CAROLINA FIRST BANCSHARES INC, 10-K, 1996-03-29

CAROLINA FIRST BANCSHARES INC
10-K, 1996-03-29
STATE COMMERCIAL BANKS

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20552

FORM 10-K

(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended
December 31, 1995 Commission File: 0-17939
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CAROLINA FIRST BANCSHARES, INC.
(Exact name of registrant as specified in its charter)

North Carolina 56-1655882
-------------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporated or organization) Identification No.)

402 East Main Street, Lincolnton, N.C. 28093
-------------------------------------- -----
(Address of principal executive office) (Zip Code)

Registrant's telephone number, including area code: (704) 732-2222
--------------

Securities registered pursuant to Section 12(b) of the Act: None
----

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

Common Stock, par value $2.50 per share
---------------------------------------

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

The aggregate market value of the common stock held by non-affiliates of
registrant as of March 7, 1996: $41,680,579 based on the last sale price on
March 7, 1996, using beneficial ownership of stock rules adopted pursuant to
Section 13 of the Securities Exchange Act of 1934 to exclude voting stock owned
by directors and certain executive officers, some of whom may not be held to be
affiliates upon judicial determination.

As of March 15, 1996, there were issued and outstanding 1,635,220 shares
of the registrant's $2.50 par value common stock.

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DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the 1995 Annual Report to Shareholders for the year ended
December 31, 1995 (Part II, Item 5, 6, 7 and 8; Part IV, Item 14)

2. Portions of the definitive Proxy Statement, dated March 20, 1996 for
the Annual Meeting of Shareholders to be held on April 16, 1996, filed with the
Securities and Exchange Commission pursuant to Regulation 14A (Part III, Items
10, 11, 12, and 13).

FORM 10-K CROSS-REFERENCE INDEX

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PAGES OF
PAGE 1995 ANNUAL
OF 10-K REPORT
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Part I

<S> <C> <C> <C>
Item 1. Business I-1 --

Item 2. Properties I-12 --

Item 3. Legal Proceedings I-12 --

Item 4. Submission of Matters to a Vote of Security Holders I-12 --

Part II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters II-1 36

Item 6. Selected Financial Information II-1 1

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations II-1 4-15

Item 8. Financial Statements and Supplementary Data II-1 17-31

Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure II-1 --
</TABLE>

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<TABLE>
<CAPTION>
PAGES OF
PAGE PROXY
OF 10-K STATEMENT
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Part III

<S> <C> <C> <C>
Item 10. Directors and Executive Officers of the Registrant III-1 2-4

Item 11. Executive Compensation III-1 6-8

Item 12. Security Ownership of Certain Beneficial Owners III-1 1-10

Item 13. Certain Relationships and Related Transactions III-1 10
</TABLE>

<TABLE>
<CAPTION>
PAGES OF
PAGE 1995 ANNUAL
OF 10-K REPORT
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Part IV

<S> <C> <C> <C>
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K IV-1 --

Documents filed:
(a) (1)List of Financial Statements IV-1 --

Consolidated Balance Sheets at December 31, 1995 and
1994 -- 17

Consolidated Statements of Income for the years ended
December 31, 1995, 1994 and 1993 -- 18

Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1995, 1994 and
1993 -- 19

Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1994 and 1993 -- 20

Notes to Consolidated Financial Statements -- 21-31

Independent Auditors' Report -- 16

(a) (2)List of Financial Statement Schedules IV-1 --

(a) (3)Listing of Exhibits IV-1 --

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PAGES OF
PAGE 1995 ANNUAL
OF 10-K REPORT
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<S> <C> <C> <C>
(b) Reports on Form 8-K IV-2 --

(d) Financial Statement Schedules IV-2 --
</TABLE>
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Part I

