concerning the status of investment securities with unrealized losses at December 31, 2006 is as follows:

Debt securities other than mortgage-backed securities.    97 debt securities other than mortgage-backed securities had unrealized losses with aggregate depreciation of 1.7% from the amortized cost basis. The unrealized losses were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment, adjusted for call premiums if appropriate. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Corporation has the ability and intent to hold these investments until maturity or a market price recovery, these investments are not considered other-than-temporarily impaired.

Mortgage-backed securities. 20 mortgage-backed securities had unrealized losses with aggregate depreciation of 2.3% from the amortized cost basis. The unrealized losses were caused by interest rate increases. These securities were issued by reputable organizations and, for certain of these securities, the contractual cash flows are guaranteed by U.S Government agencies and corporations. It is expected that the securities would not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Corporation has the ability and intent to hold these investments until maturity or a market price recovery, these investments are not considered other-than-temporarily impaired.

NOTE 5—LOANS

Major classifications of loans are as follows:

	December 31
	2006		2005
	(in thousands)
Commercial and agricultural	$	315,184	$	176,286
Real estate—construction		278,124		142,096
Real estate—mortgage:
1-4 family residential		319,182		231,071
Commercial and other		350,261		221,457
Consumer		39,089		24,141
Loans held for investment		1,301,840		795,051
Loans held for sale		20,862		17,615
Gross loans	$	1,322,702	$	812,666

Loans as presented are reduced by net deferred loan fees of $1.8 million and $0.9 million at December 31, 2006 and 2005, respectively. Accruing loans past due 90 days or more amounted to $2.9 million at December 31, 2006 and $648,000 at December 31, 2005. Nonaccrual loans amounted to $8.3 million at December 31, 2006 and $5.4 million at December 31, 2005. Interest income that would have been recorded on nonaccrual loans for the years ended December 31, 2006, 2005 and 2004, had they performed in accordance with their original terms, amounted to approximately $1,174,000, $588,000 and $355,000, respectively. Interest income on all such loans included in the results of operations amounted to approximately $618,000 in 2006, $307,000 in 2005 and $216,000 in 2004.

At December 31, 2006, the Corporation had impaired loans which totaled $9.3 million. Of the $9.3 million, $1.6 million had an allowance for loan losses of $388,000 and $7.7 million had no allowance for loan losses. At

59

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 5—LOANS—(Continued)

December 31, 2005, the Corporation had impaired loans which totaled $6.0 million, all of which had an allowance for loan losses which amounted to $1.1 million. The average carrying value of impaired loans was $7.7 million in 2006 and $5.6 million in 2005. Interest income recognized on impaired loans amounted to approximately $650,000 in 2006, $397,000 in 2005 and $334,000 in 2004.

Loans with outstanding balances of $3.4 million in 2006 and $1.0 million in 2005 were transferred from loans to other real estate acquired through foreclosure. Other real estate acquired through loan foreclosures amounted to $3.4 million at December 31, 2006 and $0.9 million at December 31, 2005 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, 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.

Loans have been made by First National Bank to directors and executive officers of the Corporation and to the associates of such persons, as defined by the Securities and Exchange Commission. Such loans were made in the ordinary course of business on substantially the same terms, including rate and collateral, as those prevailing at the time in comparable transactions with other borrowers and do not involve more than normal risk of collectibility. A summary of the activity with respect to related party loans, based upon the related parties as determined in each year, is as follows:

	2006			2005
	(in thousands)
Balance at beginning of year	$	8,933		$	2,137
New loans		45,205			29,231
Repayments		(32,795	)		(22,435	)
Balance at end of year	$	21,343		$	8,933

NOTE 6—ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses were as follows:

	Years Ended December 31
	2006			2005			2004
	(in thousands)
Balance at beginning of year	$	9,945		$	7,293		$	6,172
Provision for losses charged to operations		2,526			2,842			4,030
Loans charged off		(4,630	)		(2,616	)		(3,267	)
Recoveries on loans previously charged off		2,745			1,021			403
Acquired in purchase transactions		6,038			1,405			—
Allowance adjustment for loans sold		(4	)		—			(45	)
Balance at end of year	$	16,620		$	9,945		$	7,293

60

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 7—PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:

	December 31
	2006		2005
	(in thousands)
Land	$	12,240	$	5,864
Buildings and improvements		29,306		17,822
Furniture and equipment		21,338		16,654
Leasehold improvements		1,612		969
Total		64,496		41,309
Less accumulated depreciation and amortization		18,805		16,639
Premises and equipment, net	$	45,691	$	24,670

NOTE 8—INCOME TAXES

Income taxes as reported in the consolidated income statement included the following expense (benefit) components:

	2006		2005			2004
	(in thousands)
Current:
Federal	$	4,618	$	4,510		$	2,046
State		922		826			290
Total		5,540		5,336			2,336
Deferred:
Federal		1,430		(429	)		2
State		305		(73	)		(14	)
Total		1,735		(502	)		(12	)
Total income taxes	$	7,275	$	4,834		$	2,324

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

	2006			2005			2004
	(in thousands)
Amount of tax computed using Federal statutory tax rate of 35% in 2006 and 2005 and 34% in 2004	$	6,812		$	5,170		$	3,033
Increases (decreases) resulting from effects of:
Non-taxable income		(1,099	)		(783	)		(811	)
State income taxes, net of federal benefit		798			489			183
Other		764			(42	)		(81	)
Total	$	7,275		$	4,834		$	2,324

61

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 8—INCOME TAXES—(Continued)

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

	December 31
	2006		2005
	(in thousands)
Deferred tax assets:
Allowance for loan losses	$	6,394	$	3,712
Compensation and benefit plans		2,460		2,114
Fair value basis of loans		2,469		517
Contract termination costs		464		—
Pension and other post retirement benefits		603		—
Other		257		88
Gross deferred tax assets		12,647		6,431
Deferred tax liabilities:
Core deposit intangible		2,904		—
Mortgage servicing rights		977		951
Prepaid pension cost		—		925
Depreciable basis of premises and equipment		1,232		724
Net deferred loan fees and costs		427		231
Net unrealized securities gains		227		89
Other		481		303
Gross deferred tax liabilities		6,248		3,223
Net deferred tax asset	$	6,399	$	3,208

Changes in net deferred tax asset were as follows:

	2006			2005
	(in thousands)
Balance at beginning of year	$	3,208		$	563
Purchase accounting acquisition:
Integrity Financial Corporation		3,896			1,536
Income tax effect from change in unrealized losses (gains) on available-for-sale securities		(139	)		607
Adoption of SFAS No. 158		1,169			—
Deferred income tax benefit (expense) on continuing operations		(1,735	)		502
Balance at end of year	$	6,399		$	3,208

Under accounting principles generally accepted in the United States of America, the Corporation 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, 2006 includes 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.

