Filed Pursuant to Rule 424(b)(4)
Registration No. 333-37801

CAROLINA FIRST BANCSHARES, INC.

UP TO 225,000 SHARES
(LOGO) COMMON STOCK

Carolina First BancShares, Inc. (the "Company") hereby offers for sale up
to 225,000 shares of its $2.50 par value common stock ("Common Stock") at $25.75
per share (the "Offering"). The minimum purchase is 100 shares ($2,575).

SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS WHICH
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SHARES OFFERED
HEREBY.
---------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

THESE SHARES ARE NOT DEPOSITS OR SAVINGS ACCOUNTS AND ARE NOT GUARANTEED OR
INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.

========================================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) ISSUER(2)
- ------------------------------------------------------------------------------------------------------------------------

Per Unit.................................. $25.75 $0.80 $24.95
- ------------------------------------------------------------------------------------------------------------------------
Total Minimum(3).......................... $0 $0 $0
- ------------------------------------------------------------------------------------------------------------------------
Total Maximum............................. $5,793,750 $180,000 $5,613,750
========================================================================================================================

(1) Offers and sales of the Common Stock will be made on behalf of the Company
on a best-efforts basis primarily by Interstate/Johnson Lane Corporation,
J.C. Bradford & Co., and such other selling agents as the Company may
designate (each a "Selling Agent"). Such Selling Agent will receive a
commission equal to $.80 per share of Common Stock for which subscriptions
are received and accepted by the Company with respect to the investors
solicited by the Selling Agent. Such compensation to the Selling Agents may
be underwriting compensation. The information presented in the table assumes
a Selling Agent commission is paid on all shares sold. Offers and sales may
also be made by certain of the Company's officers and directors, in reliance
on Securities and Exchange Commission Rule 3a4-1 under the Securities
Exchange Act of 1934. Such officers and directors will receive no additional
compensation for such services but may be reimbursed for reasonable
expenses, if any, incurred in connection therewith. See "RISK FACTORS -- No
Firm Commitment Underwriting/No Minimum Number of Shares to be Sold" and
"THE OFFERING -- Terms of the Offering." There are no agreements to purchase
shares in the Offering by officers, directors, or other affiliates of the
Company.
(2) Before deducting expenses of the Offering payable by the Company, including
accounting, printing, legal, registration and qualification, selling and
other expenses estimated at approximately $74,766.
(3) There is no requirement that the Company sell a minimum number of shares in
the Offering. Funds received in connection with the Offering will not be
placed into escrow and will be available for immediate use by the Company as
subscriptions are accepted and shares are sold. See "RISK FACTORS -- No Firm
Commitment Underwriting/No Minimum Number of Shares to be Sold" and "THE
OFFERING -- Terms of the Offering."

---------------------

The Common Stock is offered subject to prior sale and to the Company's
right to accept or reject subscriptions in whole or in part, to allocate Common
Stock among subscribers, and to withdraw, cancel, or modify the Offering.
Persons interested in purchasing shares must complete and execute the
Subscription Agreement included as Appendix A hereto. It is anticipated that
delivery of certificates for the Common Stock purchased will be made promptly
after acceptance of each subscription.

The date of this Prospectus is November 11, 1997
2

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder (the "Exchange Act"), and in accordance therewith files reports,
proxy and information statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy and information
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; and at
the Commission's Northeast Regional Office, 7 World Trade Center, Suite 1300,
New York, New York 10048, and Midwest Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material can also be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington D.C. 20549. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants such as the Company that
file electronically with the Commission. The address of such site is
http://www.sec.gov.

The Company has filed a Registration Statement on Form S-2 (the
"Registration Statement") with the Commission pursuant to the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Common Stock
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement and the exhibits and schedules filed as a part
thereof, as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock, reference
is hereby made to the Registration Statement, including the exhibits and
schedules filed as a part thereof. Statements contained in this Prospectus as to
the contents of any contract or other document referred to herein are not
necessarily complete, and where such contract or other document is an exhibit to
the Registration Statement, each such statement is qualified in all respects by
the provisions of such exhibit, to which reference is hereby made, for a full
statement of the provisions thereof. The Registration Statement, including the
exhibits and schedules filed as a part thereof, may be inspected without charge
at the public reference facilities maintained by the Commission as set forth in
the preceding paragraph. Copies of these documents may be obtained at prescribed
rates from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.

NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING AGENT. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

Certain of the matters discussed under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and elsewhere in
this Prospectus may constitute forward-looking statements for the purposes of
the Securities Act and the Exchange Act and as such may involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from future results, performance or achievements expressed or implied by such
forward-looking statements. Such forward-looking statements are made based on
management's belief as well as assumptions made by, and information currently
available to, management pursuant to "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. The Company's actual results may
differ materially from the results anticipated in these forward-looking
statements due to a variety of factors, including, without limitation: the
effects of future economic conditions, governmental monetary and fiscal
policies, as well as legislative and regulatory changes; the risks of changes in
interest rates and composition of deposits, loan demand, loan collateral values,
securities portfolio values and interest rate risks; the effects of competition
from other commercial banks, thrifts, mortgage banking firms, consumer finance
companies, credit unions, securities brokerage firms, insurance companies, money
market and other mutual funds and other financial institutions operating in the
Company's market area and elsewhere, including institutions operating locally,
regionally, nationally and internationally, together with such competitors
offering banking products and services by mail, telephone, and computer and the
internet; and the failure of assumptions underlying the establishment of
reserves for possible loan losses. The Company cautions that such factors are
not exclusive. All written or oral forward-looking statements attributable to
the Company are expressly qualified in their entirety by these cautionary
statements.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents, which the Company has filed with the Commission,
are incorporated by reference herein:

(i) The Company's Annual Report on Form 10-K for the year ended December
31, 1996; and

(ii) The Company's Quarterly Reports on Forms 10-Q for the periods ended
March 31, 1997, and June 30, 1997.

Any statement contained in a document incorporated or deemed incorporated
herein by reference shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that such statement is inconsistent with a
statement contained herein or in any later filed document incorporated by
reference herein. Any statement as so modified or superseded shall not be deemed
to constitute a part of this Prospectus, except as so modified or superseded.

The Company will provide without charge, upon written or oral request, to
each person (including any beneficial owner) to whom a copy of this Prospectus
is delivered, a copy of any documents incorporated by reference herein but not
delivered herewith (other than exhibits to such documents, unless such exhibits
are specifically incorporated by reference into the information that this
Prospectus incorporates). Requests for such copies should be directed to Jan H.
Hollar, Corporate Secretary, Carolina First BancShares, Inc., 402 East Main
Street, Lincolnton, North Carolina 28092; telephone number (704) 732-2222.

2
3

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents, which the Company has filed with the Commission,
are incorporated by reference herein:

(i) The Company's Annual Report on Form 10-K for the year ended December
31, 1996; and

(ii) The Company's Quarterly Reports on Forms 10-Q for the periods ended
March 31, 1997, and June 30, 1997.

Any statement contained in a document incorporated or deemed incorporated
herein by reference shall be deemed to be modified or superseded for purposes
of this Prospectus to the extent that such statement is inconsistent with a
statement contained herein or in any later filed document incorporated by
reference herein. Any statement as so modified or superseded shall not be
deemed to constitute a part of this Prospectus, except as so modified or
superseded.

-3-

SUMMARY

The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements (including notes) appearing
elsewhere or incorporated by reference in this Prospectus and should be read
together therewith.

THE COMPANY

The Company, a North Carolina corporation, is registered as a bank holding
company under the Bank Holding Company Act of 1956, as amended (the "BHC Act").
The Company owns all of the outstanding common stock of Lincoln Bank of North
Carolina ("Lincoln Bank") and Cabarrus Bank of North Carolina ("Cabarrus Bank,"
and, together with Lincoln Bank, the "Banks"). Through the Banks and their 20
branch offices, the Company provides a broad range of banking and financial
services in the greater Charlotte, North Carolina area, including Lincoln
County, Southeastern Catawba County, Iredell County, Cabarrus County,
Rutherford County, and Mecklenburg County, all in the piedmont area of North
Carolina. As of June 30, 1997, the Company had consolidated total assets of
approximately $490.7 million, consolidated deposits of approximately $444.4
million, and consolidated shareholders' equity of approximately $37.8 million.

The Banks, which are chartered under the laws of the State of North Carolina,
primarily engage in retail and commercial banking, insurance activities, and
mortgage lending. The Banks are members of the Federal Deposit Insurance
Corporation (the "FDIC"), and their deposits are insured by the FDIC's Bank
Insurance Fund ("BIF") and Savings Association Insurance Fund ("SAIF").
Lincoln Bank and Cabarrus Bank jointly own a mortgage company, Carolina First
Mortgage Corporation ("Carolina First Mortgage"), which originates mortgage
loans for resale in the secondary market, and a financial services company,
Carolina First Financial Services Corporation ("Financial Services"), which
offers mutual funds and annuity products as an agent for its customers.

In November 1994, the Company invested $1,375,000 to purchase approximately
17% of the common stock of a de novo commercial bank, First Gaston Bank of
North Carolina ("First Gaston"), which is located in Gastonia, North Carolina,
southwest of Charlotte and east of Lincolnton. The Company's Chairman was an
organizer of First Gaston, and certain operational functions are provided for
First Gaston by the Company. In approving the Company's investment in First
Gaston, the Board of Governors of the Federal Reserve System (the "Federal
Reserve") has required the Company to commit to serve as a source of strength
for First Gaston. This requirement, as well as the relationship in general, is
not expected to have a material effect on the Company. See "THE COMPANY."
First Gaston opened during July 1995 and currently has three branches in Gaston
County. First Gaston operates in a market not currently served by the Company
and had a Tier 1 Leverage capital ratio of 14.57% and a risk based capital to
risk based assets ratio of 19.30% as of June 30, 1997.

The Company's principal executive offices are located at 402 East Main Street,
Lincolnton, North Carolina 28092, and its telephone number is (704) 732-2222.
As used herein, unless the context otherwise requires, "Company" shall mean and
include Carolina First BancShares, Inc., the Banks and their respective
subsidiaries.
THE OFFERING

COMMON STOCK OFFERED.............................. UP TO 225,000 SHARES
COMMON STOCK OUTSTANDING AFTER THE OFFERING....... UP TO 4,343,000 SHARES
USE OF PROCEEDS................................... FOR GENERAL CORPORATE
PURPOSES, INCLUDING
CAPITAL TO SUPPORT
FUTURE GROWTH AND POSSIBLE
ACQUISITIONS OF OTHER
BANKING AND BANKING-RELATED
COMPANIES.

See "USE OF PROCEEDS."

-4-

RISK FACTORS

An investment in the Common Stock offered by this Prospectus involves
various risks. Prospective purchasers should consider the following factors,
among others, before making a decision to purchase the Common Stock.

OFFERING PRICE DETERMINED SOLELY BY THE COMPANY'S BOARD

The price of the Common Stock offered hereby has been determined solely by
the Company's Board of Directors, without negotiation or independent
evaluation, and may bear no relationship to the market price of the Common
Stock before or after the Offering. In fixing the price, the Board did not
consult with the Selling Agents but determined the selling price independently
after considering, among other things, the Company's stockholders' equity (book
value), earnings, and prospects, and the offering prices of other North
Carolina bank holding company shares. There is no assurance that purchasers
will be able to sell their shares of Common Stock at the same or a higher price
than that paid therefor.

LIMITED TRADING MARKET/POSSIBLE VOLATILITY OF STOCK PRICE

No established public trading market exists for the Common Stock, and no
assurance can be given that such a market will develop in the future. It is
anticipated that officers and directors of the Company may purchase shares in
the Offering; however, the Company has not reserved any shares to be purchased
by officers or directors. See "THE OFFERING."

NO FIRM COMMITMENT UNDERWRITING/NO MINIMUM NUMBER OF SHARES REQUIRED TO BE SOLD

The Common Stock is being offered without a firm commitment underwriting
by the Selling Agents, which have no obligation or commitment to purchase any of
the shares offered. No minimum number of shares is required to be sold, and no
assurance is given that any particular number of shares will be sold. In the
event all of the shares offered are not sold in the Offering, the proceeds
available to the Company will be reduced. See "THE OFFERING."

COMPETITION

The banking business in the Company's market area is extremely
competitive. The Company competes with financial institutions which are well
established and which often have significantly greater resources and lending
limits than do the Company's subsidiaries. Such competitors perform services,
such as various international banking services, that the Company does not
directly provide.

-5-

SELECTED CONSOLIDATED FINANCIAL DATA

The selected financial data in the table below presents summary historical
consolidated data of the Company for the periods and at the dates indicated.
This information should be read in conjunction with, and is qualified by, the
more detailed consolidated financial statements of the Company and the notes
thereto, included elsewhere herein. The financial data for and at the five
years ended December 31, 1996, is derived from the Company's consolidated
financial statements, and certain items have been rounded for presentation
purposes.

JUNE 30, DECEMBER 31,

1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----

EARNINGS
Interest income $ 18,018,615 $ 32,677,346 $ 28,177,224 $ 23,453,571 $ 21,772,713 $ 22,580,693
Interest expense 7,987,941 14,439,646 12,717,046 9,774,369 9,641,056 11,510,773
Net interest income 10,030,674 18,237,700 15,460,178 13,679,202 12,131,657 11,069,920
Provision for loan losses 498,333 1,178,925 710,200 667,303 821,385 794,024
Net income 2,936,629 4,678,299 4,129,733 3,369,874 2,619,172 1,478,356
PER SHARE
Net income $ .70 $ 1.12 $ 1.05 $ .92 $ .71 $ .41
Cash dividends .12 .22 .18 .17 .16 --
Book value 9.18 8.53 7.63 6.49 5.88 5.29
BALANCE SHEET DATA AT PERIOD END
Total assets $490,681,378 $429,711,291 $369,833,439 $318,605,010 $301,258,643 $268,676,367
Loans, net of unearned income 324,598,631 309,112,008 257,177,863 223,999,059 197,933,833 173,792,884
Allowance for loan losses 4,852,905 4,488,958 3,588,489 3,158,168 2,580,004 2,236,501
Securities 116,385,490 87,616,685 84,024,410 69,743,982 74,845,035 70,474,459
Deposits 444,396,239 385,003,286 335,602,746 292,621,276 277,898,501 246,675,640
Shareholders' equity 37,803,565 35,001,856 31,122,979 23,888,838 21,615,045 19,419,844
RATIOS
Return on average assets 1.31% 1.17% 1.21% 1.09% 0.92% 0.56%
Return on average equity 15.88% 14.43% 15.41% 14.81% 12.88% 7.85%
Net interest margin 4.89% 5.01% 5.02% 4.94% 4.63% 4.54%
Dividend payout ratio 16.81% 18.93% 14.96% 16.46% 18.48% --
Average equity to average assets 8.25% 8.10% 7.82% 7.37% 7.13% 7.08%
Loans, net of unearned income, to total
deposits 73.04% 80.29% 76.63% 76.55% 71.23% 70.45%
Nonperforming assets to total assets 0.39% 0.18% 0.40% 0.50% 0.72% 1.17%
Nonperforming loans to total loans,
net of unearned income 0.50% 0.19% 0.31% 0.26% 0.39% 0.61%
Allowance for loan losses to:
Loans, net of unearned income 1.50% 1.45% 1.40% 1.41% 1.30% 1.29%
Nonperforming assets 256.28% 590.65% 240.03% 196.53% 119.22% 71.11%
Net charge-offs (recoveries)
to loans, net of unearned income 0.08% 0.09% 0.11% 0.04% 0.24% 0.29%

Earnings per share amounts for all periods presented reflect the 5% stock
dividends paid on June 23, 1992, November 29, 1994 and December 22, 1995, the
10% stock dividend paid on December 29, 1993, the 5-for-4 stock split effected
on August 23, 1996, and the 2-for-1 stock split effected on August 22, 1997.
Operating earnings for the year ended 1992 were $1,778,030 or $.93 per share
before the effect of an extraordinary item and an accounting change. Fully
diluted net income per common share data are not presented because there are no
material differences between those amounts and the income per share data as
presented.

- 6 -

RECENT DEVELOPMENTS

During the third quarter of 1997, the Company's assets increased
approximately 19% over the third quarter of 1996 to approximately $496,588,000.
While the deposit acquisitions during the second quarter accounted for
approximately 37% of this growth, the remaining growth was a continuation of
the strong increase in market share. Loans were approximately $333,039,000 at
quarter end with an allowance for loan losses of approximately 1.46%. Deposits
increased to approximately $448,401,000, which is approximately 20% higher than
the prior year. Earnings for the third quarter were approximately $1,563,000
and approximately $4,500,000 for the nine months ended September 30, 1997.
This represents an increase of approximately 56% for the quarter and
approximately 35% over the nine months ended September 30, 1996. Third quarter
earnings in 1996 were negatively affected by $284,211 as the result of a
one-time assessment for all SAIF members.

Operationally, during the third quarter, Cabarrus Bank opened another
supermarket bank in a Winn-Dixie Supermarket in northern Mecklenburg county.
Also, during the third quarter of 1997, the Company became a 52% equity partner
in a North Carolina limited liability company, Lincoln Center at Mallard Creek,
LLC. The remaining equity is held by First Colony Corporation, a land
development company in Charlotte. The main purpose of the LLC is to construct
a commercial office building of approximately 24,900 square feet in which the
Company's subsidiary, Lincoln Bank will open a full service branch facility,
pending regulatory approval, utilizing approximately 2,982 square feet on the
first floor of the building. The Company committed to fund a construction loan
in the amount of $2,444,000 for a term of 26 months. The Company also has an
unsecured line of credit with a financial institution in the amount of
$2,400,000 for a term of 26 months. This line of credit may be used to fund
the construction loan to the LLC.

THE COMPANY

The Company was formed in June 1989 as a bank holding company and is
registered as such with the Federal Reserve under the BHC Act. The Company
owns all of the outstanding common stock of two commercial banks (the "Banks"),
Lincoln Bank and Cabarrus Bank. The Banks are North Carolina-chartered banks
that are members of the Federal Deposit Insurance Corporation (the "FDIC"), but
are not members of the Federal Reserve System. The primary business of the
Banks includes retail and commercial banking, financial services activities and
mortgage lending. Lincoln Bank and Cabarrus Bank jointly own Carolina First
Mortgage, a mortgage company which originates mortgage loans for resale in the
secondary market, and Financial Services, a financial services company which
offers, as agent for its customers, mutual funds and annuity products.
Financial Services began business in October 1994.

Lincoln Bank, which commenced operations in 1983, operates in areas
southwest, west and northwest of Charlotte, North Carolina. On May 7, 1993
Lincoln Bank acquired the insured deposits and certain assets of the former
Crown National Bank, Charlotte, North Carolina and thereby expanded into the
SouthPark area of Charlotte with its first urban branch. On July 29, 1996,
Lincoln Bank opened a branch in northern Mecklenburg County at Sunset Road and
Interstate 77. On April 11, 1997, Lincoln Bank acquired certain deposits from
a super regional bank in Lake Lure, North Carolina. Lincoln Bank opened a
branch in the Winn-Dixie at Northcross Shopping Center, also in northern
Mecklenburg County, on April 24, 1997.

On January 30, 1992, the Company completed the acquisition of Cabarrus
Bank, Concord, North Carolina, in Cabarrus County, a fast growing area located
north of Charlotte and contiguous to markets served by Lincoln Bank. This
transaction was accounted for as a pooling of interests and, accordingly, the
results of Cabarrus Bank are included for all periods presented. Cabarrus
Savings was organized in 1898 and converted to a stock thrift in 1987. In
October 1992, Cabarrus Bank was converted into a commercial bank. The
acquisition of Cabarrus Bank allowed the Company to expand into part of the
Charlotte MSA, Cabarrus County, North Carolina contiguous to existing markets.
On May 16, 1997, Cabarrus Bank acquired the deposits and branch location of a
super regional bank in Mount Pleasant, North Carolina, and opened its fifth
full service branch in Cabarrus County. On June 12, 1997, Cabarrus Bank
acquired another competitor's deposits, which are being serviced by an existing
branch in Kannapolis. Cabarrus Bank opened its sixth branch at the Winn-Dixie
in Harrisburg during the third quarter of 1997. In August, 1997, Cabarrus Bank
acquired deposits of a regional bank and subsequently consolidated these
deposits with an existing branch in Concord.

In November 1994, the Company invested $1,375,000 to purchase
approximately 17% of the total common stock of a de novo commercial bank, First
Gaston, which is located in Gastonia, just west of Charlotte and south of
Lincolnton. The Company's chairman was an organizer of First Gaston, which is
located in a market contiguous to others served by Lincoln Bank but which is
not currently served by the Company. The Company performs, at market rates,
data and item processing services, operational support services, audit and loan
rating and reporting services and compliance services for First Gaston. First
Gaston opened during July 1995, and currently operates out of three offices in
Gaston County. As of

-7-

June 30, 1997, First Gaston had $43,395,407 in total assets with $36,366,303 in
total deposits. First Gaston had not produced a profit as of June 30, 1997 but
had a Tier 1 leverage capital ratio of 14.57% and a risk adjusted capital to
risk adjusted asset ratio of 19.30% as of such date. The Federal Reserve, in
approving the Company's investment in First Gaston, has required the Company to
commit to serve as a "source of strength" for First Gaston. As such, the
Company will be required to act as a source of financial and managerial
strength for First Gaston and to prevent First Gaston from operating in an
unsafe or unsound manner. The Company may be required to use available
resources to provide adequate capital funds to First Gaston during periods of
financial stress or adversity and may be required to maintain the financial
flexibility and capital-raising capacity to obtain additional resources for
assisting First Gaston in maintaining its capital base. This is substantially
the same obligation that the Company has with respect to the Banks. The
Company believes that serving as a source of strength will not have a material
effect on the Company. The Company will receive compensation for the
operational functions performed for First Gaston, but neither this compensation
nor the results of operations of First Gaston is expected to have a material
effect on the operations of the Company.