ITEM 1. BUSINESS

Carolina First BancShares, Inc. (the "Company"), a North Carolina
corporation, is registered as a bank holding company with the Board of
Governors of the Federal Reserve System ("Federal Reserve") under the Bank
Holding Company Act of 1956, as amended ("BHC Act"). Carolina First was
incorporated on November 8, 1988, for purposes of becoming a bank holding
company and acquiring Lincoln Bank of North Carolina ("Lincoln Bank"), a North
Carolina state chartered bank that is not a member of the Federal Reserve
System. The holding company formation was completed on June 6, 1989. The
Company owns all the outstanding common stock of Cabarrus Bank of North
Carolina ("Cabarrus Bank"), a North Carolina state bank that is not a member of
the Federal Reserve System. Cabarrus Bank opetes as a separate entity in the
market it currently serves. Through Lincoln Bank and Cabarrus Bank (the
"Banks") and their 15 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 and north Mecklenburg County, all in the western Piedmont area of North
Carolina. The Banks are the Company's principal subsidiaries and are North
Carolina banking corporations engaged in general commercial banking business.
Lincoln Bank and Cabarrus Bank are both members of the Federal Deposit
Insurance Corporation ("FDIC"), and their deposits are insured by the Bank
Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF"),
respectively. Lincoln Bank purchased the insured deposits of Crown National
Bank in May 1993 from the FDIC. These deposits were insured under the BIF.
Jointly, the Banks own a mortgage company, Carolina First Mortgage Corp., which
originates mortgage loans for resale in the secondary market, and a financial
services company, Carolina First Financial Services Corporation, ("Financial
Services"), which offers, as an agent for its customers, mutual funds and
annuity products. 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 Bank of North Carolina, Gastonia, North Carolina ("First
Gaston"), which is 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. First Gaston opened in
July of 1995 and operates in a market not currently served by the Company.
Certain operational functions are provided for First Gaston by the Company.
The Federal Reserve, in approving this investment, under the BHC Act, has
required the Company to enter into a commitment to serve as a "source of
strength" for First Gaston. See "Supervision, Regulation and Effects of
Governmental Policies." The Company engages in no significant operations other
than the ownership of its subsidiaries.

The Company maintains its principal executive offices at 402 East Main
Street, P.O. Box 657, Lincolnton, North Carolina 28093, and its telephone
number is (704) 732-2222.

GENERAL BANKING BUSINESS

The Banks provide a wide range of commercial banking products and
services. Services include checking accounts, NOW accounts, savings and other
time deposits of various types, including retirement accounts and certificates
of deposit. Loan services include mortgage loan originations, loans for
business, real estate, personal and household purposes, lines of credit and
credit cards. Considering the volatility of quality loan demand, the Company
maintains an investment portfolio. Other services include safe deposit boxes,
wire transfer facilities, and electronic banking facilities. In 1994, Lincoln
Bank exercised its trust powers and had 11 active trust accounts in 1994 with
assets under management of $7.8 million. In 1995, Lincoln Bank had 26 active
trust accounts with assets under management of $22.3 million.

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INVESTMENT SECURITIES

The Company has an investment portfolio that consists primarily of U. S.
Treasury and government agency securities and state, county and municipal
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. 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. Prior to January 1, 1994, debt
securities included in securities held to maturity were carried at amortized
cost adjusted for amortization of premiums and accretion of discounts, whereas
debt securities included in securities available for sale were carried at the
lower of cost or market value. The mutual fund investments and other
marketable equity securities were carried at the lower of cost or market value
with any unrealized loss shown as a reduction of shareholders' equity.
Realized gains or losses on the sale of securities are recognized when realized
using the specific identification method.

LENDING ACTIVITIES

The Banks offer a range of lending services, including commercial, real
estate and consumer loans. The Banks consider individual consumers and small
to medium businesses to be their primary market for business loans and
deposits. The Banks have no concentration of loans to particular borrowers and
no loans to foreign entities. At December 31, 1995, the Banks had no
agricultural loan balances in their loan portfolios.

The Board of Directors of the Company recognizes that the extension of
credit is an integral banking function. Accordingly, it is the Board's desire
to grant sound, profitable loans that will benefit the area economy, provide a
reasonable return on our shareholder's investment, and promote the growth of
the Banks. When allocating resources for loans, primary consideration is given
to customers within the Banks' trade areas and to those customers and
prospective customers whose overall relationships generate the greatest level
of profitability, measured against risk. Management strives to maintain
quality in the loan portfolio and to accept only those risks which meet the
Banks' standards.

The Company grants loans throughout its market area for all legitimate and
worthwhile purposes. The Banks generally will extend the following types of
credit:

COMMERCIAL LOANS

The Banks will consider loans to business concerns on a short-term basis
supported by satisfactory balance sheet and earnings statements. Personal
guarantees and financial statements of guarantors generally also are obtained
on non-public company credits. Any loan request for a period longer than
twelve (12) months generally must have monthly or quarterly principal
reductions.