62

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 9—TIME DEPOSITS

The scheduled maturities of time deposits at December 31, 2006 are as follows (in thousands):

Years ending December 31
2007	$	713,711
2008		65,366
2009		9,807
2010		6,342
2011		2,693
2012 and later years		801
Total time deposits	$	798,720

Interest expense on time deposits of $100,000 or more amounted to $14.1 million in 2006, $6.1 million in 2005 and $3.0 million in 2004.

NOTE 10—BORROWED FUNDS

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:

	2006						2005						2004
	Retail Repurchase Agreements			Federal Funds Purchased			Retail Repurchase Agreements			Federal Funds Purchased			Retail Repurchase Agreements			Federal Funds Purchased
	(dollars in thousands)
Balance at December 31	$	23,161		$	—		$	21,338		$	—		$	13,818		$	8,175
Average balance during the year		21,134			696			17,770			342			15,890			4,181
Maximum month-end balance		27,786			20,000			21,338			2,625			15,913			11,425
Weighted average interest rate:
At December 31		4.67	%		—	%		3.68	%		—	%		1.90	%		2.57	%
During the year		4.37			5.71			2.83			2.53			0.99			1.70

Federal Home Loan Bank (FHLB) Advances

First National Bank had a $235.7 million line of credit with the FHLB at December 31, 2006, secured by blanket collateral agreements on qualifying mortgage loans and, as required, by other qualifying collateral. At December 31, 2006, FHLB advances under these lines amounted to $65.8 million and were at interest rates ranging from 2.88% to 6.15%. At December 31, 2005, FHLB advances amounted to $86.2 million and were at interest rates ranging from 2.16% to 5.92%.

63

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 10—BORROWED FUNDS—(Continued)

At December 31, 2006, the scheduled maturities of FHLB advances, certain of which are callable at the option of the FHLB before scheduled maturity, are as follows (in thousands):

Years ending December 31
2007	$	3,750
2008		1,500
2009		13,500
2010		9,000
2011		—
2012 and later years		38,075
Total FHLB Advances	$	65,825

First National Bank has obtained irrevocable letters of credit from the FHLB amounting to $81.0 million at December 31, 2006. These letters of credit, which expire in 2014, 2015 and 2016, were issued in favor of the State of North Carolina to secure public funds on deposit.

Junior Subordinated Deferrable Interest Debentures

FNB United Corp. 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 Corp. 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 are now owned by FNB United Corp.

FNB Corp. 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 Corporation. The preferred securities qualify as Tier 1 and Tier 2 capital for regulatory capital purposes.

Information concerning the Junior Subordinated Debentures at December 31, 2006 and 2005 is as follows:

Issuer	Stated Maturity Date	Commencement of Early Redemption Period	Carrying Amount (in thousands)				Interest Rate
			12/31/2006		12/31/2005
FNB Trust I	12/15/2035	12/15/2010	$	20,619	$	20,619	3 month LIBOR + 1.37% 6.73% at 12/31/06
FNB Trust II	6/30/2036	6/30/2011		30,928		—	3 month LIBOR + 1.32% 6.68% at 12/31/06
Catawba Trust I	12/30/2032	12/30/2007		5,152		—	3 month LIBOR + 3.35% 8.71% at 12/31/06
Catawba Trust II	12/30/2032	12/30/2007		5,047		—	6.85% fixed rate
Total Junior Subordinated Debentures			$	61,746	$	20,619

64

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 10—BORROWED FUNDS—(Continued)

Other Borrowed Funds

Dover mortgage Company has a line of credit totaling $20.0 million with an external financial institution, secured by a blanket collateral agreement on the mortgage loans and certain other assets of Dover and separately guaranteed by FNB United Corp. Interest is payable on a variable rate basis and the line of credit is subject to annual renewal. At December 31, 2006, the balance outstanding on the line of credit was $16.3 million at a current interest rate of 6.99%. At December 31, 2005, the balance outstanding on the line of credit was $15.9 million at a current interest rate of 6.15%.

NOTE 11—EMPLOYEE BENEFIT PLANS

Pension Plan

The Corporation 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 Corporation’s funding policy is to contribute annually to the plan an amount which is not less than the minimum amount required by the Employee 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 Corporation approved a modified freeze to the pension plan. Effective December 31, 2006, no new employees are eligible to enter the plan. Participants who are at least age 40, have earned 10 years of vesting service as an employee of the the Corporation and remain an active employee as of December 31, 2006 will qualify 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 will be 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 will have their retirement benefit frozen as of December 31, 2006.

65

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 11—EMPLOYEE BENEFIT PLANS—(Continued)

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:

	2006			2005
	(dollars in thousands)
Change in Benefit Obligation:
Benefit obligation at beginning of year	$	11,548		$	10,202
Service cost		835			614
Interest cost		656			604
Net actuarial loss		238			525
Benefits paid		(414	)		(397	)
Curtailment		(1,916	)		—
Benefit obligation at end of year	$	10,947		$	11,548
Change in Plan Assets:
Fair value of plan assets at beginning of year	$	10,142		$	9,384
Actual return on plan assets		909			625
Employer contributions		—			530
Benefits paid		(414	)		(397	)
Other		—			—
Fair value of plan assets at December 31	$	10,637		$	10,142
Funded Status at End of Year	$	(310	)	$	(1,406	)
Unrecognized net actuarial loss		—			3,621
Unrecognized prior service cost		—			129
(Accrued) prepaid pension cost at December 31	$	(310	)	$	2,344
Amounts Recognized in the Consolidated Statements of Condition:
Other Assets	$	—		$	2,344
Other Liabilities		(310	)		—
		(310	)		2,344
Amounts Recognized in Accumulated Other Comprehensive Income:
Net actuarial loss	$	1,049		$	—
Prior service credit		7			—
Net amount recognized	$	1,056		$	—
Weighted-Average Allocation of Plan Assets at End of Year:
Equity securities		68	%		66	%
Debt securities		30	%		29	%
Cash and cash equivalents		1	%		5	%
Total		100	%		100	%
Weighted-Average Plan Assumptions at End of Year:
Discount rate		6.00	%		5.75	%
Expected long-term rate of return on plan assets		9.00			9.00
Rate of increase in compensation levels		6.00			6.00

66

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 11—EMPLOYEE BENEFIT PLANS—(Continued)

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.