-8-

MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK

The Common Stock is traded in the over-the-counter market and is quoted in
the "pink sheets" under the symbol "CAFP." The following table sets forth the
high and low bid quotations for shares of Common Stock, as reported in The
Charlotte Observer, and the cash dividends declared per share for the periods
indicated. Such quotations reflect inter-dealer prices without markup, markdown
or commission and may not necessarily represent actual transactions. The prices
and dividends have been adjusted to reflect the 5% stock dividend paid on
December 22, 1995, the 5-for-4 stock dividend paid on August 23, 1996, and the
2-for-1 stock split paid on August 22, 1997. As of June 30, 1997, the Common
Stock was held by approximately 2,700 holders of record.

CASH DIVIDENDS
HIGH LOW DECLARED
---- --- --------

1995

First Quarter $ 8.19 $ 7.81 $0.04

Second Quarter 8.34 8.19 0.04

Third Quarter 9.15 8.38 0.05

Fourth Quarter 10.80 9.15 0.05

1996

First Quarter $12.00 $10.80 $0.05

Second Quarter 13.00 12.00 0.05

Third Quarter 15.00 13.00 0.06

Fourth Quarter 16.00 15.00 0.06

1997

First Quarter $17.00 $16.00 $0.06

Second Quarter 19.25 17.00 0.06

Third Quarter (through October 31, 1997) 24.00 19.25 0.08

The Company has paid regular cash dividends on a quarterly basis for the
past four years and intends to continue its current dividend policy.
Declaration of future dividends will depend upon the earnings of the Company
and its subsidiaries, principally the Banks, their financial condition, capital
adequacy and other factors, including applicable governmental regulations and
policies. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and "SUPERVISION, REGULATION AND EFFECTS OF GOVERNMENTAL
POLICIES."

USE OF PROCEEDS

The net proceeds to the Company from the sale of all of the shares offered
hereby are estimated to be approximately $5,543,112. The net proceeds will be
held in short term investments pending their intended use. The Company intends
to use the net proceeds for general corporate purposes, including capital to
support future growth and possible future acquisitions of banking organizations
or companies engaged in businesses that are closely related to banking, such as
mortgage and finance companies. There are, however, no current plans or
agreements for such acquisitions. No minimum number of shares are required to
be sold in the Offering, and no assurance can be given that any minimum amount
of shares will be sold. The proceeds from the Offering available to the
Company will be reduced to the extent that all of the shares are not sold.
Therefore, proceeds from the Offering received by the Company could be
materially less than the estimated amount shown herein.

-9-

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the
consolidated financial statements and related notes and other information
appearing elsewhere herein and the more detailed information provided in the
Company's Annual Report on Form 10-K and the Company's Quarterly Report on Form
10-Q, for the quarter ended June 30, 1997. Certain of the matters discussed
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere herein may constitute forward-looking
statements for purposes of the Securities Act and the Exchange Act and as such
may involve known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of the Company to be
materially different from future results, performance or achievements expressed
or implied by such forward-looking statements. The Company's actual results
may differ materially from the results anticipated in these forward-looking
statements due to a variety of factors, including, without limitation: the
effects of future economic conditions, governmental monetary and fiscal
policies, as well as legislative and regulatory changes; the risks of changes
in interest rates on the level and composition of deposits, loan demand, loan
collateral values, securities portfolio values and interest rate risks; the
effects of competition from other commercial banks, thrifts, mortgage banking
firms, consumer finance companies, credit unions, securities brokerage firms,
insurance companies, money market and other mutual funds and other financial
institutions operating in the Company's market area and elsewhere, including
institutions operating locally, regionally, nationally and internationally,
together with such competitors offering banking products and services by mail,
telephone, and computer and the Internet; and the failure of assumptions
underlying the establishment of reserves for possible loan losses. The Company
cautions that such factors are not exclusive. All written or oral
forward-looking statements attributable to the Company are expressly qualified
in their entirety by these Cautionary Statements.

All per share data has been retroactively adjusted for the 2 for 1 stock
split effected on August 22, 1997.

FISCAL YEAR ENDED DECEMBER 31, 1996

RESULTS OF OPERATIONS

During 1996, Carolina First continued its recent trend of record
historical earnings. Earnings were $4.7 million, or $1.12 per share in 1996, a
13% increase over 1995. Earnings in 1995 were $4.1 million, or $1.05 per
share, a 23% increase over 1994. The Company's strong local economy and loan
philosophy has resulted in loan growth complimented by a conservative
securities portfolio. Growth has been realized by existing branches as well as
de novo branches and acquisition of other institutions' divested branches.

The Company's primary source of income is net interest income, which is
the difference between interest earned and interest paid. The net interest
margin is calculated as net interest income as a percentage of average earning
assets. The Company's net interest margin has been indicative of the strong
balance sheets the Banks have assembled. The growth within the counties served
by the Company's Banks has significantly outpaced the overall growth within
North Carolina. Such positive demographics translate into increased
opportunities for building banking relationships which enhance deposit and loan
growth.

Net interest income as a percentage of average earning assets has grown
from 4.94% in 1994 to 5.01% in 1996. The net interest spread, or difference
between the average interest income rate and average interest expense rate has
also remained relatively constant from 4.61% in 1995 to 4.55% in 1996. The
Company's volume is expected to continue to increase through growth, while the
difference between the rate earned and the rate paid is expected to decrease.
The economy and related interest rates will affect the Company's growth and
earnings rate in the future.

The Company's allowance for loan losses is analyzed monthly in accordance
with a board approved plan. This analysis is a functioning model that
considers the current status of the loan portfolio, historical experience and
key market indicators within the counties served by the Company. Additionally,
the Company monitors the overall portfolio as well as the level of reserve
maintained by peer banks. The monthly provision for loan losses may fluctuate
based on the results of this analysis.

Noninterest income has continued to grow as reflected in the 6.5% increase
from 1995 to 1996 and the 10.5% increase from 1994 to 1995. The Company's
growth in deposit accounts has led the way for this increase. Additionally,
Cabarrus Bank has been successful in changing from a savings and loan with few
deposit service charges to a commercial bank with fees for services rendered.
During the fourth quarter of 1995, Lincoln Bank sold its insurance subsidiary
which translated into lower insurance commissions in 1995 and considerably
lower commissions in 1996. The remaining

-10-

insurance commissions relate to the fees generated by the Financial Services
company from the sale of annuity products and mutual funds. Other service fees
and commissions relate to the Company's growth in the recently organized trust
and credit/debit card divisions. These divisions were organized in late 1994 and
have steadily grown. Management believes this growth will continue with the
further maturity of these divisions. Included in other income are fees of
$141,959 generated from services provided to First Gaston. These services
include account operations, item processing, bookkeeping and internal auditing
that are terminable by either party. Other income also reflects gains resulting
from the sale of other real estate owned.

Operating expenses decreased as a percentage of average assets in both
1995 and 1996. The larger categories within this group remained constant as a
percentage of the total category in each of the last three years. Salaries and
benefits account for approximately half of total operating expenses. This is
an area that presents a challenge to maintain favorable operating efficiency
ratios while maintaining adequate staffing levels to support the Company's
growth, and fairly compensating the staff for performance. The Company is
utilizing technology to more fully utilize staff expertise. The expense for
the added technology is included in equipment expense and represents a capital
outlay of approximately $200,000 annually. Deposit insurance premiums expense
represent several changes in the premiums over the past two years. During
1995, the FDIC reduced the premium assessed to commercial banks insured under
the BIF for insurance coverage of deposits. This reduction benefited Lincoln
Bank primarily and resulted in pretax savings of approximately $231,000 in 1995
and continued in 1996. Cabarrus Bank was a savings bank until 1992, and its
deposits are insured under the SAIF. Cabarrus Bank was assessed a one time
SAIF recapitalization fee of $569,000 pretax during the third quarter of 1996,
with a reduction of ongoing insurance premiums afterward. Management does not
expect any additional material assessments or premium changes in the
foreseeable future. The Company's operating efficiency ratio has continued to
improve, falling from 71% in 1993 to 62% in 1996. Absent deposit insurance
assessments or other unusual expenses, management seeks to further reduce the
operating efficiency ratio, however this ratio will be effected by insurance
assessments or other unusual expenses.

ASSET/LIABILITY MANAGEMENT

The Banks' Asset/Liability Committees are responsible for managing the
risks associated with changing interest rates and their impact on earnings.
The regular evaluation of the sensitivity of net interest income to changes in
interest rates is an integral part of the Company's interest rate risk
management.

The following table summarizes net interest income and average yields and
rates paid for the years indicated. For purposes of this analysis, the interest
on non-taxable investment securities has been adjusted to a taxable-equivalent
amount to facilitate comparison with other asset yields. The adjustment gives
effect to the exemption from federal income taxes for earnings on obligations
of state and political subdivisions and assumes a marginal tax rate of 34%.
Non-accrual loans are excluded from the interest-earning loan balances shown.
(In thousands).

-11-

1996 1995 1994
---------------------------- --------------------------- ----------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- -------- ------- ------- -------- ---- ------- -------- -------

ASSETS
Interest bearing deposits in
other banks........................ $ 457 $ 46 10.07% $ 352 $ 17 4.83% $ 252 $ 31 12.30%
Taxable securities.................. 72,837 4,440 6.10% 64,821 3,870 5.97% 65,200 3,717 5.70%
Non-taxable securities.............. 9,712 891 9.17% 10,503 1,083 10.31% 10,536 1,135 10.77%
Federal funds sold.................. 4,186 214 5.11% 4,971 296 5.95% 2,408 98 4.07%
Loans............................... 282,553 27,389 9.69% 234,581 23,279 9.92% 206,442 18,859 9.14%
-------- -------- -------- -------- -------- --------
Interest earning assets............ 369,745 32,980 8.92% 315,228 28,545 9.06% 284,838 23,840 8.37%
-------- ------ -------- ------ -------- ------
Other assets........................ 30,269 27,061 23,749
-------- -------- --------
$400,014 $342,289 $308,587
-------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits
Demand............................. $ 85,897 2,016 2.35% $ 77,266 2,100 2.72% $ 71,785 1,715 2.39%
Savings............................ 40,849 1,032 2.53% 41,465 1,219 2.94% 40,674 1,181 2.90%
Time................................ 197,833 11,098 5.61% 166,711 9,352 5.61% 148,987 6,835 4.59%
Notes payable and other
interest bearing
liabilities........................ 5,902 294 4.98% 620 46 7.42% 804 43 5.35%
-------- -------- -------- -------- -------- --------
Interest bearing
liabilities...................... 330,481 14,440 4.37% 286,062 12,717 4.45% 262,250 9,774 3.73%
-------- -------- ------ -------- -------- ------ -------- -------- ------
Other liabilities................... 37,116 29,425 23,583
Shareholders' equity................ 32,417 26,802 22,754
-------- -------- --------
Total liabilities and
shareholders' equity............... $400,014 $342,289 $308,587
Interest rate spread................ ======== 4.55% ======== 4.61% ======== 4.64%
====== ====== ======
Net interest earned and net
yield on earning assets
(Margin)........................... $18,540 5.01% $15,828 5.02% $14,066 4.94%
======= ====== ======= ====== ======= ======

The following table presents the dollar amount of changes in interest
income and interest expense. The table distinguishes between the changes
related to average outstanding (volume) of earning assets and interest-bearing
liabilities, as well as the changes related to average interest rates (rate) on
such assets and liabilities. Changes attributable to both volume and rate have
been allocated proportionately. (In thousands).

1996 1995 1994
---- ---- ----
INCOME/ INCOME/ INCOME/
EXPENSE VOLUME RATE EXPENSE VOLUME RATE EXPENSE
------- ------ ---- ------- ------ ----- -------

Interest earning assets:
Interest bearing deposits in other banks............ $ 46 $ 11 $ 18 $ 17 $ 5 $ (19) $ 31
Taxable investment securities....................... 4,440 489 81 3,870 (23) 176 3,717
Non-taxable investment securities................... 588 (48) (79) 715 (2) (32) 749
Federal funds sold and securities purchased with
agreements to resell............................... 214 (40) (42) 296 153 45 98
Loans............................................... 27,389 4,650 (540) 23,279 2,792 1,628 18,859
------- ------ ----- ------- ------ ------ -------
Total interest income............................... 32,677 5,062 (562) 28,177 2,925 1,798 23,454
======= ====== ===== ======= ====== ====== =======
Interest bearing liabilities:
Interest bearing demand deposits.................... 2,016 202 (286) 2,100 149 236 1,715
Savings deposits.................................... 1,032 (16) (171) 1,219 23 15 1,181
Time deposits....................................... 11,098 1,746 -- 9,352 994 1,523 6,835
Notes payable and other interest
bearing liabilities................................ 294 263 (15) 46 (14) 17 43
------- ------ ----- ------- ------ ------ -------
Total interest expense............................. 14,440 2,195 (472) 12,717 1,152 1,791 9,774
------- ------ ----- ------- ------ ------ -------
Net interest income................................ $18,237 $2,867 $ (90) $15,460 $1,773 $ 7 $13,680
======= ====== ===== ======= ====== ====== =======

Financial institutions are subject to interest rate risk to the degree
that their interest bearing liabilities (consisting principally of customer
deposits) mature or reprice more or less frequently, or on a different basis,
than their interest earning assets (generally consisting of intermediate or
long-term loans and investment securities). The match between the

-12-

scheduled repricing and maturities of the Company's earning assets and
liabilities within defined time periods is referred to as "gap" analysis. At
December 31, 1996, the cumulative one-year gap for the consolidated Company was
a negative (or liability sensitive) $1.6 million, or .37% of total assets. Such
a gap is considered immaterial, and pretax net income would be virtually
unchanged with a one percent change in interest rates. As interest rates
remained relatively constant during 1996, depositors were unwilling to extend
the maturity of time deposits, as the yield curve was somewhat flat and did not
reward depositors sufficiently for longer maturities. Intense competition in
the Company's markets continues to pressure quality loan rates downward, while
conversely pressuring deposit rates upward.

The following table reflects the Company's rate sensitive assets and
liabilities by maturity as of December 31, 1996. Variable rate loans are shown
in the category of due "within one year" because they reprice with changes in
the prime lending rate. These variable rate loans have actual maturities of
$40.4 million maturing within one year, with an additional $40.7 million
maturing within five years, and $71.8 million maturing after five years. Fixed
rate loans are presented assuming the entire loan matures on the final due
date. Actually, payments are made at regular intervals and are not reflected in
this schedule. Additionally, demand deposits and savings accounts have no
stated maturity; however, it has been the Company's experience that these
accounts are not totally rate sensitive, and thus, such deposits and accounts
are presented in the categories that management believes best identifies their
actual repricing patterns. This analysis assumes 20% of these deposits reprice
within one year and the remaining 80% reprice within one to five years. (In
thousands).

-13-

PRIME WITHIN 1 - 5 NON-
LOANS ONE YEAR YEARS 5 YEARS MARKET TOTAL
----------- -------- ----- ------- ------ -----

ASSETS:
Securities held to maturity:
U.S. Treasury................................ -- $ 4,507 $ 7,581 -- -- $ 12,088
U.S. government agencies..................... -- 1,498 8,383 -- -- 9,881
States and political subdivisions............ -- 1,277 4,264 $ 2,238 -- 7,779
Mortgage-backed securities................... -- 593 1,713 6,866 -- 9,172
-------- -------- -------- ------- -------- --------
Total securities held to maturity........... -- 7,875 21,941 9,104 -- 38,920
Securities available for sale:
U.S. Treasury................................ -- 10,518 7,969 -- -- 18,487
U.S. government agencies..................... -- 14,804 13,053 -- -- 27,857
Mortgage-backed securities................... -- -- -- 1,005 -- 1,005
Other(1)..................................... -- -- -- -- $ 1,347 1,347
-------- -------- -------- ------- -------- --------
Total securities available for sale......... -- 25,322 21,022 1,005 1,347 48,696
Federal funds sold............................ -- 2,982 -- -- -- 2,982
Loans:
Commercial and financial..................... $ 25,741 2,446 12,797 1,830 -- 42,814
Real estate:
Construction................................ 18,499 2,815 1,641 2,673 -- 25,628
Mortgage(2)................................. 105,350 5,711 43,022 43,819 -- 197,902
Consumer(3).................................. 3,226 3,654 33,466 2,389 33 42,768
-------- -------- -------- ------- -------- --------
Total loans................................. 152,816 14,626 90,926 50,711 33 309,112
Other(4)...................................... -- -- -- -- 427 427
-------- -------- -------- ------- -------- --------
Total earning assets........................ 152,816 50,805 133,889 60,820 1,807 400,137
Noninterest-earning assets.................... -- -- -- -- 29,574 29,574
-------- -------- -------- ------- -------- --------
Total assets................................ $152,816 $ 50,805 $133,889 $60,820 $ 31,381 $429,711
======== ======== ======== ======= ======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY:

Deposits:
Interest-bearing checking.................... -- $ 14,775 $ 59,101 -- -- $ 73,876
Savings...................................... -- 7,889 31,557 -- -- 39,446
Market deposit accounts...................... -- 3,900 15,600 -- -- 19,500
Time, $100,000 and over...................... -- 32,400 7,956 -- -- 40,356
Other time(5)................................ -- 140,369 33,586 $ 11 -- 173,966
-------- -------- -------- ------- -------- --------
Total interest-bearing deposits............. -- 199,333 147,800 11 -- 347,144
Borrowed funds................................ -- 5,862 -- -- -- 5,862
Other liabilities............................. -- 11 -- 120 -- 131
-------- -------- -------- ------- -------- --------
Total interest-bearing liabilities.......... -- 205,206 147,800 131 -- 353,137
Noninterest-bearing liabilities............... -- -- -- -- $ 41,572 41,572
Shareholders' equity.......................... -- -- -- -- 35,002 35,002
-------- -------- -------- ------- -------- --------
Total liabilities and shareholders' equity.. -- 205,206 147,800 131 76,574 429,711
======== ========= ======== ======= ======== ========
Gap........................................ $152,816 $(154,401) $(13,911) $60,689 $(45,193) --
======== ========= ======== ======= ======== ========
Cumulative gap............................. $152,816 $ (1,585) $(15,496) $45,193 -- --
======== ========= ======== ======= ======== ========
Adjustments:
Exclude noninterest-earning assets,
noninterest-bearing liabilities and
shareholders' equity........................ -- -- -- -- 46,765 --
-------- --------- -------- ------- -------- --------
Adjusted cumulative gap..................... $152,816 $ (1,585) $(15,496) $45,193 $ 46,765 --
======== ========= ======== ======= ======== ========

-14-

- ------------

(1) The nonmarket column consists of mutual funds, and shares of capital
representing less than 5% interest in other financial institutions.
(2) Mortgage loans consist primarily of residential loans and home equity
lines of credit.
(3) The nonmarket column consists of overdrafts.
(4) The nonmarket column consists of interest-bearing deposits due from other
banks.
(5) Other time deposits within one year consist of $42,633 maturing within
three months and $35,475 maturing after three months but within six
months.

LIQUIDITY

Liquidity refers to the Company's ability to adjust its future cash flows
to meet the needs of daily operations. The Company relies primarily on
dividends and management assessments from the Banks for liquidity. These
sources have provided adequate liquidity for the Company. The Banks' liquidity
refers to the ability or financial flexibility to adjust its future cash flows
to meet the needs of depositors and borrowers and to fund operations on a
timely and cost effective basis. The Banks' primary sources of funds are cash
generated by repayments of outstanding loans, interest payments on loans and
new deposits. Additional liquidity is available from the maturity and earnings
on securities and liquid assets, as well as the ability to liquidate securities
available for sale. The Banks also had lines of credit of $17.5 million at year
end 1996 under which they can borrow funds to meet short term liquidity needs.
Lincoln Bank has available lines of credit through Wachovia Bank and The
Georgia Banker's Bank for $4 million and $5 million, respectively, and Cabarrus
Bank has an available line of credit through the Federal Home Loan Bank for
$8.5 million. The funds generated from these sources have been adequate to
provide the necessary liquidity for the Banks.

Net cash provided from operations results primarily from net income,
adjusted for the following noncash accounting items: provision for loan losses,
depreciation and amortization, and deferred income taxes or benefits. These
items amounted to $1.6 million in 1996 and $1.2 million in 1995. This cash was
available during 1996 to increase earning assets and to pay dividends. As of
December 31, 1996, the Banks had combined retained earnings of approximately
$22,022,000, all of which were available to be paid as dividends without prior
regulatory approval provided the Banks maintain adequate capital.

FINANCIAL CONDITION

The Company's consolidated assets increased 16.2%, 16.1% and 5.76% during
1996, 1995 and 1994, respectively. Asset growth is directly related to deposit
growth and the funds available to the Company for investment. The Company has
been successful in expanding existing market share as well as adding new branch
locations. During 1996, Cabarrus Bank purchased approximately $3.5 million of
deposit accounts and consolidated them with its Copperfield branch and acquired
$30 million of deposit accounts within Cabarrus County through a branch
acquisition. During 1996, Lincoln Bank acquired $10 million of deposit
accounts west of Lincolnton in Lake Lure pursuant to a branch acquisition. This
acquired growth, as well as the natural growth generated within the Company's
existing markets are expected to produce continued strong growth trends. These
deposits will allow the Company to continue to take advantage of the vibrant
economy and quality loan demand experienced over the past several years.

The Company's small commercial loan portfolio has grown over the past
several years as the Company has employed seasoned commercial lenders to
develop these opportunities. Also, loans secured by real estate have increased,
as the Company believes real estate provides excellent collateral for loans.
Management believes the Company is not dependent on any single customer or
group of customers concentrated in a particular industry, the loss of whose
deposits or whose insolvency would have a material adverse effect on
operations.