REAL ESTATE LOANS

COMMERCIAL REAL ESTATE LOANS. Commercial real estate loans are secured
principally by a mortgage on a commercial property. Maturities generally do not
exceed ten years, but longer maturities up to 15 years may be considered.
Variable rate pricing is preferable on loans with longer maturities. Repayment
sources are specified and will generally be from the borrower's cash flow, or
if the source is to be from the liquidation of an asset, that asset generally
also is taken as collateral. The Banks' loan-to-value ratio on these types of
loans generally will not

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exceed the lower of 80% of appraised value or 80% of cost (or in the case of
unimproved land, the lower of 75% of appraised value or 75% of cost).

REAL ESTATE CONSTRUCTION LOANS. Real estate construction loans are
interim loans made to finance the initial construction period. Construction
loans generally have a maturity of one year or less, have a permanent take-out
commitment, and collect interest monthly on the outstanding balance. Progress
inspection reports are required to be documented prior to disbursing advances.
The maximum loan-to-value ratio will be the lower of 80% of appraised value or
80% of cost.

RESIDENTIAL REAL ESTATE LOANS. Residential real estate loans are secured
by first and second mortgages on one-to-four family residences. Loans held in
the portfolio are usually for a term of 15 years or less, with a maximum
loan-to-market-value ratio of 80%. However, loans conforming to certain
Federal National Mortgage Association ("FNMA") guidelines are also made and
subsequently sold in the secondary market on a servicing released basis.

HOME EQUITY LINES. Equity lines are secured by first or second mortgages
on a borrower's primary residence and are open-end revolving lines of credit
scheduled for interest payments only for ten years and then converted to a
five-year term loan. Because of these terms, special consideration is given to
the borrower's capacity to repay the loan. Debt to income ratios are
calculated using a payment amount sufficient to repay the debt in ten years.
Care is taken to ensure that the loan-to-value ratio does not exceed 80%,
including prior liens.

UNSECURED CONSUMER LOANS

Installment and short-term personal loans may be granted to persons of
good character with reliable income and satisfactory credit records. A
complete application is required for each request. A current financial
statement is required when the total direct or indirect unsecured credit
exceeds $5,000. Total unsecured credit generally does not exceed 10% of the
applicant's net worth.

Normally, unsecured loans do not exceed 36 months. Any loan requests for
a maturity longer than one year generally are made subject to monthly or
quarterly principal and interest payments. Loans with maturities of one year
or less must show a source of repayment and interest generally is collected
monthly, quarterly or semi-annually.

Unsecured home improvement loans may not exceed 50% of the owner's equity
in the house and payment terms will not exceed five years. Unsecured loans for
the purpose of making a down payment generally are not granted.

SECURED CONSUMER LOANS

In granting loans secured by collateral, the evaluation of the borrower
remains the same as for an unsecured borrower; character, purpose of loan,
credit history, capacity to repay and collateral are all considered, and a
current financial statement generally is obtained prior to making the loan if
the total exposure of the borrower exceeds $25,000.

AUTO LOANS. For new cars, the loan amount generally does not exceed 80%
of the window price of a foreign-made auto and 75% of the window price for an
American-made auto. Loans generally are not to be made on automobiles which
are five years older than current models. Maximum terms: 1 year old - 42
months; 2-3 years old - 36 months; 4 years old - 30 months; 5 years old - 24
months.

BOAT AND CAMPER LOANS. Loans to finance the purchase of boats and campers
are granted using the following guidelines: New Boats and Campers, 60 months -
25% down payment; New Boats and Campers, 36 months - 20% down payment; 1 year
old, 36 months - 20% down payment; 2 years old, 30 months - 20% down

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payment. If the amount of the loan is $15,000 or greater, the term of the loan
may be increased to eight years. Any extension of credit in excess of seven
years requires at least a five year call provision.

MOTOR HOMES. Motor homes usually call for special handling due to the
high cost of the unit. The maximum term is 60 months with a 25% down payment.
Financial statements are required to show ability to repay.

MOBILE HOMES. When possible a deed of trust is placed on the property
where the mobile home will be located. When real estate is not part of the
collateral, a landlord waiver is required. Second mortgage or second liens
generally are not taken as collateral. All units to be financed must be
underpinned, and a landlord waiver must be obtained prior to disbursing any
funds. Any mobile home over seven years old will be considered unacceptable as
collateral.

SAVINGS ACCOUNTS/TIME DEPOSITS. A loan secured by the Banks' savings
instruments may be advanced to 100% of its face value. The interest rate
generally will be not less than 2% higher than the effective yield on the
instrument held as collateral on loans of $2,500 or over, and market rates on
loans under $2,500. The maturity of the loan should not exceed the maturity of
the collateral. Loans secured by other financial institution's savings
accounts or certificates are priced by market conditions. These financial
institutions must be federally insured.