Net periodic pension cost included the following components:

	2006			2005			2004
	(dollars in thousands)
Service cost	$	835		$	614		$	567
Interest cost		656			604			576
Expected return on plan assets		(897	)		(851	)		(658	)
Amortization of prior service cost		23			29			110
Amortization of net actuarial (gain)/loss		198			130			158
Net periodic pension cost		815			526			753
Effect of curtailment		93			—			—
Total pension cost	$	908		$	526		$	753

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 $64,000 and $4,000 respectively.

The Corporation’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 63% at December 31, 2006, 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 Corporation does not expect to contribute any funds to its pension plan in 2007.

The estimated benefit payments for each year ending December 31 from 2007 through 2011 are as follows: $399,000 in 2007, $466,000 in 2008, $545,000 in 2009, $571,000 in 2010 and $596,000 in 2011. The estimated benefit payments to be paid in the aggregate for the five year period from 2012 through 2016 are $3,670,000. The estimated benefit payments are based on the same assumptions used to measure the benefit obligation at December 31, 2006 and include estimated future employee service.

Supplemental Executive Retirement Plan

The Corporation 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.

67

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 11—EMPLOYEE BENEFIT PLANS—(Continued)

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:

	2006			2005
	(dollars in thousands)
Change in Benefit Obligation:
Benefit obligation at beginning of year	$	1,594		$	1,197
Service cost		105			86
Interest cost		99			83
Amendments to plan		363			—
Net actuarial loss		109			250
Benefits paid		(22	)		(22	)
Benefit obligation at end of year	$	2,248		$	1,594
Change in Plan Assets:
Fair value of plan assets at beginning of year	$	—		$	—
Actual return on plan assets		—			—
Employer contributions		22			22
Benefits paid		(22	)		(22	)
Fair value of plan assets at end of year	$	—		$	—
Funded Status at December 31	$	(2,248	)	$	(1,594	)
Amounts Recognized in the Consolidated Statements of Condition:
Other Liabilities	$	2,248		$	1,594
Amounts Recognized in Accumulated Other Comprehensive Income:
Net actuarial loss	$	346		$	—
Prior service credit		239			—
Net amount recognized	$	585		$	—
Weighted-Average Plan Assumption at End of Year:
Discount rate		6.00	%		5.75	%
	2006			2005			2004
	(dollars in thousands)
Components of Net Periodic SERP Cost:
Service cost	$	105		$	86		$	63
Interest cost		99			83			68
Expected return on plan assets		—			—			—
Amortization of prior service cost		56			50			46
Amortization of net actuarial (gain)/loss		38			29			22
Net periodic SERP cost		298			248			199
Effect of special termination costs		174			—			—
Total SERP cost	$	472		$	248		$	199

68

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 11—EMPLOYEE BENEFIT PLANS—(Continued)

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 $28,000 and $72,000 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 2007 through 2011 are as follows: $39,000 in 2007, $72,000 in 2008, $72,000 in 2009, $71,000 in 2010 and $71,000 in 2011. The estimated benefit payments to be paid in the aggregate for the five year period from 2012 through 2016 are $542,000. The estimated benefit payments are based on the same assumptions used to measure the benefit obligation at December 31, 2006 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 2006, provisions of $86,387 were expensed for future benefits to be provided under this plan. The total liability under this plan was $521,730 at December 31, 2006 and is included in other liabilities in the accompanying consolidated balance sheets. Payments amounting to $46,512 were made under the provisions of the plan.

Other Postretirement Defined Benefit Plans

The Corporation 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 are at least age 40, have earned 10 years of vesting service as an employee of the Corporation and remain an active employee as of December 31, 2006 will qualify for a grandfathering provision. Under the grandfathering provision, the participant will continue to accrue benefits under the plan through December 31, 2011.

69

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 11—EMPLOYEE BENEFIT PLANS—(Continued)

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:

	2006			2005
	(dollars in thousands)
Change in Benefit Obligation:
Benefit obligation at beginning of year	$	1,531		$	1,375
Service cost		67			66
Interest cost		82			80
Net actuarial (gain) loss		(110	)		43
Plan participant contributions		81			76
Benefits paid		(87	)		(109	)
Curtailment		(307	)		—
Benefit obligation at end of year	$	1,257		$	1,531
Change in Plan Assets:
Fair value of plan assets at beginning of year	$	—		$	—
Actual return on plan assets		—			—
Employer contributions		6			33
Plan participant contributions		81			76
Benefits paid		(87	)		(109	)
Fair value of plan assets at end of year	$	—		$	—
Funded Status at December 31	$	(1,257	)	$	(1,531	)
Amounts Recognized in the Consolidated Statements of Condition:
Other Liabilities	$	1,257		$	1,531
Amounts Recognized in Accumulated Other Comprehensive Income:
Net actuarial loss	$	180		$	—
Prior service credit		(28	)		—
Net amount recognized	$	152		$	—
Weighted-Average Plan Assumption at End of Year:
Discount rate		6.00	%		5.75	%

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, 2006 or the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 2006.

70

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 11—EMPLOYEE BENEFIT PLANS—(Continued)

Net periodic postretirement benefit cost included the following components:

	2006			2005		2004
	(dollars in thousands)
Service cost	$	67		$	66	$	60
Interest cost		82			80		78
Expected return on plan assets		—			—
Amortization of prior service cost		(24	)		10		10
Amortization of transition obligation		—			20		20
Amortization of net actuarial (gain)/loss		35			6		8
Net periodic SERP cost		160			182		176
Effect of curtailment		(212	)		—		—
Total postretirement benefit cost	$	(52	)	$	182	$	176

The estimated net loss and prior service cost that will be amortized from accumulated other comprehensive income into net periodic postretirment benefit cost over the next year are approximately $17,000 and $5,000 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 2007 through 2011 are as follows: $68,000 in 2007, $69,000 in 2008, $74,000 in 2009, $73,000 in 2010 and $75,000 in 2010. The estimated benefit payments to be paid in the aggregate for the five year period from 2012 through 2016 are $423,000. The estimated benefit payments are based on the same assumptions used to measure the benefit obligation at December 31, 2006 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 Corporation). The Corporation 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.