As interest rates reflected a flat yield curve during 1996, customers
shortened the term of their deposits and in many cases chose transaction
deposit accounts, including negotiable order of withdrawal ("NOW") and money
market deposit accounts ("MMDA") without a stated maturity. This shift from
longer term deposits allows the depositor to react more quickly to rising
rates. As a result, the Company's cost of funds from 1995 to 1996 has
decreased, but became more vulnerable to rising interest rates which enhanced
the need for effective asset liability management.

Securities have been segregated into two categories, "held to maturity"
and "securities available for sale." While the Company has no plans to
liquidate a significant amount of any securities, the securities available for
sale may be used for liquidity purposes should management deem it to be in the
best interest of the Company. Due to declines in interest rates, the majority
of securities purchased have been relatively short term and categorized as
available for sale in anticipation

-15-

that these would be available to the Company should interest rates reverse or
quality loan demand increase. United States government and government agency
securities continue to represent the majority of both securities held to
maturity and securities available for sale. During 1996, securities available
for sale increased as a percentage of total assets, although total securities
remained relatively constant.

ASSET QUALITY

Management considers the Banks' asset quality to be of primary importance.
The allowance for loan losses represents management's estimate of an amount
adequate in relation to the risk of future losses inherent in the loan
portfolio. The loan portfolio is analyzed monthly to identify potential
problems before they actually occur. This analysis is reviewed in conjunction
with the Company's allowance for loan losses to provide a basis for determining
the adequacy of this allowance to absorb losses that might be experienced. In
addition to such analyses of existing loans, management considers the Banks'
historical loan losses, past due and non-performing loans, current and
anticipated economic conditions, underlying collateral values securing loans
and other factors which affect the allowance. Furthermore, the trend of loans
made over the past several years has been toward larger commercial loans and as
such has had limited historical loss experience for which to base a specific
reserve. Thus, the general reserve has been increased to compensate for loan
growth and the lack of historical experience with the volume of such loans.

The following table depicts the allocation of the allowance for loan
losses at December 31, 1996, 1995, 1994, 1993 and 1992. The allocation is based
on management's grading of the loan portfolio with the remaining portion
allocated to the general category, although the entire allowance is available
to be used for write-offs in any category. (Dollars in thousands.)

DECEMBER 31,
--------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- -----------------
LOAN LOAN LOAN LOAN LOAN
PERCENT PERCENT PERCENT PERCENT PERCENT
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ----- ------ ----- ------ ----- ------ ----- ------ -----

Commercial and financial $ 215 13% $ 327 13% $ 289 10% $ 152 9% $ 73 6%
Real estate:
Residential construction 109 8 21 8 14 6 15 4 18 2
Commercial construction -- -- -- -- -- -- -- -- 35 3
Residential mortgage 453 37 397 37 468 47 509 58 620 63
Commercial mortgage 221 30 320 30 226 23 138 16 318 14
Consumer 293 12 299 12 228 14 216 13 204 12
General 3,198 -- 2,224 -- 1,933 -- 1,550 -- 968 --
------ --- ------ --- ------ --- ------ --- ------ ---
Total loans $4,489 100% $3,588 100% $3,158 100% $2,580 100% $2,236 100%
====== === ====== === ====== === ====== === ====== ===

-16-

Non-performing assets include non-accrual loans, accruing loans
contractually past due 90 days or more, restructured loans, other real estate,
and other real estate under contract for sale. Loans are placed on non-accrual
status when management has concerns relating to the ability to collect the loan
principal and interest, and generally when such loans are 90 days or more past
due. Interest of $40,819 was reported on these loans during 1996, and an
additional amount of $11,983 would have been earned if these loans had been
performing. No amount of loans that have been classified by regulatory
examiners as loss, substandard, doubtful of special mention has been excluded
from amounts disclosed as non-performing loans. While non-performing assets
represent potential losses to the Company, management does not anticipate any
material losses thereon, since most are believed to be adequately secured.
Management believes the allowance for loan losses currently to be sufficient to
absorb known risks in the portfolio. No assurance can be given that adverse
economic conditions will not adversely affect borrowers and result in increased
losses. (In thousands.)

DECEMBER 31,
------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----

Nonaccrual loans.......................................... $576 $ 790 $ 570 $ 744 $ 995
Loans 90 days or more past due and
still accruing interest.................................. 43 22 20 35 59
---- ------ ------ ------ ------
Total non-performing loans................................ 619 812 590 779 1,054
Other real estate......................................... 141 683 1,017 1,385 2,091
---- ------ ------ ------ ------
Total non-performing assets............................... $760 $1,495 $1,607 $2,164 $3,145

Net charge-offs as a percentage of average loans outstanding decreased
from 1995 to 1996. This ratio continues to reflect the moderate level of losses
experienced by the Company.

1996 1995 1994 1993 1992
---- ---- ---- ---- ----

Balance at beginning of year................................. $ 3,588 $ 3,158 $ 2,580 $ 2,236 $ 1,953
Charge-offs:
Commercial, financial and agricultural..................... (39) (95) (9) (43) (324)
Real estate:
Construction.............................................. -- -- -- (180) --
Mortgage.................................................. (18) (77) (24) (40) (114)
Consumer................................................... (312) (219) (130) (270) (151)
-------- -------- -------- -------- --------
Total charge-offs........................................ (369) (391) (163) (533) (589)
Recoveries:
Commercial, financial and agricultural..................... 3 3 19 -- 22
Real estate:
Construction............................................... -- -- -- -- --
Mortgage................................................... 24 23 2 3 2
Consumer.................................................... 64 85 53 53 54
------- -------- -------- -------- --------
Total recoveries......................................... 91 111 74 56 78
-------- -------- -------- -------- --------
Net charge-offs.............................................. (278) (280) (89) (477) (511)
Provision for loan losses.................................... 1,179 710 667 821 794
-------- -------- -------- -------- --------
Balance at end of year....................................... $ 4,489 $ 3,588 $ 3,158 $ 2,580 $ 2,236
======== ======== ======== ======== ========
Loans, net of unearned interest at end of year............... $309,112 $257,178 $223,999 $197,934 $173,793
Ratio of allowance for loan losses to net
loans at end of year........................................ 1.45% 1.40% 1.41% 1.30% 1.29%
Average loans, net of unearned interest...................... $282,553 $234,581 $206,442 $182,697 $168,250
Ratio of net charge-offs to average loans
outstanding during the year................................. 0.10% 0.12% 0.04% 0.26% 0.30%

CAPITAL RESOURCES

Banks and bank holding companies, as regulated institutions, must meet
required levels of capital. The FDIC and the Federal Reserve, the primary
federal regulators for the Banks and the Company, respectively, have adopted
minimum capital regulations or guidelines that categorize components and the
level of risk associated with various types of assets. Financial institutions
are expected to maintain a level of capital commensurate with the risk profile
assigned to its assets in accordance with the guidelines. The Company, Lincoln
Bank and Cabarrus Bank all maintain capital levels exceeding the minimum levels
for well capitalized banks and bank holding companies.

DECEMBER 31, 1996 WELL ADEQUATELY CAROLINA LINCOLN CABARRUS
CAPITALIZED CAPITALIZED FIRST BANK BANK
----------- ----------- -------- -------- --------

Tier I capital to risk adjusted assets... 6.00% 4.00% 11.64% 11.00% 10.15%
Total capital to risk adjusted assets.... 10.00% 8.00% 12.90% 12.24% 11.41%
Leverage ratio........................... 5.00% 4.00% 8.67% 8.07% 6.91%

-17-

See "SUPERVISION, REGULATION AND EFFECTS OF GOVERNMENTAL POLICIES."

ACCOUNTING AND REGULATORY MATTERS

On January 1, 1994, the Company adopted Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 115
"Accounting for Certain Investment in Debt and Equity Securities," for
regulatory and capital purposes. The effect of this Standard causes
fluctuations in shareholders' equity based on changes in values of debt and
equity securities available for sale. Such gains and losses, however, are not
currently added or subtracted for purposes of computing the adequacy of capital
for regulatory purposes. Gains and losses on such securities are recognized for
income statement and regulatory capital purposes only when a security is sold.

Effective January 1, 1995, the Company adopted FASB SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan" and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosures." The adoption of these Standards causes the allowance for credit
losses related to loans identified as impaired to be based on discounted cash
flows of expected payments or the fair value of the collateral for certain
collateral dependent loans.

Effective January 1, 1996, the Company adopted FASB SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," which requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An estimate of the future
cash flows expected to result from the use of the asset and its eventual
disposition should be performed during a review for recoverability. An
impairment loss (based on the fair value of the asset) is recognized if the sum
of the expected future cash flows (undiscounted and without interest charges)
is less than the carrying amount of the asset. Additionally, SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be
disposed of, be reported at the lower of carrying amount or fair value less
cost to sell, except for certain assets. These assets will continue to be
reported at the lower of carrying amount or net realizable value.

Effective January 1, 1996, the Company adopted FASB SFAS No. 122,
"Accounting for Certain Mortgage Banking Activities," which requires that a
mortgage banking enterprise recognize as separate assets the rights to service
mortgage loans for others, however those servicing rights are acquired. A
mortgage banking enterprise that acquires mortgage servicing rights through
either the purchase or origination of mortgage loans and sells or securitizes
those loans with servicing rights retained should allocate the total cost of
the mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values if it is
practicable to estimate those fair values. If it is not practicable to estimate
the fair values of the mortgage servicing rights and the mortgage loans
(without the mortgage servicing rights), the entire cost of purchasing or
originating the loans should be allocated only to the mortgage loans without
the mortgage servicing rights. Additionally, this Standard requires that a
mortgage banking enterprise periodically assess its capitalized mortgage
servicing rights for impairment based on the fair value of those rights.

Effective January 1, 1996, the Company adopted FASB SFAS No. 123,
"Accounting for Stock-Based Compensation," which requires that the fair value
of employee stock-based compensation plans be recorded as a component of
compensation expense in the statement of income as of the date of grant of
awards related to such plans or that the impact of such fair value on net
income and earnings per share be disclosed on a pro forma basis in a footnote
to financial statements for awards granted after December 15, 1994, if the
accounting for such awards continues to be in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25). The Company will continue such accounting under the provisions of APB
25.

Statement of Financial Accounting Standard No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," as amended, (i) sets forth the criteria for (a) determining when
to recognize financial and servicing assets and liabilities; and (b) accounting
for transfers of financial assets as sales or borrowings; and (ii) requires (a)
liabilities and derivatives related to a transfer of financial assets to be
recorded at fair value; (b) servicing assets and retained interest in
transferred assets carrying amounts be determined by allocating carrying
amounts based on fair value; (c) amortization of servicing assets and
liabilities be in proportion to net servicing income; (d) impairment
measurement be based on fair value; and (e) pledged financial assets be
classified as collateral. This Standard provides implementation guidance for
assessing isolation of transferred assets and for accounting for transfers of
partial interests, servicing of financial assets, securitizations, transfers of
sales-type and direct financing lease receivables, securities lending
transactions, repurchase agreements including dollar rolls, wash sales, loan
syndications and participations, risk participations in banker's acceptances,
factoring arrangements, transfers of receivables with recourse and
extinguishments of liabilities.

-18-

This Standard is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, except
that the Standard will be effective for transfers of financial assets and
transactions related to repurchase agreements, dollar rolls, securities lending
and the like, occurring after December 31, 1997, and it is to be applied
prospectively. The effect on the Company is not expected to be material.

SIX MONTHS ENDED JUNE 30, 1997

The following discussion and analysis sets forth the major factors which
affected the Company's results of operations and financial condition reflected
in the unaudited financial statements for the three and six-month periods ended
June 30, 1997 and 1996.

GENERAL

Net income for the quarter ended June 30, 1997, was $1,499,216, or $.36
per share, compared to net income of $1,213,208, or $.29 per share, for the
same period in 1996. Net income for the six-month period ended June 30, 1997,
was $2,936,629, or $.70 per share, compared to net income of $2,332,657, or
$.56 per share, for the same period in 1996.

NET INTEREST INCOME/MARGINS

Net interest income of $10,030,674 during the first six-months of 1997
resulted from a net interest margin of 4.89% on average earning assets of $414
million. This compares with a net interest margin of 4.93% on average earning
assets of $355.7 million generating net interest income of $8,702,307 for the
same period in 1996. The interest rate earned on loans is being reduced as
competition increases for market share of quality loans. The Company has,
however, been able to sustain the strong net interest margin as average
interest bearing liabilities have decreased as a percentage of total
liabilities and capital. This is the result of both increased capital and
increases in noninterest bearing deposits. Interest rates have remained
relatively stable and thus the change in the net interest margin is more a
function of competition than changes in interest rates. Each increase in the
prime lending rate initially increases the Company's net interest income since
a large number of loans are tied to the prime lending rate and are directly and
immediately effected. However, with the passage of time, interest sensitive
liabilities will increase and the Company's interest margins should stabilize.
The increase in loan demand experienced by the Company positively affects the
net interest margin, as noted by the large volume related increase, and is an
indicator of the continued strong local economy. The increase in net interest
income consists of a small decrease of $50,000 relative to rate and an increase
of $1,379,000 relative to volume. As the Banks' loans have continued to grow,
the funds have been obtained primarily through customer deposits and the
maturing of investment securities. Deposit and loan rates are adjusted as
market conditions and the Company needs allow.

ASSET LIABILITY/MANAGEMENT

The following table summarizes net interest income and average yields and
rates paid for the periods ended June 30, 1996 and 1997. For purposes of this
analysis, the interest on non-taxable investment securities has not been
adjusted to a taxable-equivalent amount. Non-accrual loans are excluded from
the interest-earning loan balances shown. (In thousands).

-19-

JUNE 30,

1997 1996
--------------------------- ---------------------------
INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- -------- ------- ------- -------- ----

ASSETS
Interest bearing deposits in
other banks........................... $ 509 $ 15 5.89% $ 573 $ 27 9.42%
Taxable securities..................... 86,347 2,598 6.02% 72,728 2,257 6.21%
Non-taxable securities................. 7,350 250 6.80% 11,495 308 5.36%

Federal funds sold and securities
purchased with agreements to
resell................................ 8,761 237 5.41% 2,900 76 5.24%
Loans.................................. 311,003 14,919 9.59% 268,052 12,972 9.68%
-------- -------- -------- --------
Interest earning assets................ 413,970 18,019 8.71% 355,748 15,640 8.79%
-------- ---- -------- ----
Cash and due from banks................ $ 15,812 $ 13,186
Other assets........................... 18,579 16,369
-------- --------
$448,361 $385,303
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest bearing deposits
Demand................................ $ 97,739 1,177 2.41% $ 83,706 $ 973 2.32%
Savings............................... 42,055 528 2.51% 41,066 514 2.50%
Time.................................. 223,233 6,169 5.53% 190,194 5,339 5.61%
Other borrowings....................... 5,177 114 4.40% 4,576 112 4.90%
-------- -------- -------- --------
Interest bearing liabilities........... 368,204 7,988 4.34% 319,542 6,938 4.34%
Other liabilities...................... 43,180 34,883
Shareholders' equity................... 36,977 30,878
-------- --------
Total liabilities and
shareholders' equity.................. $448,361 $385,303
Interest rate spread................... ======== 4.37% ======== 4.45%
==== ====
Net interest earned and net
yield on earning assets............... $10,031 4.89% $ 8,702 4.93%
======= ==== ======= ====

The following table presents the dollar amount of changes in interest
income and interest expense for the periods ended June 30, 1996 and 1997. The
table distinguishes between the changes related to average outstanding (volume)
of earning assets and interest-bearing liabilities, as well as the changes
related to average interest rates (rate) on such assets and liabilities.
Changes attributable to both volume and rate have been allocated
proportionately. (In thousands).

1996 1997
---- ----
INCOME/ INCOME/
EXPENSE VOLUME RATE EXPENSE
------- ------ ---- -------

Interest income:
Loans.............................................. 12,972 2,060 (113) 14,919
Taxable investment securities...................... 2,257 410 (69) 2,598
Non-taxable investment securities.................. 308 (141) 83 250
Federal funds sold and interest
bearing balances in other banks................... 103 158 (9) 252
------- ------ ----- -------
Total interest income............................. 15,640 2,487 (108) 18,019
======= ====== ===== =======
Interest expense:
Interest bearing demand deposits................... 973 169 35 1,177
Savings deposits................................... 514 12 2 528
Time deposits...................................... 5,339 913 (83) 6,169
Other borrowings................................... 112 13 (11) 114
------- ------ ----- -------
Total interest expense............................ 6,938 1,108 (58) 7,988
------- ------ ----- -------
Net interest income............................... $ 8,702 $1,379 $ (50) $10,031
======= ====== ===== =======

LOAN LOSS ALLOWANCE/PROVISION

The allowance for loan losses was $4,852,905 or 1.50% of outstanding
loans, at June 30, 1997 and $4,488,958 or 1.45% of outstanding loans, at
December 31, 1996.

The provision for loan losses charged to operations during the first six
months was $498,333 in 1997 and $537,000 in 1996. The decrease in the provision
was a result of the Company's comfort level with the loan quality, the level of
the allowance for loan losses and the stable growth in the loan portfolio.
Charge-offs, net of recoveries, were $134,386 or .04% of average loans
outstanding, during the six months ended June 30, 1997, as compared to $83,142
or .03% of average loans outstanding, during the same period in 1996.
Nonaccrual loans were $1,594,276 at June 30, 1997, $576,191 at December 31,
1996 and $570,614 at June 30, 1996. The ratio of non-accrual loans to total
loans was .50% at June 30, 1997, .19% at December 31, 1996, and .20% at June
30, 1996. While this ratio increased from December, it is still significantly
less than peer banks. Management believes that reserves and asset values are
adequate to facilitate the timely disposition of these assets.

-20-
21

NET NON-INTEREST INCOME

Non-interest income increased 29.77% for the first six months of 1997 as
compared to the same period a year earlier. Non-interest income from core
operations continues to increase as the Company expands fee income areas such
as trust services and credit cards. Also, the additional deposits recently
acquired have boosted deposit related income. The Company's financial services
company has continued to mature and is contributing favorably to non-interest
income as nontraditional banking services are considered by depositors.

Non-interest expense increased $1,170,724 or 17.85%, for the six-month
period ended June 30, 1997, as compared to the same period a year earlier.
Non-interest expense increased in relation to the additional branch
acquisitions and branch opening. Specifically, occupancy and supplies were
directly effected as well as other expenses which includes the amortization of
the premium paid to acquire the deposits. Additionally, the expenses relative
to our technology expenditures are apparent in the increase in equipment
expense. Insurance premiums on deposits insured by the FDIC's SAIF were reduced
during the fourth quarter of 1996 after a one-time assessment.

FINANCIAL CONDITION

The Company's total assets at June 30, 1997 and 1996, were $490,681,378
and $394,601,998, respectively, and $429,711,291 at December 31, 1996. Average
earning assets for the first six months of 1997 were $413,970,000 versus
$355,748,000 for the same period a year earlier, an increase of 16.37%. This
growth is the result of the strong local economy and the Company's continued
expansion of its customer base. During the second quarter of 1997, the Company
opened one new branch and acquired the deposits of three branches. The Company
will continue to look for ways to grow in market share.

Average loans of $311,003,000 represented 75.13% of average earning assets
during the first six months of 1997. During the same period in 1996, average
loans totaled $268,052,000, or 75.35% of average earning assets. Gross loans
increased to $324,598,631 at June 30, 1997, a 5.01% increase over loans at
December 31, 1996. It is anticipated that general loan growth will continue to
mirror the economy generally, however, competition for quality loans may
adversely effect the net interest margins.

Securities averaged $93,697,000 during the six months ended June 30, 1997
versus $84,223,000 for the same period a year ago. The securities portfolio
represented 22.63% of earning assets at June 30, 1997 and 23.67% at June 30,
1996. At June 30, 1997, the securities portfolio had unrealized losses of
approximately $341,393. A gain of $10,889 was realized during the first half of
1997. Securities held to maturity with a carrying value of approximately $27.5
million were scheduled to mature within the next five years. Of this amount,
$9.2 million were scheduled to mature within one year. Securities available for
sale with a carrying value of $79.7 million were scheduled to mature within the
next five years. Of this amount, $29.3 million were scheduled to mature within
one year. The Company currently has the ability and intent to hold its
investment securities to maturity. Certain debt securities are designated by
management as held for sale and are carried at the lower of cost or market
because management may sell them before they mature.

Average interest bearing liabilities rose 15.23%, to $368,204,000 in the
first six months of 1997, from an average of $319,542,000 in the first six
months of 1996. Total deposits increased 25.30% from June 30, 1996 to June 30,
1997, and 15.43% from December 31, 1996 to June 30, 1997. The second quarter
acquisitions resulted in large deposit growth rates. As the Company capitalizes
on these acquisitions and gains market share deposits will continue to
increase.

The Company continues to maintain capital ratios in excess of regulatory
minimum requirements. The current capital standards call for a minimum total
capital of 8% of risk-adjusted assets, including 4% Tier I capital, and a
minimum leverage ratio of Tier I capital to total tangible assets of at least
4-5%. At June 30, 1997, the Company's ratio of total capital to risk-adjusted
assets was 12.03% which includes 10.78% Tier I capital and the Company's ratio
of total Tier I capital to total assets, adjusted for the loans loss allowance
and intangibles, was 7.72%.

LIQUIDITY

The liquidity position of Lincoln Bank and Cabarrus Bank, is primarily
dependent upon their need to respond to withdrawals from deposit accounts and
upon the liquidity of their assets. Primary liquidity sources include cash and
due from banks, federal funds sold, short-term investment securities and loan
repayments. At June 30, 1997, the Company had a liquidity ratio of 33.38%.
Management believes the liquidity sources are adequate to meet operating needs.
Except as discussed above, there are no known trends, events or uncertainties
that will have or that are reasonably likely to have a material effect on the
Company's liquidity, capital resources or operations.

-21-

MANAGEMENT AND PRINCIPAL SHAREHOLDERS

BOARD OF DIRECTORS

The following table sets forth certain information regarding the Company's
directors as of January 31, 1997. Beneficial ownership of shares have not been
restated for the 2-for-1 stock split effected August 22, 1997.