BONDS. Loans secured by bonds must comply with the following guidelines:
US Government & Federal Agencies - 90% of Current Market Value; Corporate Bonds
(Investment grade or better) - 80% of current market value; Municipal Bonds
(Investment grade or better) - 60% of current market value.

STOCKS. Loans secured by corporate stock certificates must comply with
the following guidelines: NYSE and AMEX traded securities - 70% of market
value; Actively traded over-the-counter (NASDAQ) securities - 70% of market
value; Local Pink Sheet (actively traded and have two or more market makers) -
70% of market value. Loans secured by stock of closely held corporations must
have the prior approval of the Finance Committee.

CASH SURRENDER VALUE OF LIFE INSURANCE

Loans secured by the pledge of life insurance policies with cash surrender
values may not exceed 90% of the cash surrender value of the policy.

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,
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 also compete for interest-bearing funds with
a number of other financial intermediaries and investment alternatives,
including mutual funds, brokerage firms, governmental and corporate bonds, and
other securities.

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, 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.

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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.

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 Board of Governors of
the Federal Reserve System (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 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.

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 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

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branching is permissible or "opt out" and prohibit interstate branching
altogether. North Carolina has 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 measure 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 Federal Deposit Insurance Corporation ("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. 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 Bank of North Carolina, Gastonia, North Carolina ("First
Gaston"), which is 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. First Gaston opened in
July of 1995 and operates in a market not currently served by Carolina First.
Certain operational functions are provided for First Gaston by Carolina First.
The Federal Reserve, in approving this investment, under the BHC Act, has
required Carolina First 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 of Banking (the "Commissioner"), which 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 Bank Insurance Fund ("BIF"), and Cabarrus Bank's deposits are primarily
insured by the Savings Association Insurance Fund ("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
its 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.

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Under new CRA regulations, effective January 1, 1996, the process-based
CRA assessment factors have been 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 will be 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 - will
evaluate 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.

Each of these lending categories will be 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 will 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 the lending consortia and other lenders in which the
institution has invested. As part of the new regulation, all financial
institutions will be required to report data on their small business and small
farm loans as well as their home mortgage loans, which are currently required
to be reported under the Home Mortgage Disclosure Act.

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 will be
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

I-7
<PAGE> 12

"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 June 28, 1995, 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 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. As fully phased-in at the end of 1992, 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 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.

I-8

<PAGE> 13

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 December 31, 1995, the consolidated capital ratios of the Company
and Banks were as follows:

Regulatory Lincoln Cabarrus
Minimum Company Bank Bank
---------- ------- ---- ----
<S> <C> <C> <C> <C>
Tier 1 capital ratio 4.0% 12.58% 10.57% 9.21%
Total capital ratio 8.0% 13.72% 11.82% 10.55%
Leverage ratio 3.0 - 5.0% 9.28% 7.86% 7.50%

</TABLE>

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.

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.

Bank regulators continue to indicate their desire to raise capital
requirements applicable to banking organizations, including a proposal to add
an interest rate-risk component to risk-based capital requirements.

I-9
<PAGE> 14

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 Banks, including new 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.

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. The banking regulators have not hesitated to use the new
enforcement authorities provided under FIRREA.

DEPOSITOR PREFERENCE. The Omnibus Budget Reconciliation Act of 1993
provides that deposits and certain claims for administrative expensed 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 1995, 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 June 1, 1995, the premiums range from $.04 to $.12 for every $100 of
deposits. Prior to June 1, 1995, the premiums ranged from $.23 to $.31 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 particular institution will, therefore, depend in
part upon the risk assessment classification so assigned to the institution by
the FDIC. SAIF-insured deposits are assessed premiums for the SAIF which have
remained unchanged at $.23 to $.31 per $100 of deposits, based upon the
institution's assigned risk category and supervisory evaluation. During the
year ended December 31, 1994 and 1995, Lincoln Bank paid $699,840 and $161,156
in BIF deposit insurance premiums. Cabarrus Bank paid SAIF deposit insurance
premiums of $261,325 and $143,622 in 1994 and 1995, respectively.