71

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 11—EMPLOYEE BENEFIT PLANS—(Continued)

	Before Adoption			Adjustments			After Adoption
Other Assets:
Prepaid pension cost	$	1,435		$	(1,435	)	$	—
Deferred tax asset		(566	)		1,169			603
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 Corporation 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 Corporation based on the plan formula. The matching contributions amounted to $642,000 in 2006, $379,000 in 2005 and $322,000 in 2004.

NOTE 12—LEASES

Future obligations at December 31, 2006 for minimum rentals under noncancellable operating lease commitments, primarily relating to premises, are as follows (in thousands):

Years ending December 31
2007	$	1,225
2008		1,153
2009		1,035
2010		993
2011		831
2012 and later years		9,613
Total minimum lease payments	$	14,850

Net rental expense for all operating leases amounted to $1,149,000 in 2006, $472,000 in 2005 and $359,000 in 2004.

The Corporation leases a two-story regional and branch office building in Salisbury, North Carolina from a director. The lease is for a 15-year term expiring in 2021 with annual rentals of approximately $296,000 per year. The lease may be extended for four consecutive five-year periods.

NOTE 13—SUPPLEMENTARY INCOME STATEMENT INFORMATION

Significant components of other expense were as follows:

	2006		2005		2004
	(in thousands)
Professional fees	$	1,624	$	742	$	681
Stationery, printing and supplies		1,430		814		711
Advertising and marketing		1,144		903		809

72

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 14—FNB CORP. (PARENT COMPANY) FINANCIAL DATA

The Parent Company’s principal asset is its investment in the subsidiary companies, and its principal source of income is dividends from those subsidiaries.

The Parent Company’s condensed balance sheets as of December 31, 2006 and 2005, and the related condensed statements of income and cash flows for each of the years in the three-year period ended December 31, 2006 are as follows:

Condensed Balance Sheets

	December 31
	2006		2005
	(in thousands)
Assets:
Cash	$	596	$	1,413
Investment in subsidiaries		264,302		121,130
Other assets		6,572		1,550
Total Assets	$	271,470	$	124,093
Liabilities and Shareholders’ Equity:
Accrued liabilities	$	2,056	$	1,159
Borrowed funds		61,746		20,619
Shareholders’ equity		207,668		102,315
Total liabilities and shareholders’ equity	$	271,470	$	124,093

Condensed Statements of Income

	Years Ended December 31
	2006			2005			2004
	(in thousands)
Income:
Dividends from subsidiaries	$	5,930		$	3,606		$	4,140
Other income		100			6			—
Total income		6,030			3,612			4,140
Expenses:
Interest		3,393			632			352
Operating		304			99			125
Total expenses		3,697			731			477
Income before income taxes and equity in undistributed net income of subsidiaries		2,333			2,881			3,663
Income tax benefit		(1,259	)		(254	)		(162	)
Income before equity in undistributed net income of subsidiaries		3,592			3,135			3,825
Equity in undistributed net income of subsidiaries		8,595			6,802			2,773
Net income	$	12,187		$	9,937		$	6,598

73

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 14—FNB CORP. (PARENT COMPANY) FINANCIAL DATA—(Continued)

Condensed Statements of Cash Flows

	Years Ended December 31
	2006			2005			2004
	(in thousands)
Operating Activities:
Net Income	$	12,187		$	9,937		$	6,598
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of subsidiaries		(8,595	)		(6,802	)		(2,773	)
Other, net		(2,290	)		(211	)		59
Net cash provided by operating activities		1,302			2,924			3,884
Investing Activities:
Net cash paid in merger acquisition of subsidiary company		(28,897	)		(8,685	)		—
Other, net		53			17			476
Net cash provided by (used in) investing activities		(28,844	)		(8,668	)		476
Financing activities:
Increase (decrease) in borrowed funds		30,000			8,307			1,793
Common stock issued		2,117			804			791
Common stock repurchased		—			(499	)		(2,830	)
Cash dividends paid		(5,392	)		(3,370	)		(3,515	)
Net cash provided by (used in) financing activities		26,725			5,242			(3,761	)
Net increase (decrease) in cash		(817	)		(502	)		599
Cash at beginning of year		1,413			1,915			1,316
Cash at end of year	$	596		$	1,413		$	1,915

NOTE 15—CAPITAL ADEQUACY REQUIREMENTS

Certain regulatory requirements restrict the lending of funds by First National Bank to FNB United Corp. and the amount of dividends which can be paid to FNB United Corp. In 2007, the maximum amount of dividends First National Bank can pay to FNB United Corp., without the approval of the Comptroller of the Currency, is $16,685,000 plus an additional amount equal to the retained net income in 2007 up to the date of any dividend declaration.

First National 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, 2006, the average daily reserve requirement was $3,897,000.

FNB United Corp. and First National Bank are required to comply with capital adequacy standards established by the Board of Governors of the Federal Reserve System. In addition, First National Bank is required to comply with prompt corrective action provisions established by the Federal Deposit Insurance Corporation Improvement Act. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, there are minimum ratios of capital to risk-weighted assets. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a material effect on the consolidated financial statements.

74

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 15—CAPITAL ADEQUACY REQUIREMENTS—(Continued)

Regulatory capital amounts and ratios are set forth in the table below. The risk-based capital ratios are determined by expressing allowable capital amounts, defined in terms of Tier 1, Tier 2 and Tier 3, as a percentage of risk-weighted assets, which are computed by measuring the relative credit risk of both the asset categories on the balance sheet and various off-balance sheet exposures. Tier 1 capital consists primarily of common shareholders’ equity and qualifying perpetual preferred stock and trust preferred securities, net of goodwill and other disallowed intangible assets. Tier 2 capital, which is limited to the total of Tier 1 capital, includes allowable amounts of subordinated debt, mandatory convertible debt, preferred stock, trust preferred securities and the allowance for loan losses. Tier 3 capital, applicable only to financial institutions subject to certain market risk capital guidelines, is capital allocated to support the market risk related to a financial institution’s ongoing trading activities. At December 31, 2006, FNB United Corp. and First National Bank were not subject to the market risk capital guidelines and, accordingly, had no Tier 3 capital allocation. Total capital, for risk-based purposes, consists of the sum of Tier 1, Tier 2 and Tier 3 capital.