BENEFICIAL OWNERSHIP
OF SHARES OF COMMON
STOCK
NAME, AGE AND YEAR FIRST AND PERCENTAGE OF
ELECTED OR APPOINTED A PRINCIPAL EXPERIENCE OUTSTANDING
DIRECTOR OF THE COMPANY DURING THE PAST FIVE YEARS SHARES (1)
- ----------------------- ----------------------------- -----------------------

John R. Boger, Jr. (68) Mr. Boger is a partner in 4,798 (2)
1992 the law firm of Williams, *
Boger, Grady, Davis &
Tuttle, P.A., Concord, North
Carolina. Mr. Boger is
the Chairman of the Board of
Directors of the Cabarrus
Bank, is a member of the
Board of Directors of CT
Communications, Inc. (parent
company of Concord Telephone
Company), and a past
President of the Concord
Rotary Club and the
Concord/Cabarrus Chamber of
Commerce.

D. Mark Boyd, III (59) Mr. Boyd has served as 192,701 (3)
1989 Chairman of the Board and 9.39%
Chief Executive Officer of
the Company since its
organization in 1989. Mr.
Boyd has served as Chairman
of the Board of Directors of
Lincoln Bank since 1983.
Since 1993, Mr. Boyd has
served as a member of the
North Carolina State Banking
Commission. Mr. Boyd was
also an organizer and
presently is a director of
First Gaston Bank of North
Carolina, 17% of the common
stock of which is owned by
the Company. First Gaston
Bank's common stock is
registered under the
Exchange Act.

James E. Burt, III (59) Mr. Burt has been President 28,088 (4)
1990 of the Company and Lincoln 1.37%
Bank and Chief Executive
Officer of Lincoln Bank
since 1990.

-22-

Charles A. James (50) Mr. James has served as 698
1997 Director of CK Federal from *
1983 to 1993 and
subsequently to 1997 when it
was acquired by South Trust
Bank of North Carolina. Mr.
James is the President of
Mt. Pleasant Insurance
Agency; the President of Mt.
Pleasant Enterprises, Inc.;
Director of Albemarle
Knitting Corp.; Co-owner of
Mt. Pleasant Bonded
Warehouse; Partner of All
Secure Storage; Partner of
North Branch Properties and
Partner of Earnhardt
Interchange Properties.

Samuel C. King, Jr. (49) Mr. King has served as 12,548 (5)
1989 President of King's Office *
Supply, Inc., an office
supply company in
Lincolnton, since 1977. He
has served as a director of
Lincoln Bank since 1983 and
as Vice Chairman since 1992.

Harry D. Ritchie (63) Mr. Ritchie has been the 8,869 (6)
1989 owner of Ritchie Brothers *
Dairy Farm since 1955. He
has served as a director of
Lincoln Bank since 1983.

L.D. Warlick, Jr., (57) Mr. Warlick is the President 27,602 (7)
1992 of Warlick Funeral Home, 1.34%
Lincolnton, North Carolina.
Mr. Warlick is a past
President of the Lincolnton
Rotary Club, Lincoln County
Chapter of the American Red
Cross, past President of
Lincoln Medical Center Board
of Directors and United Way
Chairman. He has served as
a director of Lincoln Bank
since 1983.

Estus B. White (66) Mr. White is the retired 12,623 (8)
1002 Clerk of Superior Court for *
Cabarrus County, North
Carolina Mr. White is a past
president of the Kannapolis
Merchants Association. He
has served as a director of
Cabarrus Bank since 1980.

- ----------------------
* Less than one percent of outstanding shares.

(1) Information relating to beneficial ownership of shares is based upon
"beneficial ownership" concepts set forth in rules of the Commission under
Section 13(d) of the Exchange Act. Under such rules a person is deemed to
be a "beneficial owner" of a security if that person has or shares "voting
power," which includes the power to vote or direct the voting of such
security, or "investment power," which includes the power to dispose or to
direct the disposition of such security. A person is also deemed to be a
beneficial owner of any security of which that person has the right to
acquire beneficial ownership within 60 days. Under these rules, more than
one person may be deemed to be a beneficial owner of the same securities,
and a person may be deemed to be a beneficial owner of securities as to
which he may disclaim beneficial interest.

-23-

(2) Includes 237 shares held by members of Mr. Boger's immediate family, as
to which shares Mr. Boger may be deemed to share voting and investment
power.

(3) Includes 68,895 shares held by three corporations of which Mr. Boyd is a
director, president and majority shareholder, 6,597 shares held by a
profit sharing plan of one such corporation, for which Mr. Boyd is a
member of the Plan Committee, and 21,060 shares held by members of Mr.
Boyd's immediate family. As to all of these shares, Mr. Boyd may be
deemed to share voting and investment power; however, Mr. Boyd disclaims
beneficial ownership.

(4) Includes 1,917 shares owned by Mr. Burt's wife, as to which Mr. Burt may
be deemed to share voting and investment power.

(5) Includes 410 shares held by a corporation of which Mr. King is president
and principal shareholder and 5,755 shares held by Mr. King's family, as
to which shares Mr. King may be deemed to share voting and investment
power.

(6) Includes 4,510 shares owned jointly with Mr. Ritchie's wife, as to which
shares Mr. Ritchie may be deemed to share voting and investment power.

(7) Includes 1,409 shares held by a corporation of which Mr. Warlick is a
director and president, and 6,436 shares held by Mr. Warlick's wife and
family members, as to which shares Mr. Warlick may be deemed to share
voting and investment power.

(8) Includes 8,327 shares owned jointly with Mr. White's wife, as to which
Mr. White may be deemed to share voting and investment power.

EXECUTIVE OFFICERS

The executive officers of the Company consist of the following:

D. Mark Boyd, III, age 59, is the Chairman of the Board and Chief
Executive Officer of the Company. He also serves as Chairman of the Board of
Lincoln Bank, a position he has held since its organization. Mr. Boyd served
as interim President of the Bank from November 1989 to June 1990. In addition,
Mr. Boyd has been President of Times Oil Corporation, a fuel and heating oil
distributor, since 1965 and a director of Kentucky Fried Chicken of Lincolnton,
Inc., a fast-food restaurant franchise, since 1968. Since 1974, Mr. Boyd has
served as a director of Carolina Mills, Inc., a manufacturer of yarn, and cloth
in Maiden, North Carolina.

James E. Burt, III, age 60, has been President of the Company and Lincoln
Bank and Chief Executive Officer of Lincoln Bank since 1990 and Director of
Cabarrus Bank since 1993. Mr. Burt previously served as President and Chief
Executive Officer of Commercial National Bank in Shreveport, Louisiana from
1980 to 1989.

James A. Atkinson, age 40, has served as Vice President and Auditor of the
Company since April 1992. Mr. Atkinson has served in various bank audit
positions since 1978.

Jan H. Hollar, age 41, has served as the Treasurer of the Company since
December 1990 and currently serves as Vice President and Secretary of the
Company. In addition, Ms. Hollar has served as the Chief Financial Officer of
Lincoln Bank since November 1990 and principal accounting officer at Cabarrus
Bank since January 1993.

Joy G. Keever, age 60, has been an officer of Lincoln Bank since its
organization, having served as Cashier from 1983 to 1986, when she was elected
Vice President. She was named Vice President - Human Resources of the Company
effective June 1, 1996.

James H. Mauney, II, age 49, has served as Vice President and Manager of
Loan Administration of the Company since February 1996. Mr. Mauney previously
served as Vice President of Hibernia National Bank from 1988 to 1996.

PRINCIPAL SHAREHOLDERS

As of January 31, 1997, there were no persons known to the Company who
were beneficial owners of more than 5% of the Company's outstanding Shares
other than D. Mark Boyd, III, P.O. Box 399, Lincolnton, North Carolina 28093,

-24-

who is a director of the Company, and who beneficially held on that date
192,701 shares, or 9.39% of the total shares outstanding. See "Proposal I -
Election of Directors."

As of January 31, 1997, the number of shares owned beneficially by all
directors and executive officers of the Company as a group (12 persons) was
approximately 297,817, or 14.47% of the total shares outstanding.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth certain elements of compensation for the
chief executive officer and the other most highly named compensated executive
officer (collectively, the "executive officers") for each of the last three
calendar years:

Summary Compensation Table

Annual Compensation All Other
-------------------
Name and Position Year Salary Bonus Compensation
(a) (b) (c) (d) (i)
- ----------------------- ---- ------ ----- ------------

D. Mark Boyd, III
Chief Executive Officer 1996 $ 18,000 $ -- $ 1,796 (1)
1995 14,400 -- 1,293 (1)
1994 11,420 -- --

James E. Burt, III
President 1996 140,920 30,983 5,385 (1)
1995 134,852 20,754 18,691 (1)
1994 132,208 16,689 16,145 (1)

- --------------------
(1) Amounts shown consist of the Company's profit sharing contribution,
matching contribution to the Carolina First BancShares Profit Sharing Plan and
amounts contributed by the Company to the Deferred Compensation Trust for
Carolina First BancShares, Inc. and Subsidiaries on behalf of the named
executive officers.

AGGREGATED OPTIONS/SARS EXERCISED IN 1996
AND 1996 YEAR-END OPTION/SAR VALUES

The following table shows stock option exercises by the named executive
officers during 1996, including the aggregate value of gains on the date of
exercise. In addition, this table includes the number of shares covered by
both exercisable and non-exercisable options as of December 31, 1996. Also
reported are the values for "in-the-money" options, which represent the
positive spread between the exercise price of any such existing options and the
year-end price of the Company's Common Stock.

Number of Value
Securities Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at at
Shares FY-End (#) FY-End ($)
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
(a) (b) (c) (d) (e)
- ---- ----------- -------- ------------- --------------

D. Mark Boyd, III -- -- 0/0 $0/$0

James E. Burt, III -- -- 66,853/0 $1,498,259/$0

-25-

EMPLOYMENT AGREEMENTS

As of December 31, 1996, Lincoln Bank entered into a new employment
contract with James E. Burt, III. The contract provides that Mr. Burt shall
remain employed by the Company through January 31, 2000, unless sooner
terminated under the terms thereof.

Either the Company or Mr. Burt may terminate the employment contract at
any time upon 60 days prior written notice. The contract may also be
terminated at the election of the Company for cause, or by reason of Mr. Burt's
disability. In the event employment is terminated without cause by the Company
prior to January 31, 2000, the Company shall continue to pay Mr. Burt's annual
salary and provide certain benefits (except for the annual bonus) for a period
of 12 months after such termination (or until January 31, 2000, whichever
occurs earlier) as severance pay.

In the event the Company experiences a "change in control," as defined in
the employment contract, Mr. Burt shall receive a lump-sum payment equal to his
annual salary and maximum bonus potential for the year in which the change in
control occurs (in addition to his regular compensation if he remains in the
Company's employ after the change in control). In certain circumstances, if
Mr. Burt's employment is terminated after a change in control, he may be
entitled to receive various benefits and compensation for a period of up to 24
months.

As of December 31, 1996, the Company also entered into a Deferred
Compensation Agreement with Mr. Burt that replaces a similar agreement dated
July 2, 1992. This agreement provides that if Mr. Burt retires from the
Company at age 65, or if his employment is terminated without cause after, or
within 12 months of, a change in control involving the Company, Mr. Burt shall
receive certain payments for up to 120 months.

CERTAIN TRANSACTIONS

Certain Company directors, officers and principal shareholders, and their
associates, were customers of, or had banking and financial transactions with,
the Company or its subsidiaries in the ordinary course of business during
1996. Some of the directors of the Company or its subsidiaries are directors,
officers, trustees or principal securities holders of corporations or other
organizations which also were customers of, or had banking and financial
transactions with, the Company or its subsidiaries in the ordinary course of
business during 1996.

All outstanding loans and other transactions with the directors, officers
and principal shareholders of the Company and its subsidiaries were made in the
ordinary course of business on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons and, when made, did not involve more than the
normal risk of collectibility or present other unfavorable features. The
aggregate amount of credit extended to directors, executive officers and
principal shareholders as of December 31, 1996, was $2,388,465 or 6.82% of the
Company's shareholders' equity. In addition to banking and financial
transactions, the Company or its subsidiaries may have had additional
transactions with, or used products or services of, various organizations of
which directors of the Company and its subsidiaries are associated. The
Company provided data processing and other services to First Gaston Bank,
during 1996, for which First Gaston Bank paid $141,959. The Company is the
largest shareholder of First Gaston Bank, and the Company's Chairman is an
organizer and a director of First Gaston Bank. Except for the transactions
with First Gaston Bank, the amounts involved in such noncredit transactions
have in no case been material in relation to the business of the Company, its
subsidiaries or such other organizations. It is expected that the Company and
its subsidiaries will continue to have similar transactions in the ordinary
course of its business with such individuals and their associates in the
future.

Securities rules and regulations require certain reports to be filed by
directors and executive officers. To the knowledge of the Company, all filings
were made on a timely basis.

-26-

SUPERVISION, REGULATION AND EFFECTS OF GOVERNMENTAL POLICIES

Bank holding companies and banks are extensively regulated under federal
and state law. This discussion is qualified in its entirety by reference to the
particular statutory and regulatory provisions referred to below and is not
intended to be an exhaustive description of the status or regulations applicable
to the Company's and the Banks' business. Supervision, regulation, and
examination of the Company and its bank and nonbank subsidiaries by the bank
regulatory agencies is intended primarily for the protection of depositors
rather than holders of Company capital stock. Any change in applicable law or
regulation may have a material effect on the Company's business.

BANK HOLDING COMPANY REGULATION

The Company, as a bank holding company, is subject to supervision and
regulation by the Federal Reserve under the BHC Act. The Company is required to
file with the Federal Reserve periodic reports and such other information as
the Federal Reserve may request. The Federal Reserve examines the Company, and
may examine the Company's subsidiaries. The Company is also registered as a
bank holding company with the North Carolina Commissioner of Banks, (the
"Commissioner"), and files reports with the Commissioner.

The BHC Act requires prior Federal Reserve approval for, among other
things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than 5% of the voting shares or substantially all
the assets of any bank, or for a merger or consolidation of a bank holding
company with another bank holding company. With certain exceptions, the BHC Act
prohibits a bank holding company from acquiring direct or indirect ownership or
control of voting shares of any company which is not a bank or bank holding
company and from engaging directly or indirectly in any activity other than
banking or managing or controlling banks or performing services for its
authorized subsidiaries. A bank holding company, may, however, engage in or
acquire an interest in a company that engages in activities which the Federal
Reserve had determined by regulation or order to be so closely related to
banking or managing or controlling banks to be a proper incident thereto.
Certain acquisitions by holding companies are subject to approval by the
Commissioner.

The Economic Growth and Regulatory Paperwork Reduction Act of 1996
("EGRPRA") was signed into law on September 30, 1996. EGRPRA streamlined the
non-banking activities application process for well-capitalized and
well-managed bank holding companies. Under EGRPRA, qualified bank holding
companies may commence a regulatory approved non-banking activity without prior
notice to the Federal Reserve; written notice is required within 10 days after
commencing the activity. Under EGRPRA, the prior notice period is reduced to 12
days in the event of any non-banking acquisition or share purchase or de novo
non-banking activity previously approved by order of the Federal Reserve, but
not yet implemented by regulations, assuming the size of the acquisition or
proposed activity does not exceed 10% of risk-weighted assets of the acquiring
bank holding company and the consideration does not exceed 15% of Tier 1
capital. On February 20, 1997, the Federal Reserve adopted, effective April 21,
1997, amendments to its Regulation Y implementing certain provisions of The
Economic Growth and Regulatory Paperwork Reduction Act of 1996 ("EGRPRA"),
which was signed into law on September 30,1996. Among other things, these
amendments to Federal Reserve Regulation Y reduce the notice and application
requirements applicable to bank and nonbank acquisitions and de novo expansion
by well-capitalized and well-managed bank holding companies; expand the list of
nonbanking activities permitted under Regulation Y and reduce certain
limitations on previously permitted activities; and amend Federal Reserve
anti-tying restrictions that include provisions that allow banks greater
flexibility to package products with their affiliates.

The Company is a legal entity separate and distinct from the Banks and its
other subsidiaries. Various legal limitations restrict the Bank from lending or
otherwise supplying funds to the Company or its non-bank subsidiaries. The
Company and the Banks also are subject to Section 23A of the Federal Reserve
Act. Section 23A defines "covered transactions," which includes extensions of
credit, and limits a bank's covered transactions with any affiliate to 10% of
such bank's capital and surplus. All covered and exempt transactions between a
bank and its affiliates must be on terms and conditions consistent with safe
and sound banking practices, and banks and their subsidiaries are prohibited
from purchasing low-quality assets from the bank's affiliates. Finally, Section
23A requires that all of a bank's extensions of credit to an affiliate be
appropriately secured by acceptable collateral, generally United States
government or agency securities, The Company and the Banks also are subject to
Section 23B of the Federal Reserve Act, which generally limits covered and
other transactions among affiliates to terms and under circumstances, including
credit standards, that are substantially the same or at least as favorable to
the bank or its subsidiary as prevailing at the time for transactions with
unaffiliated companies.

The BHC Act, as amended by the interstate banking provisions of the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Interstate Banking Act"), which became effective on September 29, 1995,
repealed the prior statutory restrictions on interstate acquisitions of banks
by bank holding companies, such that the Company and any other bank holding
company located in North Carolina may now acquire a bank located in any other
state, and any bank holding company located outside North Carolina may lawfully
acquire any bank based in another state, regardless of state

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law to the contrary, in either case subject to certain deposit-percentage, aging
requirements, and other restrictions. The Interstate Banking Act also generally
provides that, after June 1, 1997,national and state-chartered banks may branch
interstate through acquisitions of banks in other states, By adopting
legislation prior to that date, a state has the ability either to "opt in" and
accelerate the date after which interstate branching is permissible or "opt out"
and prohibit interstate branching altogether. North Carolina adopted legislation
opting into interstate branching effective July 1, 1995, including de novo
interstate branching prior to July 1, 1997 with states where reciprocal
branching is permitted and thereafter without limit.

Federal Reserve policy requires a bank holding company to act as a source
of financial strength and to take measures to preserve and protect bank
subsidiaries in situations where additional investments in a troubled bank may
not otherwise be warranted. In addition, under the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), where a bank holding
company has more than one bank or thrift subsidiary, each of the bank holding
company's subsidiary depository institutions are responsible for any losses to
the FDIC as a result of an affiliated depository institution's failure. As a
result, a bank holding company may be required to loan money to its
subsidiaries in the form of capital notes or other instruments which qualify as
capital under regulatory rules. However, any loans from the holding company to
such subsidiary banks likely will be unsecured and subordinated to such bank's
depositors and perhaps to other creditors of the bank. The Federal Reserve, in
approving the Company's investment in First Gaston, has required the Company to
enter into a commitment to serve as a source of strength for First Gaston.

BANK AND BANK SUBSIDIARY REGULATION GENERALLY

The Banks are subject to supervision, regulation, and examination by the
FDIC and the North Carolina Commissioner, which examine and monitor all areas
of the operations of the Banks, including reserves, loans, mortgages, issuance
of securities, payment of dividends, establishment of branches, and capital.
The Banks are members of the FDIC, and their deposits are insured by the FDIC
to the maximum extent provided by law. Lincoln Bank's deposits are insured by
the FDIC's BIF, and Cabarrus Bank's deposits are primarily insured by the
FDIC's SAIF. See "FDIC Insurance Assessments."

Under present North Carolina law, the Bank currently may establish and
operate branches throughout the State of North Carolina, subject to the
maintenance of adequate capital for each branch and the receipt of the
necessary approvals of the FDIC and the Commissioner.

COMMUNITY REINVESTMENT ACT

The Company and the Banks are subject to the provisions of the Community
Reinvestment Act of 1977, as amended (the "CRA") and the federal banking
agencies' regulations thereunder. Under the CRA, all banks and thrifts have a
continuing and affirmative obligation, consistent with 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 requirement 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 a depository institution's primary
federal regulator, in connection with its examination of the institution, to
assess the institution's record in assessing and meeting the credit needs of
the community served by that institution, including low- and moderate-income
neighborhoods. The regulatory agency's assessment of the institution's record
is made available to the public. Further, such assessment is required of any
institution which has applied to: (i) charter a national bank; (ii) obtain
deposit insurance coverage for a newly-chartered institution; (iii) establish a
new branch office that accepts deposits; (iv) relocate an office; or (v) merge
or consolidate with, or acquire the assets or assume the liabilities of, a
federally regulated financial institution. In the case of a bank holding
company applying for approval to acquire a bank or other bank holding company,
the Federal Reserve will assess the records of each subsidiary depository
institution of the applicant bank holding company, and such records may be the
basis for denying the application.

Under new CRA regulations, effective January 1, 1996, the process-based
CRA assessment factors were replaced with a new evaluation system that rates
institutions based on their actual performance in meeting community credit
needs. The evaluation system used to judge an institution's CRA performance
consists of three tests: a lending test; an investment test; and a service
test. Each of these tests are applied by the institution's primary federal
regulator taking into account such factors as: (i) demographic data about the
community; (ii) the institution's capacity and constraints; (iii) the
institution's product offerings and business strategy; and (iv) data on the
prior performance of the institution and similarly-situated lenders. The new
lending test - the most important of the three tests for all institutions other
than wholesale and limited purpose (e.g., credit card) banks - evaluates an
institution's lending activities as measured by its home mortgage loans, small
business and farm loans, community development loans, and, at the option of the
institutions, its consumer loans.