I-10
<PAGE> 15

BIF and SAIF assessment rates are designed to increase the reserve
ratios (i.e., the ratios of reserves to insured deposits) of these funds to
1.25%. During 1995, the BIF reached 1.25%. As a result, the FDIC refunded BIF
premiums in September 1995, and reduced BIF premiums to almost zero as of
January 1, 1996, with a nominal payment of $2,000 per year for the best-rated
banks. However, SAIF's reserve ratio was 0.47% on December 31, 1995, and its
premiums remain at $.23 to $.31 for every $100 of deposits. The level of all
deposit insurance assessments may be affected by consideration of the levels of
deposit premiums assessed on SAIF members and the much lower levels of reserves
held by the FDIC's SAIF. The reduction in BIF premiums could be adversely
affected by the low levels of SAIF reserves, especially if BIF and SAIF are
combined, as various legislators have considered. Other legislative proposals
generally include a one-time "special assessment" of approximately 0.85% on
SAIF deposits, and as a result, the annual SAIF assessment presumably would be
reduced. See "Legislative and Regulatory Changes."

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 the recapitalization of the
FDIC's SAIF and 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. The United States House of Representatives has
passed a bill freezing the adoption of new regulations. 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.

I-11
<PAGE> 16

PERSONNEL

As of December 31, 1995, the Company and its subsidiaries employed 181
full-time equivalent employees, none of whom are represented by a collective
bargaining unit. Management of the Company considers relations with its
employees to be excellent.

ITEM 2. PROPERTIES.

The Company's principal executive office is located at 402 East Main
Street, Lincolnton, North Carolina. The Company leases two branch offices of
Cabarrus Bank and two branch office buildings of Lincoln Bank; however, the
Company owns all other branch locations and the Company's operation center.
The buildings of Lincoln Bank were purchased beginning in 1983 and have been
renovated as necessary to accommodate the Company's needs. The buildings of
Cabarrus Bank were acquired as a result of the acquisition of Cabarrus Savings
Bank on January 30, 1992. For Cabarrus Bank, the Kannapolis branch building is
leased from Atlantic American Properties, Inc. in Kannapolis, and the Super-K
branch is leased from International Banking Technologies, Inc. For Lincoln
Bank, the SouthPark branch building is leased from Colony Associates Limited
Partnership, and the Troutman branch is leased from Vernon and Jackie Overcash.
At December 31, 1995, the Company had book values of $2,419,093 for land,
$4,625,449 for buildings and improvements and $1,527,502 for furniture,
fixtures and equipment.

ITEM 3. LEGAL PROCEEDINGS.

The Company's subsidiaries are subject to claims and suits arising
in the ordinary course of business. In the opinion of management, the ultimate
resolution of such pending legal proceedings will not have a material adverse
effect on the Company's financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1995.

I-12

<PAGE> 17

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS.

Stock Prices and Dividends

Carolina First BancShares, Inc.'s common stock trades infrequently in
the local Charlotte, North Carolina over-the-counter market (pink sheets)
under the symbol CAFP. Its stock is listed in the The Charlotte Observer
under the Interdealer stock section. The following table sets forth the high
and low bid quotations for the common stock and the cash dividends per share
of common stock paid by the Company for the indicated periods. Such
quotations reflect interdealer prices without markup, markdown, or
commissions and may not necessarily represent actual transactions.

Cash
Dividends
Quarter Ended High Low Per Share
===============================================================================
<S> <C> <C> <C>
March 31, 1994 $15.19 $14.29 $.10
June 30, 1994 $16.32 $15.19 $.10
September 30, 1994 $17.23 $16.32 $.10
December 31, 1994 $19.52 $17.23 $.11

March 31, 1995 $20.48 $19.52 $.11
June 30, 1995 $20.95 $20.18 $.11
September 30, 1995 $22.86 $20.95 $.11
December 31, 1995 $27.00 $22.86 $.12

</TABLE>

ITEM 6. SELECTED FINANCIAL INFORMATION.

The information contained in the table captioned "Financial
Highlights" on page 1 of the Company's 1995 Annual Report to Shareholders
is incorporated herein by reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

The information contained under the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" set
forth on pages 4 through 15 of the Company's 1995 Annual Report to Shareholders
is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION.

The report of KPMG Peat Marwick LLP, independent certified public
accountants, and the consolidated financial statements of the Company, set
forth on pages 16 through 31 of the Company's 1995 Annual Report to
Shareholders is incorporated herein by reference.

Supplementary information is not applicable.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.

Not applicable.

II - 1

<PAGE> 18

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.

The information contained under the heading "Proposal I, Election of
Directors" in the Company's definitive Proxy Statement, dated March 20, 1996
for the 1996 Annual Meeting of Shareholders to be held on April 16, 1996, (the
"Proxy Statement"), filed with the Commission pursuant to Regulation 14A, is
incorporated herein by reference. The information required by this item with
respect to executive officers is set forth above in Part I, Item 4A of this
Annual Report on Form 10-K.