First National 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, First National Bank must meet minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below.

									Minimum Ratios
	Capital Amount				Ratio				For Capital Adequacy Purposes		To Be Well Capitalized Under Prompt Corrective Action Provisions
	2006		2005		2006		2005
	(dollars in thousands)
As of December 31
Total capital (to risk-weighted assets):
FNB United Corp.	$	166,442	$	100,182	11.53	%	11.46	%	8.00	%	N/A
First National Bank		161,592		96,773	11.30		11.20		8.00		10.00	%
Tier 1 capital (to risk-weighted assets):
FNB United Corp.		120,705		89,231	8.36		10.21		4.00		N/A
First National Bank		144,965		86,070	10.14		9.96		4.00		6.00	%
Tier 1 capital (to average assets):
FNB United Corp.		120,705		89,231	7.16		8.81		4.00		N/A
First National Bank		144,965		86,070	8.72		8.26		4.00		5.00	%

NOTE 16—SHAREHOLDERS’ EQUITY

Stock Buyback Program

There was no stock buyback program in effect at December 31, 2006. Under prior stock buyback programs authorized by the Board of Directors for the repurchase of shares of common stock, the Corporation repurchased 24,800 shares in 2005 and 66,303 shares in 2004.

Earnings Per Share (EPS)

Basic net income per share, or basic EPS, is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if the Corporation’s potential common stock and contingently issuable shares, which consist of dilutive stock

75

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 16—SHAREHOLDERS’ EQUITY—(CONTINUED)

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:

	2006	2005	2004
Basic EPS denominator—Weighted average number of common shares outstanding	9,619,870	5,731,966	5,663,173
Dilutive share effect arising from potential common stock issuances	95,715	137,057	158,874
Diluted EPS denominator	9,715,585	5,869,023	5,822,047

For the years 2006, 2005 and 2004, there were 271,069, 236,730 and 175,400 stock options, respectively, that were antidilutive since the exercise price exceeded the average market price. These common stock equivalents were omitted from the calculations of diluted EPS for their respective years.

Stock-Based Compensation

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

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

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

As of December 31, 2006, the Corporation had six share-based compensation plans in effect. The compensation expense charged against income for those plans in 2006 was $673,000 and the related income tax benefit was $92,000.

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

76

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 16—SHAREHOLDERS’ EQUITY—(Continued)

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, 2006, a maximum of 345,555 shares of common stock has been reserved for issuance under the 1993 stock compensation plan. A maximum of 419,375 shares of common stock has been reserved for issuance under the 2003 stock compensation plan. At December 31 2006, there were 40,000 shares available under the 2003 plan for the granting of additional options or stock awards.

The Corporation assumed a stock compensation plan in its merger acquisition of Carolina Fincorp in 2000. One grant of qualified and nonqualified stock options was made under the plan in 1999 to key employees and directors at a price equal to fair market value on the date of grant. No additional grants will be made under the plan. Based on the stock options outstanding at December 31, 2006, a maximum of 39,408 shares of common stock has been reserved for issuance under the stock compensation plan.

The Corporation 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, 2006, a maximum of 164,416 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 Corporation’s common stock over approximately the previous 6 years. The expected life of the options has historically been considered to be approximately 6 years. The expected dividend yield is based upon the current yield in effect at the date of grant. Forfeitures are estimated at a 3.00% rate, adjusted to 1.75% for 5-year vesting.

The weighted-average fair value per share of options granted in 2006, 2005 and 2004 amounted to $4.93, $5.04 and $5.64, respectively. Fair values were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	2006		2005		2004
Risk-free interest rate	4.73	%	4.40	%	3.80	%
Dividend yield	3.25		2.75		2.75
Volatility	31.00		31.00		33.05
Expected life	6 years		6 years		6 years

77

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 16—SHAREHOLDERS’ EQUITY—(Continued)

The following is a summary of stock option activity:

	Years Ended December 31
	2006					2005					2004
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding at beginning of year		768,963		$	14.72		841,822		$	16.27		765,345		$	15.11
Granted		16,000			18.31		11,000			17.97		161,000			19.79
Assumed in merger
Acquisition		325,384			9.44		—			—		—			—
Exercised		(214,502	)		9.87		(61,559	)		12.12		(66,303	)		10.47
Forfeited		(20,966	)		15.75		(22,300	)		19.24		(18,220	)		19.61
Outstanding at end of year		874,879			15.59		768,963			16.54		841,822			16.27
Options exercisable at end of year		650,020			14.36		483,763			14.72		418,852			13.65
Aggregate intrinsic value at end of year (in thousands):
Options outstanding	$	2,406				$	1,892				$	2,416
Options exercisable	$	2,587				$	2,071				$	2,299

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

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Shares	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$ 5.29 – 9.97	136,065	2.02	$	9.07	136,065	$	9.07
10.00 – 14.20	265,544	4.14		12.31	244,285		12.17
15.00 – 19.82	321,670	6.94		18.02	177,470		17.41
20.00 – 27.00	151,600	6.87		22.03	92,200		22.09
	874,879	5.31		15.59	650,020		14.36

In 2006, 2005 and 2004, the intrinsic value of options exercised was $1,558,00, $447,000 and $641,000, respectively, and the grant-date fair value of options vested was $482,000, $369,000 and $603,000, respectively.

The cash proceeds from options exercised in 2006 amounted to $2,117,000 and the related tax benefit recorded in shareholders’ equity for the tax deduction realized from these exercised options amounted to $279,000.

78

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 16—SHAREHOLDERS’ EQUITY—(Continued)

The following is a summary of non-vested restricted stock activity for the year ended December 31, 2006:

	Shares		Weighted Average Grant Date Fair Value
Non-vested at December 31, 2005	—		$	—
Granted	55,875			18.30
Vested	—			—
Forfeited	(2,000	)		18.26
Non-vested at December 31, 2006	53,875			18.30

Restricted stock was first granted by the Corporation during the three months ended September 30, 2006. Accordingly, based on the vesting schedule, there is no fair value information to be reported for restricted stock that has vested.