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Each of these lending categories are weighed to reflect its relative
importance to the institution's overall business and, in the case of community
development loans, the characteristics and needs of the institution's service
area and the opportunities available for this type of lending. Assessment
criteria for the lending test include: (i) geographic distribution of the
institution's lending; (ii) distribution of the institution's home mortgage and
consumer loans among different economic segments of the community; (iii) the
number and amount of small business and small farm loans made by the
institution; (iv) the number and amount of community development loans
outstanding; and (v) the institution's use of innovative or flexible lending
practices to meet the needs of low-to-moderate income individuals and
neighborhoods. At the election of an institution, or if particular circumstances
so warrant, the banking agencies will take into account in making their
assessments lending by the institution's affiliates as well as community
development loans made by any lending consortia and other lenders in which the
institution has invested. As part of the new regulation, all financial
institutions are required to report data on their small business and small farm
loans as well as their home mortgage loans.

The investment test focuses on the institution's qualified investments
within its service area that (i) benefit low-to-moderate income individuals and
small businesses or farms, (ii) address affordable housing needs, or (iii)
involve donations of branch offices to minority or women's depository
institutions. Assessment of an institution's performance under the investment
test is based upon the dollar amount of the institution's qualified
investments, its use of innovative or complex techniques to support community
development initiatives, and its responsiveness to credit and community
development needs.

The service test evaluates an institution's systems for delivering retail
banking services, taking into account such factors as (i) the geographic
distribution of the institution's branch offices and ATMs, (ii) the
institution's record of opening and closing branch offices and ATMs, and (iii)
the availability of alternative product delivery systems such as home banking
and loan production offices in low-to-moderate income areas. The federal
regulators also will consider an institution's community development service as
part of the service test. A separate community development test is applied to
wholesale or limited purpose financial institutions.

Institutions having total assets of less than $250 million will be
evaluated under more streamlined criteria. The Company and the Banks are
eligible for these streamlined criteria at this time. In addition, a financial
institution will have the option of having its CRA performance evaluated based
on a strategic plan of up to five years in length that it had developed in
cooperation with local community groups. In order to be rated under a strategic
plan, the institution will be required to obtain the prior approval of its
federal regulator.

The interagency CRA regulations provide that an institution evaluated
under a given test will receive one of five ratings for that test: outstanding,
high satisfactory, low satisfactory, needs to improve, or substantial
non-compliance. An institution will receive a certain number of points for its
rating on each test, and the points are combined to produce an overall
composite rating of either outstanding, satisfactory, needs to improve, or
substantial noncompliance. Under the agencies' rating guidelines, an
institution that receives an "outstanding" rating on the lending test will
receive an overall rating of at least "satisfactory", and no institution can
receive an overall rating of "satisfactory" unless it receives a rating of at
least "low satisfactory" on its lending test. In addition, evidence of
discriminatory or other illegal credit practices would adversely affect an
institution's overall rating. Under the new regulations, an institution's CRA
rating would continue to be taken into account by its primary federal regulator
in considering various types of applications. As a result of the Banks' most
recent CRA examinations in March 13, 1995 and January 16, 1996, Lincoln Bank
and Cabarrus Bank have CRA ratings of "2" and "1," respectively.

The Banks are also subject, among other things, to the provisions of the
Equal Credit Opportunity Act (the "ECOA") and the Fair Housing Act (the "FHA"),
both of which prohibit discrimination based on race or color, religion,
national origin, sex, and familial status in any aspect of a consumer or
commercial credit or residential real estate transaction. Bases on recently
heightened concerns that some prospective home buyers and other borrowers may
be experiencing discriminatory treatment in their efforts to obtain loans, the
Department of Housing and Urban Development, the Department of Justice (the
"DOJ"), and all of the federal banking agencies in April 1994 issued an
Interagency Policy Statement on Discrimination in Lending in order to provide
guidance to financial institutions as to what the agencies consider in
determining whether discrimination exists, how the agencies will respond to
lending discrimination, and what steps lenders might take to prevent
discriminatory lending practices. The DOJ has also recently increased its
efforts to prosecute what it regards as violators of the ECOA and FHA.

PAYMENTS OF DIVIDENDS

The Company is a legal entity separate and distinct from its banking and
other subsidiaries. The prior approval of the FDIC is required if the total of
all dividends declared by a state non-member bank (such as the Banks) in any
calendar

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year will exceed the sum of such bank's net profits for the year and
its retained net profits for the preceding two calendar years, less any
required transfers to surplus. North Carolina law also prohibits any state
non-member bank from paying dividends that would be greater than such bank's
undivided profits after deducting statutory bad debt in excess of such bank's
allowance for loan losses.

In addition, the Company and Banks are subject to various general
regulatory policies and requirements relating to the payment of dividends,
including requirements to maintain adequate capital. The appropriate federal
regulatory authority is authorized to determine under certain circumstances
relating to the financial condition of a national or state member bank or a
bank holding company that the payment of dividends would be an unsafe or
unsound practice and to prohibit payment thereof. The FDIC has indicated that
paying dividends that deplete a state bank's capital base to an inadequate
level would be an unsound and unsafe banking practice. The FDIC and the Federal
Reserve have each indicated that depository institutions and their holdings
should generally pay dividends only out of current operating earnings.

CAPITAL

The Federal Reserve and the FDIC have adopted final risk-based capital
guidelines for bank holding companies and state non-member banks. The guideline
for a minimum ratio of capital to risk-weighted assets (including certain
off-balance sheet activities, such as standby letters of credit) is 8%. At
least half of the total capital must consist of common equity, retained
earnings and a limited amount of qualifying preferred stock, less goodwill
("Tier 1 capital"). The remainder may consist of subordinated debt, non
qualifying preferred stock and a limited amount of any loan loss allowance
("Tier 2 capital" and, together with Tier 1 capital, "Total Capital").

In addition, the federal bank regulatory agencies have established minimum
leverage ratio guidelines for bank holding companies and state non-member
banks, which provide for a minimum leverage ratio of Tier 1 capital to adjusted
average quarterly assets ("leverage ratio") equal to 3%, plus an additional
cushion of 100 to 200 basis points (i.e., 1%-2%) if the institution has less
than the highest regulatory rating. The guidelines also provide that
institutions experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels without significant reliance on intangible assets.
Furthermore the Federal Reserve's guidelines indicate that the Federal Reserve
will continue to consider a "tangible Tier 1 leverage ratio" (deducting all
intangibles) in evaluating proposals for expansion or new activity. The Federal
Reserve, the FDIC and the Commissioner have not advised the Company or either
Bank of any specific minimum leverage ratio or tangible Tier 1 leverage ratio
applicable to them.

The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), among other things, requires the federal banking agencies to take
"prompt corrective action" regarding depository institutions that do not meet
minimum capital requirements. FDICIA establishes five capital tiers: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." A depository
institution's capital tier will depend upon how its capital levels compare to
various relevant capital measures and certain other factors, as established by
regulation.

All of the federal banking agencies have adopted regulations establishing
relevant capital measures and relevant capital levels. The relevant capital
measures are the Total Capital ratio, Tier 1 capital ratio, and the leverage
ratio. Under the regulations, a state non-member bank will be (i) well
capitalized if is has a Total Capital ratio of 10% or greater, a Tier 1 capital
ratio of 6% or greater, and leverage ratio of 5% or greater and is not subject
to any order or written directive by a federal bank regulatory agency to meet
and maintain a specific capital level for any capital measure, (ii) adequately
capitalized if is has a Total Capital ratio of 8% or greater, a Tier 1 capital
ratio of 4% or greater, and a leverage ratio of 4% or greater (3% in certain
circumstances), (iii) undercapitalized if it has a Total Capital ratio of less
than 8%, a Tier 1 capital ratio of less than 4% (3% in certain circumstances),
or (iv) critically undercapitalized if its tangible equity is equal to or less
than 2% of average quarterly tangible assets.

As of June 30, 1997, the consolidated capital ratios of the Company and
Banks were as follows:

Regulatory Lincoln Cabarrus
Minimum Company Bank Bank
------- ------- ---- ----

Tier 1 capital ratio 4.0% 10.78% 10.30% 10.29%
Total capital ratio 8.0% 12.03% 11.55% 11.55%
Leverage ratio 3.0 - 5.0% 7.72% 7.30% 7.05%

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The federal bank regulators continue to indicate their desire to raise
capital requirements applicable to banking organizations beyond their current
levels. In this regard, the federal banking agencies have, pursuant to FDICIA,
recently adopted final regulations which require regulators to consider
interest rate risk (when the interest rate sensitivity of an institution's
assets does not match the sensitivity of its liabilities or its
off-balance-sheet position) in the evaluation of a bank's capital adequacy. The
bank regulatory agencies have concurrently proposed a methodology for
evaluating interest rate risk which would require banks with excessive interest
rate risk exposure to hold additional amounts of capital against such
exposures.

In December 1996, the OCC adopted the Federal Financial Institutions
Examination Council's ("FFIEC") updated statement of policy entitled "Uniform
Financial Institutions Rating System" ("UFIRS") effective January 1, 1997.
UFIRS is an internal rating system used by the federal and state regulators for
assessing the soundness of financial institutions on a uniform basis and for
identifying those institutions requiring special supervisory attention. Under
the previous UFIRS, each financial institution was assigned a confidential
composite rating based on an evaluation and rating of five essential components
of an institution's financial condition and operations including Capital
adequacy, Asset quality, Management, Earnings, and Liquidity. The major changes
include an increased emphasis on the quality of risk management practices and
the addition of a sixth component for Sensitivity to market risk. For most
institutions, the FDIC has indicated that market risk primarily reflects
exposures to changes in interest rates. When regulators evaluate this
component, consideration is expected to be given to: management's ability to
identify, measure, monitor, and control market risk; the institution's size;
the nature and complexity of its activities and its risk profile; and the
adequacy of its capital and earnings in relation to its level of market risk
exposure. Market risk is rated based upon, but not limited to, an assessment of
the sensitivity of the financial institution's earnings or the economic value
of its capital to adverse changes in interest rates, foreign exchanges rates,
commodity prices, or equity prices; management's ability to identify, measure,
monitor, and control exposure to market risk; and the nature and complexity of
interest rate risk exposure arising from nontrading positions.

FDICIA

FDICIA directs that each federal banking regulatory agency prescribe
standards for depository institutions and depository institution holding
companies relating to internal controls, information systems, internal audit
system, loan documentation, credit underwriting, interest rate exposure, asset
growth compensation, a maximum ratio of classified assets to capital, minimum
earnings sufficient to absorb losses, a minimum ratio of market value to book
value for publicly traded shares, and such other standards as the agency deems
appropriate. These standards are not expected to have material effect on the
Company and the Banks.

FDICIA also contains a variety of other provisions that may affect the
operations of the Company and the Banks, including reporting requirements,
regulatory standards for estate lending, "truth in savings" provisions, the
requirement that a depository institution give 90 days prior notice to
customers and regulatory authorities before closing any branch, and prohibition
on the acceptance or renewal of brokered deposits by depository that are not
well capitalized or are adequately capitalized and have not received a waiver
from the FDIC. Under regulations relating to brokered deposits, the Banks are
well capitalized and not restricted.

FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
growth limitations and are required to submit a capital restoration plan for
approval. For a capital restoration plan to be acceptable, the depository
institution's parent holding company must guarantee that the institution comply
with such capital restoration plan. The aggregate liability of the parent
holding company is limited to the lesser of 5% of the depository institution's
total assets at the time it became undercapitalized and the amount necessary to
bring the institution into compliance with applicable capital standards. If a
depository institution fails to submit an acceptable plan, it is treated as if
is significantly undercapitalized. If the controlling holding company fails to
fulfill its obligations under FDICIA and files (or has filed against it) a
petition under the federal Bankruptcy Code, the claim would be entitled to a
priority in such bankruptcy proceeding over third party creditors of the bank
holding company.

Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirement to reduce total
assets, and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized institutions are subject to the appointment of a
receiver or conservator.

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Because the Company and the Banks exceed applicable capital requirements,
the respective managements of the Company and the Banks do not believe that the
capital adequacy provisions of FDICIA have had any material impact on the
Company and the Bank or their respective operations.

ENFORCEMENT POLICIES AND ACTIONS

FIRREA and subsequent federal legislation significantly increased the
enforcement authorities of the FDIC and other federal depository institution
regulators, and authorizes the imposition of civil money penalties of up to $1
million per day. Persons who are affiliated with depository institutions can be
removed from any office held in such institution and banned for life from
participating in the affairs of any such institution.

DEPOSITOR PREFERENCE

The Omnibus Budget Reconciliation Act of 1993 provides that deposits and
certain claims for administrative expenses and employee compensation against an
insured depository institution would be afforded a priority over other general
unsecured claims against such an institution in the "liquidation or other
resolution" of such an institution by any receiver.

FISCAL AND MONETARY POLICY

Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits and
it other borrowings, and interest received by a bank on its loans and
securities holdings, constitutes the major portion of a bank's earnings. Thus,
the earnings and growth of the Company and the Banks are subject to the
influence of economic conditions generally, both domestic and foreign, and also
to the monetary and fiscal policies of the United States and its agencies,
particularly the Federal Reserve. The Federal Reserve regulates the supply of
money through various means, including open market dealings in United States
government securities, the discount rate at which banks may borrow from the
Federal Reserve, and the reserve requirements on deposits. The nature and
timing of any changes in such policies and their effect on the Company and its
subsidiaries cannot be predicted.

FDIC INSURANCE ASSESSMENTS

The Banks are subject to FDIC deposit insurance assessments. Lincoln
Bank's deposits are primarily insured by the FDIC's BIF. Having converted from
a thrift charter, Cabarrus Bank's deposits are insured by the FDIC's SAIF. In
1996, the FDIC adopted a new risk-based premium schedule which decreased the
assessment rates for BIF depository institutions. Under this schedule, which
took effect for assessment periods after January 1, 1996, the annual premiums
range from zero to $.27 for every $100 of deposits. Each financial institution
is assigned to one of three capital groups - well capitalized, adequately or
undercapitalized - and further assigned to one of three subgroups within a
capital group, on the basis of supervisory evaluations by the institution's
primary federal and, if applicable, state regulators and other information
relevant to the institution's financial condition and the risk posed to the
applicable insurance fund. The actual assessment rate applicable to a
particular institution will, therefore, depend in part upon the risk assessment
classification so assigned to the institution by the FDIC. Since October 1,
1996, for Sasser and Oakar institutions, and since January 1, 1997 for other
SAIF-insured institutions, SAIF-insured deposits have been assessed annual SAIF
premiums of four to 31 basis points per $100 of deposits, based upon the
institution's assigned risk category and supervisory evaluation. During the
year ended December 31, 1995 and 1996, Lincoln Bank paid $161,156 and $30,364
in BIF deposit insurance premiums. Cabarrus Bank paid SAIF deposit insurance
premiums of $143,622 and $111,972 in 1995 and 1996, respectively.

The FDIC's Board of Directors has retained the 1996 BIF assessment
schedule of zero to 27 basis points per annum for the first semiannual period
of 1997. In addition, the FDIC Board eliminated the $2,000 minimum annual
assessment and authorized the refund of the fourth-quarter minimum assessment
of $500 paid by certain BIF-insured institutions on September 30, 1996 by
crediting such amount against each BIF member's first semiannual assessment in
1997. The EGRPRA recapitalized the FDIC's SAIF Fund to bring it into parity
with BIF. As part of this recapitalization, The Deposit Insurance Funds Act of
1996 (the "Funds Act") authorized FICO to levy assessments on BIF-assessable
deposits at a rate equal to one-fifth of the FICO assessment rate that is
applied to deposits assessable by SAIF. The actual annual assessment rates for
FICO for 1997 have been set at 1.30 basis points for BIF-assessable deposits
and 6.48 basis points for SAIF deposits.

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COMMUNITY DEVELOPMENT ACT

The Community Development Act has several titles. Title I provides for the
establishment of community development financial institutions to provide equity
investments, loans and development services to financially undeserved
communities. A portion of this Title also contains various provisions regarding
reverse mortgages, consumer protections for qualifying mortgages and hearings
for home equity lending, among other things. Title II provides for small
business loan securitization and securitizations of other loans, including
authorizing a study on the impact of additional securities based on pooled
obligations. Small business capital enhancement is also provided. Title III of
the Act provides for paperwork reduction and regulatory improvement, including
certain examination and call report issues, as well as changes in certain
consumer compliance requirements, certain audit requirements and real estate
appraisals, and simplification and expediting processing of bank holding
company applications, merger applications and securities filings, among other
things. It also provides for commercial mortgage-related securities to be added
to the definition of a "mortgage-related security" in the Exchange Act. This
will permit commercial mortgages to be pooled and securitized, and permit
investment in such instruments without limitation by insured depository
institutions. It also pre-empts state legal investment and blue sky laws
related to qualifying commercial mortgage securities. Title IV deals with money
laundering and currency transaction reports, and Title V reforms the national
flood insurance laws and requirements.

LEGISLATIVE AND REGULATORY CHANGES

Various changes have been proposed with respect to restructuring and
changing the regulation of the financial services industry. FIRREA required a
study of the deposit insurance system. On February 5, 1991, the Department of
the Treasury released "Modernizing the Financial System; Recommendations for
Safer, More Competitive Banks." Among other matters, this study analyzed and
made recommendations regarding reduced bank competitiveness and financial
strength, overextension of deposit insurance, the fragmented regulatory system
and the under capitalized deposit insurance fund. It proposed restoring
competitiveness by allowing banking organizations to participate in a full
range of financial service outside of insured commercial banks. Deposit
insurance coverage would be narrowed to promote market discipline. Risk based
deposit insurance premiums were proposed with feasibility tested through an
FDIC demonstration project using private reinsurers to provide market pricing
for risk based premiums.

Other legislative and regulatory proposals regarding changes in banking,
and the regulation of banks, thrifts and other financial institutions and bank
holding company powers are being considered by the executive branch of the
Federal government, Congress and various state governments, including North
Carolina. Among other items under consideration are a possible combination of
BIF and SAIF, changes in or repeal of the Glass-Steagall Act which separates
commercial banking form investment banking and changes in the BHC Act to
broaden the powers of "financial services" companies to own and control
depository institutions and engage in activities not closely related to
banking. Certain of these proposals, if adopted, could significantly change the
regulation of banks and the financial services industry. It cannot be predicted
whether any of these proposals will be adopted, and, if adopted, how these
proposals will affect the Company and the Banks.

COMPETITION

Commercial banking is highly competitive. The Banks compete with other
financial institutions located in metropolitan Charlotte and elsewhere in North
Carolina. Other competitors include banks, savings and loan associations,
insurance companies, finance companies, credit unions, mortgage bankers,
pension trusts, out-of-state banks and other institutions that provide loan and
investment services and money market funds. Competition between commercial
banks and thrift institutions has intensified significantly as a result of the
elimination of many previous distinctions between the various types of
financial institutions.

The Banks compete for deposits, loans and other business with a number of
major banks and bank holding companies which have numerous offices and
affiliates operating over wide geographic areas. Other competitors such as
thrifts, credit unions, mortgage companies, insurance companies and other local
and nonlocal financial institutions also compete with the Banks. Among the
advantages certain of these institutions may have compared to the Company, are
the ability to finance extensive advertising campaigns, and their ability to
allocate and diversify their assets among loans and securities of the highest
yield in locations with the greatest demand. Some of such competitors are
subject to less regulation and more favorable tax treatment than the Company.

Many of the major commercial banks in the Company's service area or their
affiliates offer services such as international banking investment which are
not offered directly by the Banks. Such competitors, because of their greater
capitalization, also have substantially higher lending limits than the Banks
and are better able to absorb risk.

-33-
34

DESCRIPTION OF COMMON STOCK

The authorized capital stock of the Company consists of 5,000,000 shares
of Common Stock, of which 4,120,596 shares were issued and outstanding as of
August 31, 1997. The following description is a brief summary of certain rights
relating to the Common Stock, as determined under North Carolina law and the
Company's Articles of Incorporation and Bylaws. The following discussion is
qualified in its entirety by reference to the governing laws and the Company's
Articles of Incorporation and Bylaws. See "AVAILABLE INFORMATION" and
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."

DIVIDEND RIGHTS

Holders of Common Stock are entitled to receive such dividends as, when,
and if legally declared by the Board of Directors out of funds legally
available therefor.

LIQUIDATION AND OTHER RIGHTS

In the event of any voluntary or involuntary liquidation, dissolution, or
winding up of the Company, holders of Common Stock will be entitled to share
ratably in the net assets of the Company available for distribution to its
shareholders, according to the number of shares of Common Stock held by them.

PREEMPTIVE RIGHTS

The Company's shareholders do not have any preemptive right to acquire any
additional or treasury shares of Common Stock.

ASSESSMENT AND REDEMPTION

The shares of Common Stock presently outstanding are, and the shares that
will be issued in connection with the Offering will be, fully paid and
nonassessable. There are no provisions for the redemption or conversion of the
Common Stock.

VOTING RIGHTS

Except as otherwise provided by law, each stockholder is entitled to one
vote per share on all matters to be voted upon, except with respect to the
election of directors, for which shareholders, under certain circumstances, may
cumulate votes. Pursuant to the Company's Bylaws, at each election of
directors, every shareholder entitled to vote at such election has the right to
vote, in person or by proxy, the number of shares standing of record in his
name for as many persons as there are directors to be elected and for whose
election he or she has a right to vote, or to cumulate his or her votes by
giving one candidate as many votes as the number of such directors multiplied
by the number of his shares shall equal, or by distributing such votes on the
same principal among any number of such candidates. The right of cumulative
voting, however, is not available to shareholders if, when the stock transfer
books are closed or on the record date fixed to determine the shareholders
entitled to receive notice of and to vote at the meeting called for the
election of directors, the Company is a public corporation, which means any
corporation that has a class of shares registered under Section 12 of the
Exchange Act, as amended. The right of cumulative voting, if available, may
not be exercised unless the meeting notice or proxy statement accompanying the
notice states conspicuously that cumulative voting is authorized; or a
shareholder or proxy holder announces in open meeting, before the voting for
directors starts, his intention so to vote cumulatively; and if such
announcement is made, the Chairman shall declare that all shares entitled to
vote have the right to vote cumulatively, shall announce the number of votes
represented in person or in proxy, and shall thereupon grant a recess of not
less than one hour nor more than four hours, as he shall determine, or of such
other period of time as is unanimously then agreed upon. As of the date of this
Prospectus, the Company was a public corporation and, therefore, shareholders
were not permitted to cumulate their votes for the election of directors. The
Company does not anticipate that it will cease to be a public corporation or
that cumulative voting will become available, in the foreseeable future.