The following list contains certain information regarding the executive
officers of the Company.

D. Mark Boyd, III, age 58, 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, cloth and
furniture in Maiden, N.C.

James E. Burt, III, age 58, 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 39, 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 40, has served as the Treasurer of the Company since
December 1990 and Secretary of the Company since October 1995. 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.

ITEM 11. EXECUTIVE COMPENSATION.

The information contained under the heading "Executive Compensation" in
the Company's definitive Proxy Statement, filed with the Commission pursuant to
Regulation 14A, is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.

The information contained under the headings "Principal Shareholders"
and "Election of Directors" in the Company's definitive Proxy Statement, filed
with the Commission pursuant to Regulation 14A, is incorporated herein by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information contained under heading "Executive Compensation -
Compensation Committee Interlocks and Insider Participation" and "Executive
Compensation - Certain Transactions" in the Company's definitive Proxy
Statement, filed with the Commission pursuant to Regulation 14A, is
incorporated herein by reference.

III - 1
<PAGE> 19

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.

<TABLE>
<CAPTION>
Page(s) in
Annual Report*
--------------
<S> <C>
(a) The following documents are filed as part of this report:

(1) Financial Statements

Consolidated Balance Sheets at
December 31, 1995 and 1994 17
Consolidated Statements of Income
for the years ended December 31,
1995, 1994 and 1993 18
Consolidated Statements of Changes
in Shareholders' Equity for the
years ended December 31, 1995,
1994 and 1993 19
Consolidated Statements of Cash Flows
for the years ended December 31, 1995,
1994 and 1993 20
Notes to Consolidated Financial
Statements 21-31
Independent Auditor's Report 16

* Incorporated by reference from the indicated pages of
the 1995 Annual Report.

(2) Financial Statement Schedules N/A

(3) The following Exhibits are filed as part of this report in 14(c).

</TABLE>

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

3.0 Articles of Incorporation of the Registrant, incorporated herein by
reference to Registrant's Registration Statement No. 33-26861.

3.1 Bylaws of the Registrant, incorporated herein by reference to
Registrant's Registration Statement No. 33-26861.

4.0 Specimen of Common Stock certificate of the Registrant, incorporated
herein by reference to Registrant's Registration Statement No. 33-26861.

10.0 Lincoln Bank of North Carolina Deferred Compensation Plan for
Directors, incorporated herein by reference to Registrant's Registration
Statement No. 33-26861.

10.1 Lincoln Bank of North Carolina 1988 Incentive Stock Option Plan,
incorporated herein by reference to Registrant's Registration Statement
No. 33-26861.

IV - 1
<PAGE> 20

10.2 Lincoln Bank of North Carolina 1983 Incentive Stock Option Plan,
incorporated herein by reference to Registrant's Registration Statement
No. 33-26861.

10.3 Profit Sharing Plan of Lincoln Bank of North Carolina, incorporated
herein by reference to Registrant's Registration Statement No. 33-26861.

10.4 Registrant's 1990 Stock Option and Stock Appreciation Rights Plan, as
amended incorporated herein by reference to Registrant's Registration
Statement No. 33-43037.

10.5 Employment Agreement and Deferred Compensation Agreement dated July 1,
1992 by and between Carolina First BancShares, Inc. and James E. Burt,
III, incorporated herein by reference to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1992, No. 0-17939.

10.6 Employment Agreement dated September 8, 1992 by and between
Lincoln Bank of North Carolina and James R. Beam, incorporated
herein by reference to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1992, No. 0-17939.

10.7 Employment Agreement dated September 8, 1992 by and between
Lincoln Bank of North Carolina and Stephen S. Robinson,
incorporated herein by reference to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1992, No. 0-17939.

10.8 Employment Agreement dated October 19, 1993 by and between
Lincoln Bank of North Carolina and Carroll G. Heavner,
incorporated herein in reference to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993, No. 0-17939.

11 Calculation of earnings per share.

13 Registrant's 1995 Annual Report to Shareholders.

21 List of Subsidiaries of the Registrant, incorporated herein by
reference to Registrant's Registration Statement No. 33-26861.

(b) Reports on Form 8-K. NONE

(d) Financial Statement Schedules. N/A

23 Consent of Independent Auditors.

27 Financial Data Schedule

IV - 2
<PAGE> 21

INDEX TO EXHIBITS

Sequential
Exhibit No. Description of Exhibit
- ----------- ----------------------
Number Pages
- ------------

3.0 Articles of Incorporation of the Registrant, incorporated herein
by reference to Registrant's Registration Statement No. 33-26861.