As of December 31, 2006, there was $1,979,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all of the Corporation’s stock benefit plans. That cost is expected to be recognized over a weighted-average period of 2.6 years.

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

NOTE 17—COMMITMENTS

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

Commitments by First National Bank to extend credit and undisbursed advances on customer lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. At December 31, 2006, total commitments to extend credit and undisbursed advances on customer lines of credit amounted to $303.5 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 Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on the credit evaluation of the borrower.

First National Bank issues standby letters of credit whereby it guarantees the performance of a customer to a third party if a specified triggering event or condition occurs. The guarantees generally expire within one year and may be automatically renewed depending on the terms of the guarantee. All standby letters of credit provide for recourse against the customer on whose behalf the letter of credit was issued, and this recourse may be further secured by a pledge of assets. The maximum potential amount of undiscounted future payments related to standby letters of credit was $6.6 million at December 31, 2006 and $7.8 million at December 31, 2005. Due to insignificance, the Corporation has recorded no liability at December 31, 2006 for the current carrying amount of the obligation to perform as a guarantor.

Dover Mortgage Company 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

79

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 17—COMMITMENTS—(Continued)

mortgage loan with a potential borrower and the time the closed loan is sold, the Corporation is subject to variability in market prices related to these commitments. The Corporation believes that it is prudent to limit the variability of expected proceeds from the future sales of these loans by entering into forward sales commitments and commitments to deliver loans into a mortgage-backed security. The commitments to originate residential mortgage loans and the forward sales commitments are freestanding derivative instruments. They do not qualify for hedge accounting treatment so their fair value adjustments are recorded through the income statement in income from mortgage loan sales. The commitments to originate residential mortgage loans totaled $19.3 million at December 31, 2006, and the related forward sales commitments totaled $19.3 million. Loans held for sale by Dover Mortgage Company totaled $16.3 million at December 31, 2006, and the related forward sales commitments totaled $16.3 million.

First National Bank had loans held for sale of $4.6 million at December 31, 2006. Binding commitments of First National Bank for the origination of mortgage loans intended to be held for sale at December 31, 2006 were not material.

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

NOTE 18—FAIR VALUE OF FINANCIAL INSTRUMENTS

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

Cash and Cash Equivalents.    For cash on hand, amounts due from banks, and federal funds sold, the carrying value is considered to be a reasonable estimate of fair value.

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

Loans.    The fair value of 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.

Bank Owned Life Insurance.    The carrying value of life insurance is considered to approximate fair value because this investment is carried at cash surrender value, as determined by the insurer.

Deposits.    The fair value of demand, savings and money market deposits is the amount 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 amount of accrued interest is considered to approximate fair value.

Commitments.    The fair value of commitments to extend credit is considered to approximate carrying value, since the large majority of these commitments would result in loans that have variable rates and/or relatively short

80

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 18—FAIR VALUE OF FINANCIAL INSTRUMENTS—(Continued)

terms to maturity or sale. For other commitments, generally of a short-term nature, the carrying value is considered to be a reasonable estimate of fair value. The various commitment items are disclosed in Note 17.

The estimated fair values of financial instruments are as follows:

	December 31, 2006				December 31, 2005
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
	(in thousands)
Financial Assets
Cash and cash equivalents	$	108,340	$	108,340	$	44,879	$	44,879
Investment securities:						—		—
Available for sale		128,945		128,945		110,693		110,918
Held to maturity		42,870		41,865		48,888		47,508
Net loans		1,306,082		1,367,333		802,721		796,202
Accrued interest receivable		8,718		8,718		5,003		5,003
Bank owned life insurance		28,303		28,303		17,334		17,334
Financial Liabilities
Deposits		1,421,013		1,420,480		841,609		843,945
Retail repurchase agreements		23,161		23,155		21,338		21,338
Federal Home Loan Bank advances		65,825		62,805		86,225		84,512
Other borrowed funds		78,032		78,032		39,004		39,004
Accrued interest payable		4,593		4,593		2,280		2,280

The fair value estimates are made at a specific point in time based on relevant market and other information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holdings of a particular financial instrument nor are potential taxes and other expenses that would be considered in an actual sale considered. Because no market exists for a significant portion of the Corporation’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, 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.

81

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 19—BUSINESS SEGMENT INFORMATION

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

	Year Ended December 31, 2006
	First National Bank		Dover Mortgage Company			Other			Total
	(in thousands)
Interest Income	$	102,461	$	907		$	1		$	103,369
Interest Expense		42,952		812			3,391			47,155
Net interest income		59,509		95			(3,390	)		56,214
Provision for credit losses		2,526		—			—			2,526
Net interest income after provision for credit losses		56,983		95			(3,392	)		53,688
Noninterest income		15,272		3,727			216			19,215
Noninterest expense		47,914		5,080			447			53,441
Income (loss) before income taxes		24,341		(1,258	)		(3,623	)		19,462
Income taxes (benefit)		8,365		177			(1,267	)		7,275
Net income (loss)	$	15,976	$	(1,435	)	$	(2,356	)	$	12,187
Total assets	$	1,791,507	$	21,339		$	2,059		$	1,814,905
Net loans		1,289,792		16,290			—			1,306,082
Goodwill		108,797		2,159			—			110,956
	Year Ended December 31, 2005
	First National Bank		Dover Mortgage Company			Other			Total
	(in thousands)
Interest Income	$	53,439	$	971		$	5		$	54,415
Interest Expense		18,623		796			631			20,050
Net interest income		34,816		175			(626	)		34,365
Provision for credit losses		2,842		—			—			2,842
Net interest income after provision for credit losses		31,974		175			(626	)		31,523
Noninterest income		11,196		3,780			(50	)		14,926
Noninterest expense		27,740		3,911			27			31,678
Income (loss) before income taxes		15,430		44			(703	)		14,771
Income taxes (benefit)		5,057		22			(245	)		4,834
Net income (loss)	$	10,373	$	22		$	(458	)	$	9,937
Total assets	$	1,078,367	$	22,554		$	1,164		$	1,102,085
Net loans		786,439		16,282			—			802,721
Goodwill		27,605		3,776			—			31,381