-34-
35

TRANSFER AGENT

The transfer agent and registrar for the Common Stock is First Citizens
Bank and Trust Company of North Carolina, Raleigh, North Carolina.

THE OFFERING

TERMS OF THE OFFERING

The Company is offering up to 225,000 shares of its Common Stock at a price
of $25.75 per share, for an aggregate price of $5,793,750. There is no
requirement that the Company sell a minimum number of shares in the Offering.
The minimum purchase for any investor (together with the investor's affiliates)
is 100 shares ($2,575). In order to increase the number of retail investors and
to broaden its distribution of stock ownership, the Company may choose to limit
the purchase of any investor (together with the investor's affiliates) to a
maximum of 1,000 shares ($25,750), although the Company, in its sole discretion,
reserves the right to accept subscriptions for a greater number of shares. In
addition, pursuant to the Selling Agency Agreements between the Company and each
of the two initial Selling Agents, each Selling Agent shall use all reasonable
efforts to achieve a broad, retail distribution of the offered shares, including
the foregoing subscription limitations, selling at least 33% of the shares of
Common Stock made available to such Selling Agent to persons not presently
Company shareholders and to sell a minimum number of shares to residents of
Cabarrus County, North Carolina (25,000 shares with respect to
Interstate/Johnson Lane Corporation and 20,000 shares with respect to J.C.
Bradford & Co.). In determining which subscriptions to accept and in what
amounts, the Company may take into account the order in which subscriptions are
received, the subscriber's business relationships or potential to do business
with, or to direct customers to, the Company, the Company's desire to have a
broad distribution of stock ownership, and any regulatory comments or action
with respect to any subscriber or subscription. There are no agreements to
purchase shares in the Offering by officers, directors, or other affiliates of
the Company and no shares are reserved for such persons, although such persons
may subscribe for shares offered hereby.

The offering period for the shares will terminate on the date that all
shares offered hereby are sold, but the Company reserves the right to terminate
the Offering at any time. The date on which this Offering terminates is
referred to herein as the "Expiration Date."

Any subscriber who intends to purchase shares through a self-directed
retirement plan should contact his or her Selling Agent broker for directions
as to how his or her check should be prepared.

The Company reserves the right in its sole discretion to accept or reject
subscriptions for shares in whole or in part and to allocate shares among
subscribers, on or before the Expiration Date. Subscriptions are binding upon
the Company only if and to the extent accepted by the Company. The Company or a
Selling Agent will promptly notify each subscriber after receipt of his or her
subscription whether his or her subscription has been accepted. With respect to
any subscriptions which are not accepted by the Company, the unaccepted portion
of the subscription funds will be returned by the Company or the Selling Agent,
without interest. Upon rejection of a subscription or the termination or
expiration of this Offering, the Company, its subsidiaries, and their
respective directors, officers, employees, agents, and affiliates will have no
further liability to the subscribers whose subscriptions are being returned
once all appropriate refunds have been mailed to the address shown in the
Subscription Agreement.

The Selling Agents or the Company will confirm all sales of Common Stock.
As a convenience to subscribers, unless a subscriber indicates otherwise in the
space provided in the subscription agreement, the certificate representing the
Common Stock to be issued on behalf of the subscriber will be issued in "street
name" for the account of the Selling Agent who solicited the subscriber's
purchase, with shares underlying the subscription being held in the
subscriber's brokerage account, with the Selling Agent for the benefit of the
subscriber. If the subscriber indicates that he does not wish his certificate
to be issued in street name, he will receive physical delivery of the
certificate, registered in his name. Whether issued to a broker in street
name or directly to subscribers, certificates

-35-
36

representing shares of Common Stock duly subscribed and fully paid will be
issued by the Company's registrar and transfer agent promptly after the
Company's acceptance of each subscription and the issuance of a confirmation
therefor.

METHOD OF OFFERING

The shares of Common Stock offered hereby are to be offered and sold
primarily through the efforts of the Selling Agents, which are registered
broker/dealers. As compensation for their services, each Selling Agent will
receive a commission equal to $.80 for each share of Common Stock for which
subscriptions are received and accepted by the Company with respect to
investors solicited by such Selling Agent. Such Selling Agent compensation may
be deemed to be underwriting compensation under the Securities Act. The Company
has agreed to indemnify the Selling Agent against certain liabilities and
expenses (including legal fees) incurred in connection with certain claims or
litigation arising out of or based upon untrue statements or omissions
contained in this Prospectus.

The Selling Agents have no obligation or commitment to purchase any of the
shares offered or to assure the sale of any particular number of shares. See
"RISK FACTORS -- No Firm Commitment Underwriting/No Minimum Number of Shares
Required to Be Sold."

The shares may also be offered through the efforts of certain directors
and officers of the Company, who may receive subscriptions without payment of
any per share commission to the Selling Agents. Such directors and officers
will rely on Commission Rule 3a4-1 under the Exchange Act to conduct the
Offering on behalf of the Company. The activities of officers and directors in
connection with the Offering are in addition to their regular duties, and they
will not receive any commission or other additional remuneration for such
activities, although they may be reimbursed for reasonable expenses, if any,
incurred in connection therewith.

Subscribers may wish to have their self-directed retirement plans purchase
shares of the Common Stock offered hereby subject to the terms of the
applicable plan or trust document, and as permitted by applicable law. The
shares may be purchased in any type of retirement plan, including Individual
Retirement Accounts ("IRAs"), profit sharing, money purchase pension, and
401(k) plans. Each subscriber should consult his or her own counsel,
accountant, or other professional advisor as to all matters concerning his or
her investment in the shares of Common Stock.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby has been passed
upon for the Company by Alston & Bird LLP, Atlanta, Georgia.

EXPERTS

The consolidated financial statements of Carolina First BancShares, Inc.
and subsidiaries as of December 31, 1996 and 1995, and for each of the years in
the three-year period ended December 31, 1996, have been included herein and in
the Registration Statement in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.

-36-

CAROLINA FIRST BANCSHARES, INC.

FINANCIAL STATEMENTS

Consolidated Balance Sheets June 30, 1997 and December 31, 1996 ...............................................F-2

Consolidated Statements of Operations For the Three and Six Months Ended June 30, 1997 and 1996 ...............F-3

Consolidated Statements of Changes in Shareholder's Equity For the Six Months Ended June 30, 1997 and 1996 ....F-4

Consolidated Statements of Cash Flows For the Six Months Ended June 30, 1997 and 1996 .........................F-5

Notes to Unaudited Interim Consolidated Financial Statements ..................................................F-6

Independent Auditors' Report ..................................................................................F-7

Consolidated Balance Sheets December 31, 1996 and 1995 ........................................................F-8

Consolidated Statements of Income For the Years Ended December 31, 1996, 1995 and 1994 ........................F-9

Consolidated Statements of Changes in Shareholders' Equity For the Years Ended
December 31, 1996, 1995 and 1994 ..........................................................................F-10

Consolidated Statements of Cash Flows For the Years Ended December 31, 1996, 1995 and 1994 ....................F-11

Notes to Financial Statements .................................................................................F-12

F-1

CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY
COMPANIES
- ------------------------------------------------------
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- ------------------------------------------------------
JUNE 30, DECEMBER 31,
------------- -------------
1997 1996
------------- -------------

Assets:
Cash and due from banks $ 21,763,662 $ 16,343,459
Federal funds sold 11,025,000 2,982,000
------------ ------------
Total cash and cash equivalents 32,788,662 19,325,459
Interest bearing deposits in other banks 645,023 426,766
Investment securities (market value $35,326,916
in 1997 and $39,275,715 in 1996) 35,018,311 38,920,273
Securities available for sale (cost of $80,448,652 in
1997 and $48,612,087 in 1996) 81,367,179 48,696,412
Loans, net of unearned income ( $411,495 in 1997 and
$405,263 in 1996) 324,598,631 309,112,008
Allowance for loan losses (4,852,905) (4,488,958)
------------ ------------
Loans, net 319,745,726 304,623,050

Premises and equipment, net 10,180,912 9,509,172
Other real estate owned 131,781 141,067
Other assets 10,803,784 8,069,092
------------ ------------
Total Assets $490,681,378 $429,711,291
============ ============

Liabilities and Shareholders' Equity
Deposits:
Demand $ 49,853,108 $ 37,858,889
Interest bearing demand accounts 109,025,775 93,376,439
Savings 47,022,951 39,445,821
Time, $100,000 and over 44,591,253 40,355,803
Other time 193,903,152 173,966,334
------------ ------------
Total deposits 444,396,239 385,003,286
Repurchase agreements 4,253,977 5,862,026
Other liabilities 4,227,597 3,844,123
------------ ------------
Total Liabilities 452,877,813 394,709,435

Shareholders' Equity:
Common stock, $2.50 par value;
authorized --- 5,000,000 shares;
issued and outstanding - 4,118,058 shares in
1997, and 2,052,971 shares in 1996 10,295,144 5,132,428
Additional paid-in capital 11,345,773 16,442,810
Retained earnings 15,821,255 13,378,236
Net unrealized loss on available for sale securities 341,393 48,382
------------ ------------
Total Shareholders' Equity 37,803,565 35,001,856
Commitments and Contingent Liabilities ----- -----
Total Liabilities and Shareholders' Equity $490,681,378 $429,711,291
============ ============

Book Value Per Share $ 9.18 $ 8.52
============ ============

F-2

CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
- --------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------

QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996

INTEREST INCOME:
INTEREST AND FEES ON LOANS ............................. $7,632,399 $ 6,716,202 $14,918,895 $12,972,363
INTEREST AND DIVIDENDS
ON SECURITIES:
TAXABLE INCOME ......................................... 1,401,246 1,131,596 2,597,790 2,257,431
NON-TAXABLE INCOME ..................................... 121,867 159,919 249,758 308,184
INTEREST ON FEDERAL FUNDS SOLD ......................... 136,401 27,571 225,415 76,015
OTHER INTEREST INCOME .................................. 17,419 13,952 26,757 26,771
---------- ----------- ----------- -----------
TOTAL INTEREST INCOME .................................. 9,309,332 8,049,240 18,018,615 15,640,764
INTEREST EXPENSE:
INTEREST ON DEPOSITS ................................... 4,076,045 3,423,766 7,874,328 6,826,246
INTEREST ON NOTES PAYABLE .............................. 52,890 82,845 113,613 112,211
---------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE ................................. 4,128,935 3,506,611 7,987,941 6,938,457
---------- ----------- ----------- -----------
NET INTEREST INCOME .................................... 5,180,397 4,542,629 10,030,674 8,702,307
PROVISION FOR LOAN LOSSES .............................. 212,733 306,000 498,333 537,000
---------- ----------- ----------- -----------
NET CREDIT INCOME ...................................... 4,967,664 4,236,629 9,532,341 8,165,307
OTHER INCOME:
CHARGES ON DEPOSIT ACCOUNTS ............................ 591,266 519,277 1,149,417 998,596
INSURANCE COMMISSIONS .................................. 228,739 118,879 401,316 233,558
OTHER SERVICE FEES AND
COMMISSIONS ............................................ 289,602 177,748 493,808 369,236
MORTGAGE BANKING INCOME ................................ 115,498 85,768 224,083 205,689
SECURITIES GAINS (LOSSES), NET ......................... 10,365 (870) 10,889 8,641
OTHER INCOME ........................................... 204,662 150,147 368,782 225,062
---------- ----------- ----------- -----------
TOTAL OTHER INCOME ..................................... 1,440,132 1,050,949 2,648,295 2,040,782
OPERATING EXPENSES:
SALARIES AND BENEFITS .................................. 2,195,298 1,826,800 4,172,972 3,603,991
OCCUPANCY AND EQUIPMENT ................................ 524,204 380,229 950,792 770,590
FEDERAL AND OTHER INSURANCE
PREMIUMS ............................................... 33,284 74,057 63,429 145,709
OFFICE SUPPLIES ........................................ 171,605 90,194 285,686 192,975
DATA PROCESSING ........................................ 115,788 97,313 218,336 188,355
OTHER EXPENSES ......................................... 1,108,627 908,814 2,036,742 1,655,613
----------- -----------
TOTAL OPERATING EXPENSES ............................... 4,148,806 3,377,407 7,727,957 6,557,233
----------- -----------
INCOME BEFORE INCOME TAXES ............................. 2,258,990 1,910,171 4,452,679 3,648,856
INCOME TAXES ........................................... 759,774 696,963 1,516,050 1,316,199
----------- -----------
NET INCOME ............................................. $1,499,216 $ 1,213,208 $ 2,936,629 $ 2,332,657
========== =========== =========== ===========
NET INCOME PER COMMON SHARE (1) ........................ $ 0.35 $ 0.29 $ .70 $ .56
========== =========== =========== ===========
CASH DIVIDEND PER COMMON SHARE (1) ..................... $ 0.06 $ 0.05 $ 0.12 $ 0.10
========== =========== =========== ===========

(1) As restated for the 2 for 1 stock split effected on
August 22, 1997.

F-3

CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996

COMMON STOCK ADDITIONAL
------------ PAID-IN RETAINED VALUATION SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS RESERVE EQUITY
--------------------------------------------------------------------------------------------

Balance, December 31, 1995 1,632,458 $ 4,081,145 $17,377,333 $ 9,585,436 $ 79,065 $ 31,122,979

Exercise of stock options 5,912 14,781 40,836 55,617

Cash dividend ($.19 per share) (392,882) (392,882)

Retirement of stock (2,193) (5,483) (62,668) (68,151)

Dividend reinvestment plan 2,592 6,480 72,732 79,212

Change in unrealized
gain on securities
available for sale (301,909) (301,909)

Net income 2,332,657 2,332,657
- - - - - -
Balance, June 30, 1996 1,638,769 4,096,923 17,428,233 11,525,211 (222,844) 32,827,523

Balance, December 31, 1996 2,052,971 5,132,428 16,442,810 13,378,236 48,382 35,001,856

Exercise of stock options 6,970 17,425 79,309 96,734

Cash dividend ($.24 per share) (493,610) (493,610)

Retirement of stock (912) (2,281) (28,774) (31,055)

Dividend reinvestment plan

Change in unrealized gain on
securities available for sale
293,011 293,011
Net income 2,936,629 2,936,629
----------- ------------
Balance, June 30, 1997 2,059,029 5,147,572 16,493,345 15,821,255 341,393 37,803,565

2 For 1 Stock Split On
August 22, 1997 2,059,029 5,147,572 (5,147,572)
----------- ------------ -----------

Balance, June 30, 1997 4,118,058 $ 10,295,144 $11,345,773 $15,821,255 $ 341,393 $ 37,803,565
=========== ============ =========== =========== ========= ============

F-4

CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARY COMPANIES
- --------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)

June 30, June 30,
------------ ------------
1997 1996
------------ ------------

OPERATING ACTIVITIES:
Net Income $ 2,936,629 $ 2,332,657
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 605,300 370,217
Accretion and amortization of securities discounts
and premiums, net (80,519) 154,179
Provision for loan losses 498,333 537,000
Deferred taxes (benefit) (634,148) (345,186)
Gains on sales of securities available for sale (13,684) (900)
Gains on calls and maturities of securities held to maturity ---- (8,490)
Losses on calls and maturities of securities held to maturity 98 750
Losses (gains) on sales of equipment, net (4,810) (4,097)
Gains on sales of real estate, net ( 64,013) (46,701)
Net increase in core deposit intangibles (2,541,876) ----
Decrease in other assets 371,276 54,791
Increase (decrease) in other liabilities 393,153 (69,494)
------------ ------------
Net cash provided by operating activities 1,465,739 2,974,726
------------ ------------
INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale 12,816,008 3,091,510
Proceeds from sales of securities available for sale 42,215 3,500,000
Purchases of securities available for sale (45,121,806) (10,836,689)
Proceeds from calls and maturities of securities held to maturity 4,870,019 12,763,776
Purchases of securities held to maturity (988,125) (5,074,375)
Purchases and maturities of certificates of deposit, net (218,257) (33,365)
Originations of loans, net (15,659,009) (30,754,157)
Proceeds from sale of real estate 106,299 270,175
Proceeds from sales of premises and equipment 41,384 9,852
Capital expenditures (1,238,558) (736,915)
------------ ------------
Net cash used in investing activities (45,349,830) (27,800,188)
------------ ------------
FINANCING ACTIVITIES:
Increase in time deposits, net 24,172,268 13,215,558
Net increase in other deposits, net 35,220,685 5,843,354
Net increase (decrease) in borrowed funds (1,608,049) 4,083,750
Repayment of notes payable (9,679) (9,153)
Repurchase of stock (31,055) (68,151)
Payment of cash dividends and fractional shares (493,610) (392,882)
Issuance of stock 96,734 134,829
------------ ------------
Net cash provided by financing activities 57,347,294 22,807,305
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 13,463,203 (2,018,157)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 19,325,459 15,391,366
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 32,788,662 $ 13,373,209
============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 7,803,269 $ 6,844,203
Income taxes paid 2,161,706 1,696,157
Supplemental disclosure on noncash investing and
financing activities
Decrease in net unrealized loss 293,011 (301,909)
Assets transferred to other real estate 38,000 255,649
Transferred from investment securities to
securities available for sale --- ---

Disclosure of accounting policy:

For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, due from banks and federal funds sold.
See accompanying notes to consolidated financial statements.

F-5

CAROLINA FIRST BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. In the opinion of Management, the accompanying consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of Carolina First
BancShares, Inc. and Subsidiary Companies as of June 30, 1997 and December 31,
1996 the results of operations for the three and six-month periods ended June
30, 1997 and 1996, and cash flows for the six-month periods ended June 30, 1997
and 1996.

The accounting policies followed by the Company are set forth in Note 1 to the
Company's audited financial statements for the year ended December 31, 1996.

2. The consolidated financial statements include the accounts of the holding
company, and its wholly owned subsidiaries, Cabarrus Bank of North Carolina,
("Cabarrus Bank"), and Lincoln Bank of North Carolina, ("Lincoln Bank").
Jointly, Lincoln Bank and Cabarrus Bank own a mortgage company, Carolina First
Mortgage Corporation and a financial services company, Carolina First Financial
Services Corporation. All significant intercompany items and transactions have
been eliminated in consolidation.

3. The results of operations for the three-month and six-month periods ended
June 30, 1997 and 1996, are not necessarily indicative of the results that
might be expected for the full year ending December 31, 1997 and 1996.

4. The Company's Board of Directors declared a 2-for-1 stock split payable on
August 22, 1997 and a 25% stock dividend payable August 23, 1996. Earnings per
share for the periods presented have been computed after giving retroactive
effect to the stock dividend.

F-6

Independent Auditors' Report

The Shareholders and the Board of Directors of
Carolina First BancShares, Inc.

We have audited the accompanying consolidated balance sheets of Carolina
First BancShares, Inc. and subsidiaries as of December 31, 1996 and 1995 and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the years in the three-year period ended December
31, 1996. These consolidated financial statements are the responsibility of the
Company'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 generally accepted auditing
standards. 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 Carolina
First BancShares, Inc. and subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.

/s/ KPMG Peat Marwick LLP

Charlotte, North Carolina
February 7, 1997, except for
notes 1(h) and 8 which are
as of August 22, 1997

F-7

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
Carolina First BancShares, Inc. and Subsidiaries

1996 1995
---- ----

ASSETS
Cash and due from banks...................................................... $ 16,343,459 $ 14,361,366
Federal funds sold........................................................... 2,982,000 1,030,000
------------ ------------
Total cash and cash equivalents............................................ 19,325,459 15,391,366
Interest bearing deposits in other banks..................................... 426,766 350,128
Securities held to maturity (market value $39,275,715 in 1996 and
$57,660,405 in 1995)....................................................... 38,920,273 56,561,646
Securities available for sale (cost of $48,612,087 in 1996 and $27,335,383
in 1995)................................................................... 48,696,412 27,462,764
Loans, net of unearned income ($405,263 in 1996; $327,450 in 1995)........... 309,112,008 257,177,863
Allowance for loan losses.................................................. (4,488,958) (3,588,489)
------------ ------------
Loans, net................................................................. 304,623,050 253,589,374
Premises and equipment, net.................................................. 9,509,172 8,572,044
Other real estate owned...................................................... 141,067 683,409
Other assets................................................................. 8,069,092 7,222,708
------------ ------------
Total Assets................................................................. $429,711,291 $369,833,439
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand..................................................................... $ 37,858,889 $ 30,295,524
Interest bearing transaction accounts...................................... 93,376,439 81,171,081
Savings.................................................................... 39,445,821 41,751,256
Time, $100,000 and over.................................................... 40,355,803 30,658,383
Other time................................................................. 173,966,334 151,726,502
------------ ------------
Total deposits............................................................. 385,003,286 335,602,746
Borrowed funds............................................................... 5,862,026 --
Other liabilities............................................................ 3,844,123 3,107,714
------------ ------------
Total Liabilities............................................................ 394,709,435 338,710,460
Shareholders' Equity:
Common stock, $2.50 par value; authorized -- 5,000,000 shares; issued and
outstanding -- 4,105,942 in 1996, and 1,632,458 shares in 1995........... 10,264,856 4,081,145
Additional paid in capital................................................. 11,310,382 17,377,333
Retained earnings.......................................................... 13,378,236 9,585,436
Net unrealized gain on securities available for sale....................... 48,382 79,065
------------ ------------
Total Shareholders' Equity................................................. 35,001,856 31,122,979
------------ ------------
Commitments and Contingent Liabilities
Total Liabilities and Shareholders' Equity................................... $429,711,291 $369,833,439

See accompanying notes to consolidated financial statements.