3.1 Bylaws of the Registrant, incorporated herein by reference to
Registrant's Registration Statement No. 33-26861.

4.0 Specimen of Common Stock certificate of the Registrant,
incorporated herein by reference to Registrant's Registration
Statement No. 33-26861.

10.0 Lincoln Bank of North Carolina Deferred Compensation Plan for
Directors, incorporated herein by reference to Registrant's
Registration Statement No. 33-26861.

10.1 Lincoln Bank of North Carolina 1988 Incentive Stock Option Plan,
incorporated herein by reference to Registrant's Registration
Statement No. 33-26861.

10.2 Lincoln Bank of North Carolina 1983 Incentive Stock Option Plan,
incorporated herein by reference to Registrant's Registration
Statement No. 33-26861.

10.3 Profit Sharing Plan of Lincoln Bank of North Carolina,
incorporated herein by reference to Registrant's Registration
Statement No. 33-26861.

10.4 Registrant's 1990 Stock Option and Stock Appreciation Rights Plan,
as amended incorporated herein by reference to Registration
Statement No. 33-43037.

10.5 Employment Agreement and Deferred Compensation Agreement dated
July 1, 1992 by and between Carolina First BancShares, Inc. and
James E. Burt, III, incorporated herein by Registrant's Annual
Report on Form 10-K for the year ended December 31, 1992, No.
0-17939.

10.8 Employment Agreement dated October 19, 1993 by and between Lincoln
Bank of North Carolina and Carroll G. Heavner, incorporated herein
by reference to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993, No. 0-17939.

11 Calculation of earnings per share.

13 Registrant's 1995 Annual Report to Shareholders.

21 List of Subsidiaries of the Registrant.

23 Consent of Independent Auditors

<PAGE> 22

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Lincolnton, State of North Carolina, on the 28th day of March, 1996.

CAROLINA FIRST BANCSHARES, INC.

By: /s/ D. Mark Boyd, III
--------------------------------
D. Mark Boyd, III
Chairman of the Board and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:

<TABLE>
<CAPTION>
Signatures Title Date
----------------------------- --------------------- --------------
<S> <C> <C>
Principal Executive Officers:

/s/ D. Mark Boyd, III
----------------------------- Chairman of the Board March 28, 1996
of Directors and Chief
D. Mark Boyd, III Executive Officer

/s/
------------------------------- President and Director March 28, 1996
James E. Burt, III

Principal Financial Officer and
Principal Accounting Officer:

/s/ Jan H. Hollar
------------------------------- Treasurer March 28, 1996
Jan H. Hollar

Directors:

/s/ John R. Boger, Jr.
------------------------------- Director March 28, 1996
John R. Boger, Jr.

/s/ Samuel C. King, Jr.
------------------------------- Director March 28, 1996
Samuel C. King, Jr.

/s/ Harry D. Ritchie
------------------------------- Director March 28, 1996
Harry D. Ritchie

/s/ L. D. Warlick, Jr.
------------------------------- Director March 28, 1995
L. D. Warlick, Jr.

/s/ Estus B. White
------------------------------- Director March 28, 1995
Estus B. White

</TABLE>

<PAGE> 1

Exhibit 11

Earnings Per Share

Primary Year Ended December 31,
-------------------------------------------

1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Average common shares outstanding* 1,582,273 1,471,561 1,471,445
========== ========== ==========
Net income $4,129,733 $3,369,874 $2,619,172
========== ========== ==========
Per share amount $2.61 $2.29 $1.78
===== ===== =====
</TABLE>

Earnings per share amounts for each year presented reflect the 10% stock
dividend, December 29, 1993 and 5% stock dividend, November 29, 1994 and
December 22, 1995. 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.

* Includes an immaterial amount of common stock equivalents.

<PAGE> 1
EXHIBIT 13

- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Carolina First BancShares, Inc. and Subsidiaries

The following discussion should be read in conjunction with the
consolidated financial statements and related notes and other information
appearing elsewhere in this Annual Report and the more detailed information
provided in the Company's Annual Report on Form 10-K.