82

FNB UNITED CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 19—BUSINESS SEGMENT INFORMATION—(Continued)

	Year Ended December 31, 2004
	First National Bank		Dover Mortgage Company			Other			Total
	(in thousands)
Interest Income	$	39,835	$	601		$	—		$	40,436
Interest Expense		11,749		301			352			12,402
Net interest income		28,086		300			(352	)		28,034
Provision for credit losses		4,030		—			—			4,030
Net interest income after provision for credit losses		24,056		300			(352	)		24,004
Noninterest income		10,781		3,058			(166	)		13,673
Noninterest expense		25,209		3,587			(41	)		28,755
Income (loss) before income taxes		9,628		(229	)		(477	)		8,922
Income taxes (benefit)		2,562		(76	)		(162	)		2,324
Net income (loss)	$	7,066	$	(153	)	$	(315	)	$	6,598
Total assets	$	845,402	$	17,174		$	315		$	862,891
Net loans		646,542		10,919			—			657,461
Goodwill		12,583		3,752			—			16,335

83

CONTROLS AND PROCEDURES

As of December 31, 2006, the end of the period covered by this report, FNB United carried out an evaluation under the supervision and with the participation of the company’s management, including FNB United’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of FNB United’s disclosure controls and procedures. In designing and evaluating the Corporation’s disclosure controls and procedures, FNB United and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and FNB United’s management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, except for the matter discussed in the following paragraph, the Corporation’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by FNB United in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

During the quarterly period ended December 31, 2006, the Corporation’s management learned that FNB United did not maintain effective internal control over financial reporting. Specifically, FNB United did not have controls designed and in place for nonroutine transactions such as the restructuring of the Corporation’s investment portfolio that occurred in the third quarter of 2006. These events necessitated the restatement of FNB United’s Consolidated Financial Statements and other financial information for the three and nine months ended September 30, 2006. FNB United reviews its disclosure controls and procedures, which may include its internal controls over financial reporting, on an ongoing basis and may from time to time make changes aimed at enhancing their effectiveness.

The annual report of management on the effectiveness of internal control over financial reporting and the attestation report thereon issued by the Corporation’s independent registered public accounting firm are set forth below under “Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm.”

84

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of FNB United Corp. (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, 2006 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

A material weakness is a control deficiency, or combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of the annual or interim financial statement will not be prevented or detected. As of December 31, 2006, the Corporation did not have controls designed and in place for nonroutine transactions such as the restructuring of the Corporation’s investment portfolio that occurred in the third quarter of 2006. This control deficiency resulted in the restatement of the Corporation’s interim consolidated financial statements for the third quarter of 2006. Because of this material weakness, management has concluded that the Corporation did not maintain effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control—Integrated Framework issued by the COSO.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. 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.

Management has excluded certain controls of Integrity Financial Corporation, which was acquired by the Corporation on April 28, 2006, from its assessment. While many of the internal controls over financial reporting applicable to Integrity were integrated with those of the Corporation as of December 31, 2006, and therefore included in management’s assessment, the controls regarding the Integrity branch locations had not yet been integrated as of December 31, 2006.

Dixon Hughes PLLC, an independent, registered public accounting firm, has audited the Corporation’s consolidated financial statements as of and for the year ended December 31, 2006 included in this annual report, and has issued an attestation report on management’s assessment of the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2006, which is included herein.

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, 2006.

March 26, 2007

FNB United Corp.

/s/    MICHAEL C. MILLER	/s/    JERRY A. LITTLE
Michael C. Miller	Jerry A. Little
Chief Executive Officer	Chief Financial Officer

85

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors

FNB United Corp. and Subsidiaries

We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, that FNB United Corp. and subsidiaries (the “Corporation”) maintained effective internal control over financial reporting as of December 31, 2006, 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 over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Corporation’s internal control over financial 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, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A Corporation’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 Corporation’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 Corporation; (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 Corporation are being made only in accordance with authorizations of management and directors of the Corporation; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Corporation’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.

86

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in management’s assessment: As of December 31, 2006, the Corporation did not have controls designed and in place for nonroutine transactions such as the restructuring of the Corporation’s investment portfolio that occurred in the third quarter of 2006. This control deficiency has resulted in the restatement of the Corporation’s interim consolidated financial statements for the third quarter of 2006. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2006 consolidated financial statements, and this report does not affect our report dated March 26, 2007 on those consolidated financial statements.

Management has excluded certain controls of Integrity Financial Corporation, which was acquired by the Corporation on April 28, 2006, from its assessment. While many of the internal controls over financial reporting applicable to Integrity were integrated with those of the Corporation as of December 31, 2006, and therefore included in management’s assessment, the controls regarding the Integrity branch locations had not yet been integrated as of December 31, 2006.

In our opinion, management’s assessment that FNB United Corp. and subsidiaries did not maintain effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also, 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 subsidiaries has not maintained effective internal control over financial reporting as of December 31, 2006, 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 subsidiaries as of and for the year ended December 31, 2006, and our report dated March 26, 2007, 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 26, 2007

87

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 26, 2007.

FNB United Corp.
(Registrant)
By:	/s/     MICHAEL C. MILLER
	Michael C. Miller
	Chairman and President

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 26, 2007.

Signature	Title
/s/                           MICHAEL C. MILLER Michael C. Miller	Chairman and President (Principal Executive Officer)
/s/                               JERRY A. LITTLE Jerry A. Little	Treasurer and Secretary (Principal Financial and Accounting Officer)
/s/                         JACOB F. ALEXANDER III Jacob F. Alexander III	Director
/s/                             LARRY E. BROOKS Larry E. Brooks	Director
/s/                       JAMES M. CAMPBELL, JR. James M. Campbell, Jr.	Director
/s/                           R. LARRY CAMPBELL R. Larry Campbell	Director
/s/                               DAVID E.CLINE     David E. Cline	Director
/s/                               DARRELL L. FRYE     Darrell L. Frye	Director
/s/                           WILBERT L. HANCOCK     Wilbert L. Hancock	Director
/s/                           ROBERT P. HUNTLEY     Robert P. Huntley	Director
/s/                            THOMAS A. JORDAN     Thomas A. Jordan	Director
/s/                               LYNN S. LLOYD     Lynn S. Lloyd	Director