F-8

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Carolina First BancShares, Inc. and Subsidiaries

1996 1995 1994
---- ---- ----

INTEREST INCOME:
Interest and fees on loans........... $27,388,938 $23,279,164 $18,858,565
Interest and dividends on securities:
Taxable income..................... 4,440,219 3,870,017 3,716,990
Non-taxable income................. 588,209 714,716 748,785
Other interest income................ 259,980 313,327 129,231
----------- ----------- -----------
Total interest income.............. 32,677,346 28,177,224 23,453,571
INTEREST EXPENSE:
Interest on deposits................. 14,145,984 12,670,832 9,731,281
Interest on borrowed funds........... 293,662 46,214 43,088
----------- ----------- -----------
Total interest expense............. 14,439,646 12,717,046 9,774,369
----------- ----------- -----------
NET INTEREST INCOME.................. 18,237,700 15,460,178 13,679,202
PROVISION FOR LOAN LOSSES............ 1,178,925 710,200 667,303
----------- ----------- -----------
NET CREDIT INCOME.................... 17,058,775 14,749,978 13,011,899
OTHER INCOME:
Charges on deposit accounts.......... 2,116,069 1,676,264 1,538,019
Insurance commissions................ 532,444 811,811 907,953
Other service fees and commissions... 758,500 639,733 477,100
Mortgage banking commission income... 394,138 382,663 295,643
Securities gains (losses), net....... (10,482) 2,048 (33,180)
Other income......................... 656,530 661,847 592,003
----------- ----------- -----------
Total other income................. 4,447,199 4,174,366 3,777,538
OPERATING EXPENSES:
Salaries and benefits................ 7,381,676 6,773,540 6,223,894
Occupancy and equipment.............. 1,657,552 1,447,252 1,280,601
Federal and other insurance premiums. 818,816 499,636 708,442
Office supplies...................... 447,842 398,086 339,015
Data processing...................... 384,597 389,495 381,231
Other expenses....................... 3,449,265 3,132,551 2,938,429
----------- ----------- -----------
Total operating expenses........... 14,139,748 12,640,560 11,871,612
----------- ----------- -----------
INCOME BEFORE INCOME TAXES........... 7,366,226 6,283,784 4,917,825
INCOME TAXES......................... 2,687,927 2,154,051 1,547,951
----------- ----------- -----------
NET INCOME........................... $ 4,678,299 $ 4,129,733 $ 3,369,874
EARNINGS PER SHARE
Net Income Per Common Share (1)...... $ 1.12 $ 1.05 $ .92

See accompanying notes to consolidated financial statements.

(1) As restated for the 2 for 1 stock split effected on August 22, 1997.

F-9

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Carolina First BancShares, Inc. and Subsidiaries

COMMON STOCK ADDITIONAL NET
------------ PAID-IN RETAINED UNREALIZED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS GAIN/(LOSS) EQUITY
---------- ------------ ------------ ------------ --------- ------------

Balance, December 31, 1993 .............. 1,333,324 $ 3,333,310 $ 11,529,198 $ 6,752,537 -- $ 21,615,045
Effect of change in accounting principle -- -- -- -- $ 61,466 61,466
5% Stock dividend ....................... 65,535 163,838 1,146,863 (1,336,063) -- (25,362)
Exercise of stock options ............... 5,311 13,277 20,537 -- -- 33,814
Cash dividend ($.41 per share) .......... -- -- -- (554,752) -- (554,752)
Retirement of stock ..................... (5,454) (13,635) (82,263) -- -- (95,898)
Dividend reinvestment plan .............. 3,312 8,280 47,148 -- -- 55,428
Change in unrealized gain on securities
available for sale .................... -- -- -- -- (570,777) (570,777)
Net income .............................. -- -- -- 3,369,874 -- 3,369,874
---------- ------------ ------------ ------------ --------- ------------
Balance, December 31, 1994 .............. 1,402,028 3,505,070 12,661,483 8,231,596 (509,311) 23,888,838
Issuance of stock in public offering .... 150,000 375,000 2,787,088 -- -- 3,162,088
5% Stock dividend ....................... 76,663 191,658 1,878,243 (2,100,323) -- (30,422)
Exercise of stock options ............... 2,304 5,760 21,793 -- -- 27,553
Cash dividend ($.45 per share) .......... -- -- -- (617,835) -- (617,835)
Retirement of stock ..................... (1,103) (2,758) (22,594) -- -- (25,352)
Dividend reinvestment plan .............. 2,566 6,415 51,320 (57,735) -- --
Change in unrealized loss on securities
available for sale .................... -- -- -- -- 588,376 588,376
Net income .............................. -- -- -- 4,129,733 -- 4,129,733
---------- ------------ ------------ ------------ --------- ------------
Balance, December 31, 1995 .............. 1,632,458 4,081,145 17,377,333 9,585,436 79,065 31,122,979
5-for-4 stock split ..................... 409,586 1,023,965 (1,049,260) -- -- (25,295)
Exercise of stock options ............... 9,412 23,531 68,748 -- -- 92,279
Cash dividend ($.43 per share) .......... -- -- -- (885,499) -- (885,499)
Retirement of stock ..................... (3,589) (8,973) (102,103) -- -- (111,076)
Dividend reinvestment plan .............. 5,104 12,760 148,092 -- -- 160,852
Change in unrealized gain on securities
available for sale .................... -- -- -- -- (30,683) (30,683)
Net income .............................. -- -- -- 4,678,299 -- 4,678,299
---------- ------------ ------------ ------------ --------- ------------
Balance, December 31, 1996 .............. 2,052,971 5,132,428 16,442,810 13,378,236 48,382 35,001,856
2 for 1 stock split on August 22, 1997 .. 2,052,971 5,132,428 (5,132,428) -- -- --
---------- ------------ ------------ ------------ --------- ------------
Balance, December 31, 1996 .............. 4,105,942 $ 10,264,856 $ 11,310,382 $ 13,378,236 $ 48,382 $ 35,001,856

See accompanying notes to consolidated financial statements.

F-10

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Carolina First BancShares, Inc. and Subsidiaries

1996 1995 1994
------------- ------------- -------------

OPERATING ACTIVITIES:
Net Income........................................................................... $ 4,678,299 $ 4,129,733 $ 3,369,874
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization........................................................ 1,017,442 863,267 776,038
Accretion and amortization of securities discounts and premiums, net................ 230,389 264,877 408,456
Provision for loan losses............................................................ 1,178,925 710,200 667,303
Deferred taxes (benefit)............................................................. (634,148) (345,186) (395,463)
Gains on sales of securities available for sale...................................... (26,839) (1,160) (34,936)
Losses on sales of securities available for sale..................................... -- 1,006 68,903
Gains on calls and maturities of securities held to maturity........................ (8,490) (1,989) (4,397)
Losses on calls and maturities of securities held to maturity........................ 2,131 95 3,165
Gains on sales of equipment, net..................................................... (63,273) (1,277) (1,301)
Gains on sales of real estate, net................................................... (141,750) (71,384) (110,298)
Increase in other assets............................................................. (244,529) (509) (1,625,947)
Increase in other liabilities........................................................ 754,953 1,030,324 373,505
------------ ------------ ------------
Net cash provided by operating activities............................................ 6,743,110 6,577,997 3,494,902
------------ ------------ ------------
INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale............................ 7,701,659 8,581,972 2,666,713
Proceeds from sales of securities available for sale................................. 6,586,841 1,009,785 4,511,950
Purchases of securities available for sale........................................... (35,699,300) (18,148,361) (11,010,710)
Proceeds from calls and maturities of securities held to maturity.................... 22,606,274 13,129,521 16,052,605
Purchases of securities held to maturity............................................. (5,074,375) (18,207,484) (8,288,740)
Purchases and maturities of certificates of deposit, net............................. (76,638) (299,496) 693,000
Originations of loans, net........................................................... (52,527,250) (33,618,383) (26,206,328)
Proceeds from sale of real estate.................................................... 999,241 506,874 728,267
Decrease in investment in joint ventures............................................. -- 28,307 163,254
Proceeds from sale of premises and equipment......................................... 221,380 36,519 5,006
Capital expenditures................................................................. (2,022,132) (1,212,445) (270,584)
------------ ------------ ------------
Net cash used in investing activities.............................................. (57,284,300) (48,193,191) (20,955,567)
------------ ------------ ------------
FINANCING ACTIVITIES:
Increase (decrease) in time deposits................................................. 31,937,252 32,165,918 (957,736)
Net increase in other deposits....................................................... 17,463,288 10,815,552 15,680,511
Net increase in borrowed funds....................................................... 5,862,026 -- --
Repayment of notes payable........................................................... (18,544) (17,506) (23,706)
Repurchase of stock.................................................................. (111,076) (25,352) (95,898)
Payment of cash dividends and fractional shares...................................... (910,794) (648,257) (580,114)
Issuance of stock.................................................................... 253,131 3,189,641 89,242
------------ ------------ ------------
Net cash provided by financing activities.......................................... 54,475,283 45,479,996 14,112,299
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................. 3,934,093 3,864,802 (3,348,366)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR......................................... 15,391,366 11,526,564 14,874,930
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR............................................... $ 19,325,459 $ 15,391,366 $ 11,526,564
Supplemental disclosures of cash flow information:
Interest paid...................................................................... $ 14,241,426 $ 12,353,527 $ 9,774,369
Income taxes paid.................................................................. 3,507,975 2,127,700 2,128,399
============ ============ ============
Supplemental disclosure of noncash investing and financing activities:
Effect of change in accounting principle (net of tax effect of $31,665).............. -- -- $ 61,466
Effect on equity of change in unrealized gain (loss) on securities available for sale $ (30,683) 588,376 (570,777)
Assets transferred to other real estate.............................................. 314,649 231,820 51,963
Transferred from securities held to maturity to securities available for sale........ -- -- 1,855,497

See accompanying notes to consolidated financial statements.

F-11

48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
Carolina First BancShares, Inc. and Subsidiaries

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Carolina First BancShares, Inc. is a bank holding company, formed in June
1989, which owns all of the outstanding common stock of Lincoln Bank of North
Carolina ("Lincoln Bank") and Cabarrus Bank of North Carolina ("Cabarrus Bank"
and together with Lincoln Bank, the "Banks"). Lincoln Bank was organized as a
state chartered commercial bank in May 1983 and operates in areas northwest of
Charlotte, North Carolina with one office in southeast Charlotte. Cabarrus
Bank was converted from a savings bank charter to a state commercial bank
charter in October 1992 and operates in Cabarrus County. The principal
business of the Banks includes retail and commercial banking and mortgage
lending.

(a) Principles of Consolidation -- The consolidated financial statements
include the accounts of Carolina First BancShares, Inc., Lincoln Bank, Cabarrus
Bank and their subsidiaries (referred to herein collectively as the "Company").
All significant intercompany items and transactions have been eliminated in
consolidation. Certain 1995 and 1994 amounts have been reclassified to conform
with 1996 classifications. The reclassifications have no effect on
shareholders' equity or net income as previously reported.

The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from
those estimates.

(b) Cash and Cash Equivalents -- Cash and cash equivalents include cash on
hand, due from banks and overnight federal funds sold.

(c) Securities -- Effective January 1, 1994, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" which prescribes the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. Securities that the
Company has the positive intent and ability to hold to maturity are classified
as held to maturity and reported at cost. Securities held for current resale
are classified as trading securities and reported at fair value, with
unrealized gains and losses included in income. The Company currently has no
such securities. Securities not classified as held to maturity or trading
securities are classified as available for sale and reported at fair value,
with unrealized gains and losses net of the related tax effect excluded from
income and reported as a separate component of shareholders' equity. The
effect of the foregoing will cause fluctuations in shareholders' equity based
on changes in values of debt and equity securities. The classification of
securities as held to maturity, trading or available for sale is determined at
the date of purchase.

Realized gains or losses on the sale of securities are recognized on the
specific identification method. Premiums and discounts are amortized to
interest income over the life of the security using a method approximating a
level yield method. The market value of securities is generally based on
quoted market prices or dealer quotes.

As a member of the Federal Home Loan Bank of Atlanta (the "FHLB"), the
Company is required to maintain an investment in the stock of the FHLB. This
stock, which is classified in the other asset category at December 31, 1996, is
carried at cost since it has no quoted market value.

(d) Allowance for Loan Losses -- The provision for loan losses charged to
operations is an amount that management believes is sufficient to bring the
allowance for loan losses to an estimated balance considered adequate to absorb
inherent losses in the portfolio. Management's determination of the adequacy
of the allowance is based on an evaluation of the portfolios, current economic
conditions, historical loan loss experience and other risk factors. This
evaluation is heavily dependent upon estimates and appraisals which are
susceptible to rapid changes because of economic conditions and the economic
prospects of borrowers.

In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize changes to the
allowance based on their judgments about information available at the time of
examination.

F-12

49
Effective January 1, 1995, the Corporation adopted Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" ("SFAS No. 114") and Statement of Financial Accounting Standards No.
118 ("SFAS No. 118"), "Accounting by Creditors for Impairment of a Loan --
Income Recognition and Disclosures." Loans are determined to be impaired when it
is probable that all amounts due according to the contractual terms of the
agreement will not be collected as scheduled in the agreement taking into
account the value of collateral securing the extension of credit. Under SFAS No.
114, the allowance for loan losses for all years after 1994 relating to loans
that are determined to be impaired is based on discounted cash flows using the
loan's initial effective interest rate and the fair value of the collateral for
certain collateral dependent loans. The Bank previously measured loan impairment
in a method generally comparable to the methods prescribed in SFAS No. 114.
Accordingly, no additional provisions for loan losses were required as a result
of the adoption of SFAS No. 114.

(e) Nonaccrual Loans -- Generally, a loan (including a loan impaired under
SFAS No. 114) is classified as nonaccrual and the accrual of interest on such
loan is discontinued when the contractual payment of principal or interest has
become 90 days past due or management has doubts about further collectibility
of principal or interest even though the loan currently is performing. A loan
may remain on accrual status if it is in the process of collection and is
either guaranteed or well secured. When a loan is placed on nonaccrual status,
unpaid interest credited to income in the current year is reversed and unpaid
interest accrued in prior years is charged against the allowance for credit
losses. Interest received on nonaccrual loans generally is either applied
against principal or reported as interest income according to management's
judgment as to the collectibility of principal. Generally, loans are restored
to accrual status when the obligation is brought current, has performed in
accordance with the contractual terms for a reasonable period of time and the
ultimate collectibility of the total contractual principal and interest is no
longer in doubt.

(f) Premises and Equipment -- Premises and equipment are stated at cost
less accumulated depreciation. Additions and major replacements or betterments
which extend the useful lives of premises and equipment are capitalized.
Maintenance, repairs and minor improvements are expensed as incurred.
Depreciation of buildings and improvements is computed on the straight-line
method over 15 years. Depreciation of furniture, fixtures and equipment is
computed on the straight-line method over periods that approximate the
estimated useful lives of the assets. Accelerated depreciation methods are
used for tax purposes. Gains and losses on dispositions of premises and
equipment are reflected in income.

(g) Other Real Estate Owned -- Other real estate owned is carried at the
lower of cost (principal balance of the loan plus costs of obtaining title and
possession) or fair value less selling costs. Subsequent to acquisition, a
provision for loss, if required, is recorded to reduce the carrying value of
the asset to fair value.

In accordance with SFAS No. 114, a loan is classified as in-substance
foreclosure when the Company has taken possession of the collateral regardless
of whether formal foreclosure proceedings take place. Loans previously
classified as in-substance foreclosure but for which the Company had not taken
possession of the collateral have been reclassified to loans. This
reclassification did not impact the Company's financial condition or results of
operations.

(h) Earnings Per Share -- Earnings per share are calculated on the basis
of the weighted average number shares and common stock equivalents outstanding.
The weighted average number of shares for each year presented have been
retroactively adjusted for the two-for-one stock split on August 22 1997,the
five-for-four stock split in 1996, and the 5% stock dividend in 1995 and 1994.
Fully diluted per share amounts are not presented since the differences are not
significant.

(i) Financial Instruments -- Financial instruments are valued in
accordance with SFAS No. 107, "Disclosure about Fair Value of Financial
Instruments," which requires disclosure of the estimated fair values of the
Company's financial instruments. Such instruments include investment
securities (see note 2), loans (see note 3), and deposit accounts (see note 6).
Fair value estimates, methods, and assumptions for each of these instruments
are set forth in their respective footnotes.

The carrying amounts for cash, overnight federal funds sold and interest
bearing deposits in other banks approximate fair value because they mature in
less than 90 days and do not present unanticipated credit concerns. The
carrying amounts for borrowed funds also approximate fair value because of the
daily maturity of most of these items.

Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no active market readily exists for a portion of
the Company'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 other
factors.
F-13

50
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.

Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments. Other
significant assets and liabilities that are not considered financial assets or
liabilities include the mortgage banking operation, property, plant, equipment,
and goodwill. 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.

SFAS No. 107 specifies that fair values should be calculated based on the
value of one unit without regard to any premium or discount that may result
from concentration of ownership of a financial instrument, possible tax
ramifications, or estimated transaction cost.

(j) Stock Options -- SFAS No. 123 requires that the fair value of employee
stock-based compensation plans be recorded as a component of compensation
expense in the statement of income or the impact of such fair value on net
income and earnings per share be disclosed on a pro forma basis in a footnote
to financial statements in accordance with APB 25. The Company will continue
such accounting under the provisions of APB 25.

(k) Income and Expense -- The Company utilizes the accrual method of
accounting except for immaterial amounts of loan income and other minor fees
which are recorded as income when collected. Substantially all loans earn
interest on the level yield method based on the daily outstanding balance. The
accrual of interest is discontinued when, in management's judgment, the
interest may not be collected.

The Banks defer the recognition of the net amounts of loan origination
fees and certain loan origination costs and amortize these deferred amounts
over the life of each related loan as an adjustment to the loan yield.

(l) Income Taxes -- Income taxes are accounted for under SFAS No. 109,
"Accounting for Income Taxes." According to SFAS No. 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to apply to a
taxable income in the years in which those temporary differences are expected
to be recovered in income in the period that includes the enactment date. The
Company files consolidated Federal income tax returns.

2. SECURITIES

As discussed in note 1, the Company adopted SFAS No. 115 as of January 1,
1994 and transferred debt and equity securities at that time to the available
for sale category. Amortized cost, market values and unrealized gains and
losses of securities as of December 31, 1996 and 1995 are summarized as
follows:

F-14

AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1996 COST GAINS LOSSES VALUE
- ------------------ ---- ----- ------ -----------

HELD TO MATURITY
U.S. Treasury securities............$12,088,819 $ 55,044 $ (32,148) $12,111,715
U.S. government agencies............ 9,880,637 64,329 (13,620) 9,931,346
Mortgage-backed securities.......... 9,171,725 53,825 (82,086) 9,143,464
State and political subdivisions.... 7,779,092 310,503 (405) 8,089,190
----------- ---------- --------- -----------
Total.......................... $38,920,273 $ 483,701 $(128,259) $39,275,715
AVAILABLE FOR SALE
U.S. Treasury securities............$18,484,978 $ 31,190 $ (30,037) $18,486,131
U.S. government agencies............ 27,919,073 49,353 (110,947) 27,857,479
Mortgage-backed securities.......... 976,067 29,148 -- 1,005,215
Mutual funds and marketable
equity securities................... 1,231,969 168,655 (53,837) 1,346,787
----------- ---------- --------- -----------
Total.......................... $48,612,087 $ 278,346 $(194,821) $48,695,612
DECEMBER 31, 1995
HELD TO MATURITY
U.S. Treasury securities............$15,102,308 $ 171,731 $ (6,609) $15,267,430
U.S. government agencies............ 19,646,292 289,756 (6,932) 19,929,116
Mortgage-backed securities.......... 11,683,322 121,821 (24,517) 11,780,626
State and political subdivisions.... 10,129,724 553,590 (81) 10,683,233
----------- ---------- --------- -----------
Total.......................... $56,561,646 $1,136,898 $ (38,139) $57,660,405
AVAILABLE FOR SALE
U.S. Treasury securities............$17,113,732 $ 62,806 $ (49,298) $17,127,240
U.S. government agencies............ 5,499,540 22,088 (2,963) 5,518,665
Mortgage-backed securities.......... 1,182,048 35,873 -- 1,217,921
State and political subdivisions.... 2,500,000 -- -- 2,500,000
Mutual funds and marketable
equity securities................... 1,040,063 107,279 (48,404) 1,098,938
----------- ---------- --------- -----------
Total............................$27,335,383 $ 228,046 $(100,665) $27,462,764

Amortized cost and market values of securities at December 31, 1996, by
maturity, are shown below.

HELD TO MATURITY AVAILABLE FOR SALE
---------------- ------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
---- ----- ---- -----

Due within one year.................. $ 7,878,644 $ 7,942,492 $25,334,145 $25,321,890
Due after one year but within 5 years 21,937,576 22,151,948 21,069,906 21,022,520
Due after 5 years but within 10 years 4,332,229 4,439,122 -- --
Due after 10 years................... 4,771,824 4,742,153 976,067 1,005,215
Mutual funds and marketable equity
securities........................... -- -- 1,231,969 1,346,787
----------- ----------- ----------- -----------
Total........................... $38,920,273 $39,275,715 $48,612,087 $48,696,412

Investment securities with an amortized cost of $21,335,810 at December
31, 1996 were pledged to secure public deposits and for other purposes required
or permitted by law.

Included in other assets is an investment in the common stock of First
Gaston Bank of North Carolina with a carrying amount of approximately
$1,128,000 at December 31, 1996. Although the investment only represents an
approximate 17% interest in the bank, the Company accounts for the investment
under the equity method as the Company has committed to serve as a source of
strength, as defined by the Federal Reserve, for First Gaston Bank; has
representation on the bank's board of directors; and provides certain
operational functions to the bank. Under the equity method, the Company adjusts
the carrying value of the investment for its portion of the bank's earnings or
losses. Also included in other assets is an investment in the stock of the
Federal Home Loan Bank of Atlanta ("FHLB") of $1,082,100 at December 31, 1996
and 1995 that is pledged as collateral for advances from the FHLB. No ready
market exists for the stock, which is carried at cost.

F-15

52
3. LOANS

Major classifications of loans as of December 31, 1996 and 1995 are as
follows:

1996 1995
------------- -------------

Commercial.................. $ 43,121,946 $ 33,082,877
Real estate:
Construction.............. 25,589,843 20,873,525
Mortgage.................. 197,898,770 170,000,535
Consumer.................... 39,047,715 30,259,379
Other....................... 3,453,734 2,961,547
------------ ------------
Total loans........... 309,112,008 257,177,863
Allowance for loan losses... (4,488,958) (3,588,489)
------------ ------------
Total loans, net...... $304,623,050 $253,589,374

Included in mortgage real estate loans at December 31, 1996 are
approximately $106,270,000 in 1-4 family residential loans.

Certain officers and directors, and companies in which they have 10% or
more beneficial ownership, were indebted to the Banks in the aggregate amount
of $2,388,465 and $1,982,531 at December 31, 1996 and 1995, respectively.
During 1996, additions to such loans were $1,870,526 and repayments totaled
$1,464,592. In the opinion of management, these loans do not involve more than
the normal risk of collectibility, nor do they present other unfavorable
features.

Loans past due 90 days or more and still accruing interest totaled $42,759
for December 31, 1996 and $21,814 for December 31, 1995, while nonaccrual loans
as of December 31, 1996 and 1995 were $576,191 and $790,359 respectively.
Nonaccrual loans at December 31, 1996 consist of 46 loans, the largest of which
had a balance of $49,780. Management considers collateral on nonaccrual loans
to be adequate to avoid any significant losses on the loans, exclusive of
allowance for loan losses. Additional interest of $11,983 and $8,834 would
have been earned in 1996 and 1995, respectively, if the nonaccrual loans as of
each year end had been earning throughout each year. Income of $40,819 and
$39,457 was recognized on these loans during 1996 and 1995, respectively.

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. The estimated
fair market value of loans outstanding is approximately $309,811,000 and
$256,231,000 at December 31, 1996 and 1995, respectively.

4. ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses for the years ended December 31,
1996, 1995 and 1994 were as follows:

1996 1995 1994
---------- ---------- ----------

Balance at beginning of year $3,588,489 $3,158,168 $2,580,004
Charge-offs................. (369,549) (390,392) (163,347)
Recoveries.................. 91,093 110,513 74,208
---------- ---------- ----------
Net charge-offs............. (278,456) (279,879) (89,139)
---------- ---------- ----------
Provision for loan losses... 1,178,925 710,200 667,303
---------- ---------- ----------
Balance at end of year...... $4,488,958 $3,588,489 $3,158,168

At December 31, 1996, the recorded investment in loans that are considered
to be impaired under Statement 114 was $713,963 (of which $576,191 were on a
nonaccrual basis). Included in this amount is $105,189 of impaired loans for
which the related allowance for credit losses is $29,962. The amount of
interest income recognized on impaired loans during the year was not material.

5. PREMISES AND EQUIPMENT

Major classifications of these assets as of December 31, 1996 and 1995 are
as follows:

1996 1995
----------- -----------

Land............................. $ 2,968,275 $ 2,419,093

F-16

Buildings and improvements....... 6,248,774 5,787,652
Furniture, fixtures and equipment 4,703,963 3,902,969
----------- -----------
Total cost....................... $13,921,012 $12,109,714
Accumulated depreciation......... 4,411,840 3,537,670
----------- -----------
Carrying value................... $ 9,509,172 $ 8,572,044

6. LIABILITIES

The fair value of noninterest-bearing demand deposits and NOW, 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. The estimated fair market value
of deposits is approximately $386,920,000 and $336,557,000 at December 31, 1996
and 1995, respectively.

Time deposits maturing in each of the five years subsequent to December
31, 1996 are as follows: 1997, $172,940,000; 1998, $30,751,000; 1999,
$8,415,000; 2000, $1,590,000; 2001, $447,000; and subsequent years, $180,000.

Borrowed funds primarily consist of FHLB advances and repurchase
agreements of $2,000,000 and $3,862,026, respectively. FHLB advances mature
January 31, 1997 and have a rate of 5.93% and repurchase agreements mature
daily and on December 31, 1996 the rate was 4.46% for balances less than or
equal to $250,000 and 4.96% for balances greater than $250,000.

7. INCOME TAXES

Income tax expense consists of:

CURRENT DEFERRED TOTAL
---------- --------- ---------

Year ended December 31, 1996
Federal..................... $2,887,925 $ (547,874) $ 2,340,051
State....................... 434,150 (86,274) 347,876
---------- ---------- -----------
Total...................... $3,322,075 $ (634,148) $ 2,687,927
Year ended December 31, 1995
Federal..................... $2,182,056 $ (256,693) $ 1,925,363
State....................... 317,181 (88,493) 228,688
---------- ---------- -----------
Total..................... $2,499,237 $ (345,186) $ 2,154,051
Year ended December 31, 1994
Federal.................... $1,749,009 $ (287,833) $ 1,461,176
State...................... 194,405 (107,630) 86,775
---------- ---------- -----------
Total..................... $1,943,414 $ (395,463) $ 1,547,951

A reconciliation of total income tax expense for the years ended December
31, to the amount of tax expense computed by multiplying income before income
taxes by the statutory federal income tax rate of 34 percent follows:

1996 1995 1994
---- ---- ----

Tax provision at statutory rate....................... $2,559,641 $2,136,487 $1,672,060
Increase (reduction) in income taxes resulting from:
Tax-exempt interest income.......................... (203,354) (210,500) (225,591)
Change in the beginning-of-the-year balance of the
valuation allowance for deferred tax assets
allocated to income tax expense................. 38,030 20,676 (64,524)
State income taxes, net of federal tax benefit........ 229,598 150,934 57,272
Other................................................. 64,012 56,454 108,734
---------- ---------- ----------
Total income taxes.................................. $2,687,927 $2,154,051 $1,547,951

F-17

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and (liabilities) at December 31, 1996 and
1995, respectively, are presented below:

1996 1995
---- ----

Deferred tax assets:
Loan loss reserves............................................ $1,544,446 $1,217,432
Foreclosed property, tax basis in excess of
financial reporting amount.................................. 85,471 108,632
Accrued expenses, deductible when paid........................ 506,082 235,102
Other......................................................... 102,574 131,001
---------- ----------
Total gross deferred tax assets........................... 2,238,573 1,692,167
Less valuation allowance.................................. (63,016) (29,699)
---------- ----------
Net deferred tax assets................................... 2,175,557 1,662,468
---------- ----------
Deferred tax (liabilities):
Bad debt reserve recapture, tax accounting adjustment......... (116,652) (234,294)
Financial reporting stock basis in excess of tax basis........ (178,235) (178,990)
Depreciable basis of fixed assets............................. (141,262) (238,464)
Deductible expenses for tax in excess of financial reporting.. (71,576) (50,696)
Unrealized gain on securities available for sale.............. (53,740) (51,942)
Other......................................................... (138,695) (69,748)
---------- ----------
Total gross deferred tax liability........................ (700,160) (824,134)
---------- ----------
Net deferred tax asset included in other assets........... $1,475,397 $ 838,334

The net change in the total valuation allowance for deferred tax assets
for the year ended December 31, 1996 was an increase of $33,317. A portion of
the change in the net deferred tax asset relates to unrealized gains and losses
on securities available for sale. The related current period deferred tax
benefit of $2,915, which is net of a decrease of $4,713 to the valuation
allowance, has been recorded directly to shareholders' equity. The balance of
the change in the net deferred tax asset results from the current period
deferred tax benefit of $634,148. It is management's contention that
realization of the net deferred tax asset is more likely than not, based upon
the Company's history of taxable income and estimates of future taxable income.
The valuation allowance primarily relates to certain temporary differences for
state income tax purposes.

8. STOCK BASED COMPENSATION

All share and per share data below has been retroactively adjusted for the
two-for-one stock split effected on August 22, 1997.

In 1990, the Board of Directors of the Company adopted the Carolina First
BancShares, Inc. 1990 Stock Option and Stock Appreciation Rights Plan (the
"1990 Plan"), and certain amendments to the 1990 Plan were approved in 1991
(collectively "the Plan"). In January 1991, stock appreciation rights were
granted in accordance with the 1990 Plan. These rights were granted at market
value on the date of the grant and 20% of each grant becomes exercisable on
each anniversary of the date of the grant and expires five years after they
become exercisable. Stock appreciation rights totaling 83,566 have been
granted and all have a measurement price of $4.71. The expense related to
these rights is included in compensation expense and for the years ended
December 31, 1996, 1995 and 1994 were $504,000, $290,000 and $140,000,
respectively.

Since the inception of the Plan, options to purchase shares of Company
common stock have been granted to key employees of the Company and 86,280 such
options are still available. The Plan provides that options are granted at
market value on the date of the grant and 20% of each grant becomes exercisable
on each anniversary of the date of the grant. All currently outstanding
options have been granted for a ten-year term or until the recipient leaves the
Company's employment. A summary of all stock option activity for 1996 and the
status at December 31, 1996 follows. All share and per share amounts give
retroactive effect to stock dividends declared by the Company.

Employee Stock Option Plan:

OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------ ------------------------
AVERAGE AVERAGE
SHARES OPTION PRICE SHARES OPTION PRICE
------ ------------ ------ ------------

Balance, December 31, 1993 204,568 $ 4.40 83,128 $3.99

F-18

Additional Options Granted 9,786 6.32 -- --
Became Exercisable........ -- -- 32,924 4.71
Less:
Exercised............... (13,942) 2.32 (14,564) 2.32
Forfeited............... (2,814) 4.61 -- --
--------- ------- --------- -------
Balance, December 31, 1994 197,598 4.66 101,488 4.46
Additional Options Granted 2,626 9.90 -- --
Became Exercisable........ -- -- 33,130 4.77
Less:
Exercised............... (6,048) 4.55 (6,048) 4.55
Forfeited............... (4,826) 6.81 -- --
--------- ------- --------- -------
Balance, December 31, 1995 189,350 4.69 128,570 4.54
Additional Options Granted 44,124 12.54 -- --
Became Exercisable........ -- -- 21,370 4.72
Less:
Exercised............... (22,144) 4.16 (22,144) 4.16
Forfeited............... (4,608) 9.07 -- --
--------- ------- --------- -------
Balance, December 31, 1996 206,722 $ 6.32 127,796 $4.64
========= =========

The following table summarizes information about fixed stock options
outstanding at December 31, 1996:

OPTIONS OUTSTANDING
-----------------------------
NUMBER WEIGHTED-AVERAGE
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE
- ---------------- ----------- ---------------- ----------------

Less than $5 154,142 4.77 $ 4
6 to 7 7,700 6.98 5
8 to 10 2,626 8.90 10
11 to 16 42,254 9.31 12
- ---------------- -----------
$1 to 16 206,722
- ---------------- -----------

On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which requires either the (i) fair value of employee
stock-based compensation plans be recorded as a component of compensation
expense in the statement of income as of the date of grant of awards related to
such plans, or (ii) impact of such fair value on net income and earnings per
share be disclosed on a pro forma basis in a footnote to financial statements
for awards granted after December 15, 1994, if the accounting for such awards
continues to be in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25"). The Company will
continue such accounting under the provisions of APB 25. The pro forma effect
in 1996 to net income per common share was approximately three percent and,
accordingly, additional information is not considered material.

9. BENEFIT PLANS

The Company sponsors a noncontributory profit-sharing plan which provides
for participation by substantially all employees. Participants may make
voluntary contributions resulting in salary deferrals in accordance with
Section 401(k) of the Internal Revenue Code. The plan provides for employee
contributions up to 15% of the participant's annual salary and an employer
contribution of 50% matching of the employee contribution up to 6% of the
participant's salary. Contributions to the plan for the years ended December
31, 1996, 1995 and 1994 were $594,000, $517,000 and $455,620, respectively.

A deferred compensation plan allows the directors of the Company and the
Banks to defer the compensation they earn for attendance at meetings of the
Board or various committees. Each director elects annually to either receive
that year's compensation currently or to defer receipt until his death,
disability or retirement as a director. The amount deferred is credited to the
director's account and invested in various options available through the
Lincoln Bank Trust Department. The obligation of the Company under the plan is
fully funded.

The Company does not provide benefits contemplated by Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for Post
retirement Benefits Other Than Pensions."

F-19

10. REGULATION AND REGULATORY RESTRICTIONS

As a bank holding company, Carolina First BancShares, Inc. is regulated by
the Federal Reserve. The Company also must file periodic reports with, and
comply with securities regulations of, the Securities and Exchange Commission.
Lincoln Bank and Cabarrus Bank are subject to the regulations of the FDIC, the
North Carolina State Banking Commission and the Federal Reserve.

The primary source of funds for the payment of dividends by the Company is
dividends received from the Banks. The Banks, as North Carolina banking
corporations, may pay dividends only out of retained earnings as determined
pursuant to North Carolina General Statutes. As of December 31, 1996, the
Banks had combined retained earnings of approximately $22,022,000 all of which
is available to be paid as dividends without prior regulatory approval provided
the Banks maintain adequate capital.

The Company is required by federal regulations to maintain various ratios
of capital to assets. Failure to meet the minimum capital requirements can
initiate certain mandatory -- and possibly additional discretionary-actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1996,
that the Company meets all capital adequacy requirements to which it is
subject.

As of December 31, 1996, the most recent notification from the FDIC
categorized the Company as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Company
must maintain minimum total risk-based, Tier I risk-based, Tier I leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.

The table below also presents the actual capital amounts and ratios for
the Company, Lincoln Bank, and Cabarrus Bank as computed for regulatory
purposes.

MINIMUM REQUIRED FOR MINIMUM REQUIRED BY
REGULATORY CAPITAL REGULATORS TO BE
ACTUAL ADEQUACY PURPOSES WELL CAPITALIZED
------------------ -------------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----

AS OF DECEMBER 31, 1996:
Total Capital (to Risk Weighted Assets)
Consolidated.......................... $38,393,000 12.9% >$23,815,000 >8.0%
- -
Lincoln Bank.......................... $28,341,000 12.2% >$18,526,000 >8.0% >$23,158,000 >10.0%
- - - -
Cabarrus Bank.......................... $ 8,211,000 11.4% >$ 5,758,000 >8.0% >$ 7,197,000 >10.0%
- - - -
Tier I Capital (to Risk Weighted Assets)
Consolidated.......................... $34,662,000 11.6% >$11,908,000 >4.0%
- -
Lincoln Bank.......................... $25,442,000 11.0% >$ 9,263,000 >4.0% >$13,895,000 > 6.0%
- - - -
Cabarrus Bank......................... $ 7,307,000 10.2% >$ 2,879,000 >4.0% >$ 4,318,000 > 6.0%
- - - -
Tier I Capital (to Average Assets)
Consolidated.......................... $34,662,000 8.7% >$16,828,000 >4.0%
- -
Lincoln Bank.......................... $25,442,000 8.1% >$12,607,000 >4.0% >$15,759,000 > 5.0%
- - - -
Cabarrus Bank......................... $ 7,307,000 6.9% >$ 4,227,000 >4.0% >$ 5,284,000 > 5.0%
- - - -
AS OF DECEMBER 31, 1995:
Total Capital (to Risk Weighted Assets)
Consolidated.......................... $34,155,000 13.9% >$19,717,000 >8.0%
- -
Lincoln Bank.......................... $22,677,000 11.8% >$15,343,000 >8.0% >$19,178,000 >10.0%
- - - -
Cabarrus Bank......................... $ 7,964,000 10.6% >$ 6,032,000 >8.0% >$ 7,540,000 >10.0%
- - - -

F-20

Tier I Capital (to Risk Weighted Assets)
Consolidated............................ $31,069,000 12.6% >$ 9,858,000 >4.0%
- -
Lincoln Bank............................ $20,281,000 10.6% >$ 7,671,000 >4.0% >$11,507,000 >6.0%
- - - -
Cabarrus Bank........................... $ 6,952,000 9.2% >$ 3,016,000 >4.0% >$ 4,524,000 >6.0%
- - - -
Tier I Capital (to Average Assets)
Consolidated............................ $31,069,000 9.3% >$13,392,000 >4.0%
- -
Lincoln Bank............................ $20,281,000 7.9% >$10,327,000 >4.0% >$12,909,000 >5.0%
- - - -
Cabarrus Bank........................... $ 6,952,000 7.5% >$ 3,710,000 >4.0% >$ 4,637,000 >5.0%
- - - -

11. COMMITMENTS AND CONTINGENT LIABILITIES

In the normal course of business there are various commitments and
contingent liabilities outstanding which are not reflected in the accompanying
consolidated financial statements. The Company's exposure to credit loss in
the event of nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented by
the contract amount of these instruments. Management does not expect any
material loss as a result of these transactions. The following is a summary of
commitments and contingent liabilities:

DECEMBER 31,
----------------
1996 1995
---- ----

Commitments for additional loans $73,677,000 $50,298,000
Standby letters of credit 1,090,000 876,000
=========== ===========

The Banks make contractual commitments to extend credit, which are legally
binding agreements to lend money to customers at predetermined interest rates
for a specified period of time. The same credit standards used in the lending
process are applied when issuing these commitments. Additional risks arise when
these commitments are drawn upon, such as the demands on the Banks' liquidity
if a significant portion were drawn down at once. This is considered unlikely
as many commitments expire without being used.

The fair value of commitments to extend credit is considered to
approximate carrying value, since the large majority of these would result in
loans that have variable rates and/or relatively short terms to maturity. For
other commitments, generally of a short-term nature, the carrying value is
considered to be a reasonable estimate of fair value.

Minimum operating lease payments due in each of the five years subsequent
to December 31, 1996 are as follows: 1997, $242,000; 1998, $254,000; 1999,
$255,000; 2000, $248,000; 2001, $215,000; and subsequent years, $692,000.
Rental expense for all operating leases for the three years ended December 31,
was $251,000, 1996; $247,000, 1995; $262,000, 1994.

Cabarrus Bank has agreed to acquire approximately $30 million in deposits
in the communities of Mount Pleasant and Kannapolis and Lincoln Bank has agreed
to acquire approximately $10 million in deposits in the community of Lake Lure.
Although definitive agreements have been signed, these acquisitions are
subject to regulatory approval and the anticipated deposit amounts are an
approximation based on deposits at the time the definitive agreement was
signed. These acquisitions are expected to be completed during the second
quarter of 1997.

12. CONDENSED BALANCE SHEET

December 31,
------------
1996 1995
---- ----

CONDENSED BALANCE SHEET
Assets:
Cash on deposit with subsidiary banks.... $ 502,164 $ 1,866,401
Investment in subsidiary banks........... 32,967,141 27,331,641
Other investments........................ 1,015,617 646,092
Other assets............................. 1,849,808 1,859,038
----------- ------------
Total.................................. $36,334,730 $ 31,703,172
----------- ------------
Liabilities................................ $ 1,332,874 $ 580,193
Shareholders' equity....................... 35,001,856 31,122,979
----------- ------------
Total.................................. $36,334,730 $ 31,703,172
----------- ------------

F-21

Years ended December 31,
-------------------------------------------
1996 1995 1994
---- ---- ----

CONDENSED RESULTS OF OPERATIONS
Equity in earnings of subsidiary Banks:
Dividends......................................................... $ -- $ 154,272 $ 1,929,752
Undistributed..................................................... 5,707,517 4,422,452 1,547,559
Other income (expense), net......................................... (1,029,218) (446,991) (107,437)
----------- ----------- -----------
Net income.......................................................... $ 4,678,299 $ 4,129,733 $ 3,369,874
----------- ----------- -----------
Condensed Cash Flow
Cash flows from operating activities:
Net income........................................................ $ 4,678,299 $ 4,129,733 $ 3,369,874
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Equity in undistributed earnings of subsidiary banks.............. (5,707,517) (4,422,452) (1,547,559)
Decrease in other assets.......................................... (12,961) (464,584) (1,386,678)
Increase in liabilities........................................... 752,681 369,169 158,024
----------- ----------- -----------
Net cash provided by (used in) operating activities................. (289,498) (388,134) 593,661
----------- ----------- -----------
Cash flows from investing activities:
Purchases of investments.......................................... (306,000) (271,779) --
----------- ----------- -----------
Net cash used in investing activities............................... (306,000) (271,779) --
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock............................ 253,131 3,189,641 89,242
Dividends and fractional shares paid.............................. (910,794) (648,257) (580,114)
Other, net........................................................ (111,076) (25,352) (95,898)
----------- ----------- -----------
Net cash provided by (used in) financing activities................. (768,739) 2,516,032 (586,770)
----------- ----------- -----------
Net increase (decrease) in cash..................................... (1,364,237) 1,856,119 6,891
Cash at beginning of year........................................... 1,866,401 10,282 3,391
----------- ----------- -----------
Cash at end of year................................................. $ 502,164 $ 1,866,401 $ 10,282
=========== =========== ===========

F-22

======================================================

NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF
COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH AN OFFER OR SOLICITATION
IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
THEREOF.

UNTIL DECEMBER 22, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

---------------------

TABLE OF CONTENTS

PAGE
----

Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
Summary............................... 3
Risk Factors.......................... 4
Selected Consolidated Financial
Data................................ 5
The Company........................... 6
Market Price of and Dividends on
Common Stock........................ 8
Use of Proceeds....................... 8
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 9
Management and Principal
Shareholders........................ 17
Executive Compensation................ 20
Supervision and Regulation............ 22
Competition........................... 28
Description of Common Stock........... 29
The Offering.......................... 30
Legal Matters......................... 31
Experts............................... 31
Financial Statements.................. F-1

======================================================
======================================================
UP TO
225,000 SHARES
(LOGO)

CAROLINA FIRST
BANCSHARES, INC.

COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
NOVEMBER 11, 1997
======================================================