88

Signature	Title
/s/                           RAY H. MCKENNEY, JR.         Ray H. McKenney, Jr.	Director
/s/                       EUGENE B. MCLAURIN, II     Eugene B. McLaurin, II	Director
/s/                         R. REYNOLDS NEELY, JR.         R. Reynolds Neely, Jr.	Director
/s/                              RICHARD K. PUGH       Richard K. Pugh	Director
/s/                              J. M. RAMSAY III     J. M. Ramsay III	Director
/s/                                   CARL G. YALE             Carl G. Yale	Director

89

INDEX TO EXHIBITS

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

90

Exhibit No.	Description of Exhibit
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. Stock Incentive Plan, as amended.
10.24*	Form of Incentive Stock Option Agreement between FNB Corp. and certain of its key employees, pursuant to the Registrant’s 2003 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.24 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended September 30, 2003.
10.25*	Form of Nonqualified Stock Option Agreement between FNB Corp. and certain of its directors, pursuant to the Registrant’s 2003 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.25 to the Registrant’s Form 10-K Annual Report for the fiscal year ended December 31, 2003.
10.30*	Employment Agreement dated as of January 1, 2006 among FNB Corp., First National Bank and Trust Company and Michael C. Miller, incorporated herein by reference to Exhibit 10 to the Registrant’s Current Report on Form 8-K filed on January 6, 2006.
10.31*	Carolina Fincorp, Inc. Stock Option Plan (assumed by the Registrant on April 10, 2000), incorporated herein by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 (File No. 333-54702).
10.32*	Employment Agreement dated as of April 10, 2000 between First National Bank and Trust Company and R. Larry Campbell, incorporated herein by reference to Exhibit 10.32 to the Registrant’s Form 10-K Annual Report for the fiscal year ended December 31, 2000.
10.33*	First Amendment to Employment Agreement dated as of June 30, 2006 between First National Bank and Trust Company and R. Larry Campbell, incorporated herein by reference to Exhibit 10 to the Registrant’s Form 8-K Current Report dated June 30, 2006 and filed July 7, 2006.
10.34*	Nonqualified Supplemental Retirement Plan with R. Larry Campbell, incorporated herein by reference to Exhibit 10(c) to the Annual Report on Form 10-KSB of Carolina Fincorp, Inc. for the fiscal year ended June 30, 1997.
10.35*	Form of Change of Control Agreement between FNB United Corp. and certain of its key employees and officers, incorporated herein by reference to Exhibit 10.35 to the Registrant’s Form 10-Q Quarterly Report for the quarter ended June 30, 2006.
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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EX-10.23

Exhibit 10.23

FNB UNITED CORP.

2003 STOCK INCENTIVE PLAN

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

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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.

“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 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.

“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.

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“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, if no sale takes place on such date, the average of the reported closing bid and asked prices on such date, 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, if no sale takes place on such date, the average of the reported closing bid and asked prices on such date under the quotation system under which such bid and asked prices are reported, or (3) if no such last sales price or average of the reported closing bid and asked prices are available on such date, such last reported sale price of the Stock or, if no sale takes place, the average of the reported closing bid and asked prices as so reported 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 as reasonably determined by the Board.

“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.

“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 or Parent Corporation 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.

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“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 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, 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.

“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.

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“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 420,000 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 420,000, 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 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.

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(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.

5. ADMINISTRATION OF THE PLAN.

(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

6

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

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.

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 legal consideration that the Committee may deem appropriate, including without limitation any form of consideration authorized under Section 7(d) below, on such basis as the Committee may determine in accordance with this Plan, 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

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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 deferred 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.

(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.

(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;

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(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;

(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,

(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,

(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 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. No Stock Appreciation Right granted under this Plan may be exercised more than 10 years from the Grant Date.

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.

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(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.

(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.

(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:

(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.

(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 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.

(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.

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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.

(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 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.

(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.

(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

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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.

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, 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

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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.

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.

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 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.

19. AMENDMENTS AND OTHER MATTERS.

(a) The Board may amend, alter, suspend, discontinue or terminate the Plan or any portion thereof at any time; 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 Section 7(b) 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,

13

prospectively or retroactively; provided that 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) 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, regulations, or accounting principles, 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.

(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.

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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.

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.

16. OTHER LAWS.

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.

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 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.

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30. TERMINATION.

This Plan shall terminate ten years from the date on which this Plan is 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-21

Exhibit 21

SUBSIDIARIES OF THE REGISTRANT

First National Bank and Trust Company—

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—

Mortgage banking company incorporated in the State of North Carolina

FNB United Statutory Trust I—

A Connecticut statutory business trust

FNB United Statutory Trust II—

A Delaware statutory business trust

Catawba Valley Capital Trust I—

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.

We consent to incorporation by reference in the registration statements (Nos. 33-72686, 333-54702, 333-99333, 333-105442 and 333-109450) on Form S-8 and the registration statement (No. 33-59565) on Form S-3 of FNB United Corp. of our reports dated March 26, 2007 with respect to the consolidated financial statements of FNB United Corp. and subsidiaries, and management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting as of December 31, 2006, which reports appear in the December 31, 2006 Annual Report on Form 10-K.

March 26, 2007

Raleigh, North Carolina

EX-31.10

Exhibit 31.10

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Michael C. Miller, certify that:

1. I have reviewed this annual report on Form 10-K of FNB 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 annual 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 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 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 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 26, 2007	/s/                         MICHAEL C. MILLER
	Michael C. Miller
	Chief Executive Officer

EX-31.11

Exhibit 31.11

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Jerry A. Little, certify that:

1. I have reviewed this annual report on Form 10-K of FNB 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 annual 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 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 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 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 26, 2007	/s/                            JERRY A. LITTLE
	Jerry A. Little
	Chief Financial Officer

EX-32

Exhibit 32

Certification

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of FNB Corp., a North Carolina corporation (the “Corporation”), does hereby certify that:

The Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (the “Form 10-K”) of the Corporation fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all materials respects, the financial condition and results of operations of the Corporation.

Date:	March 26, 2007	/s/                         MICHAEL C. MILLER
		Michael C. Miller Chief Executive Officer
Date:	March 26, 2007	/s/                         JERRY A. LITTLE
		Jerry A. Little Chief Financial Officer

The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Form 10-K or as a separate disclosure document.