GENERAL

Carolina First BancShares, Inc., (the "Company" or "Carolina First") is a
bank holding company formed in June 1989, and registered as such with the Board
of Governors of the Federal Reserve System (the "Federal Reserve") under the
Bank Holding Company Act of 1956, as amended (the "BHC Act"). The Company owns
all of the outstanding common stock of two commercial banks (the "Banks"),
Lincoln Bank of North Carolina ("Lincoln Bank") and Cabarrus Bank of North
Carolina ("Cabarrus Bank"). The Banks are North Carolina-chartered banks that
are members of the FDIC, but are not members of the Federal Reserve System.
Cabarrus Bank is also a member of the Federal Home Loan Bank-Atlanta ("FHLB").
The primary business of the Banks includes retail and commercial banking, and
mortgage lending. Jointly, Lincoln Bank and Cabarrus Bank own a mortgage
company, Carolina First Mortgage Corp. ("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, 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
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. During 1995, Lincoln Bank sold its
subsidiary, North State Insurance Agency, Inc.

Cabarrus Bank was organized in 1898 as Cabarrus Savings and converted to a
stock association in 1987. In January 1992, the Company acquired Cabarrus
Savings, and in October 1992, Cabarrus Savings was converted to a commercial
bank. Cabarrus Bank continues to expand in Cabarrus County by operating four
full service branches, including a branch inside the Super Kmart Center which
opened in 1995.

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 Bank of
North Carolina, Gastonia, North Carolina ("First Gaston"), which is 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. First Gaston opened in July of 1995 and operates in a market not
currently served by Carolina First. Certain operational functions are provided
for First Gaston by Carolina First. The Federal Reserve, in approving this
investment, under the BHC Act, has required Carolina First to enter into a
commitment to serve as a source of strength for First Gaston.

RESULTS OF OPERATIONS

Carolina First earned $4.1 million, or $2.61 per share, in 1995, a 23% (14%
per share) increase over 1994. Earnings in 1994 were $3.4 million, or $2.29 per
share, a 29% increase over 1993. This continued favorable trend represents the
Company's strong net interest margin, increased non-interest income and
controlling non-interest expenses. The Company continues to expand into growing
markets in the central piedmont area of North Carolina, which have generally
strong economies. Management believes this growth will continue through the
foreseeable future with favorable effects upon the Company.

The Company's net interest income consists of the difference between
interest earned on interest earning assets and the interest paid on interest
bearing liabilities. The growth of the central Piedmont area of North Carolina,
as well as the continued increase in market penetration into these areas, has
allowed the Company to grow assets at a healthy 16% over 1994 and 6% from 1994
over 1993. Interest earning assets consist primarily of loans, but also include
securities and to a lesser extent cash equivalents. The strong economy in our
region of North Carolina has

- ---------
4
<PAGE> 2

continued to enhance the strength of small and medium businesses which has
supported our lending growth. Interest bearing liabilities consist almost
exclusively of consumer deposit relationships. Commercial checking accounts are
growing as a result of the commercial customer base that is increasing at
Lincoln and Cabarrus Banks.

Net interest income as a percentage of average earning assets has grown
from 4.75% in 1993 to 5.02% in 1995. This improvement can be attributable to the
spread between the average rate paid on average earning assets and the average
rate paid on average interest-bearing liabilities or an increase in volume. The
spread experienced by the Company has remained relatively constant from 4.64% in
1994 to 4.61% in 1995. The increased volume of loans has been the primary factor
in the improved net interest income. Although growth and earnings are expected
to continue, interest rates and economic conditions will affect these results in
the future.

The Company's allowance for loan losses is analyzed monthly in accordance
with a board approved plan. This analysis is intended to anticipate potential
risks prior to losses being incurred and includes a component relating to the
stability of the local economy. The monthly provision for loan losses may
fluctuate based on the results of this analysis.

Noninterest income increased 11% from 1994 to 1995 and 12% from 1993 to
1994. These increases resulted from the growth in deposit accounts which
provided greater fee income. The decline in insurance commissions in 1995
resulted from the sale of the insurance subsidiary and were offset by a decrease
in operating expenses. The gain associated with the sale of this subsidiary is
reflected in other income. Noninterest income from credit cards, trust income,
income from annuity products and debit cards increased as the departments
offering these products continued to mature. Income resulting from these
services should continue to increase as these areas of the Company grow.
Included in other income are the fees generated from services provided to First
Gaston. These services include financial reporting, account operations, item
processing, bookkeeping, and internal audit at a fee that is beneficial to both
the Company and First Gaston. Other income also reflects gains resulting from
the sale of other real estate owned.

Operating expenses remained relatively static from 1993 to 1994 and
declined as a percentage of average assets in 1995. The Federal Deposit
Insurance Corporation ("FDIC") premium paid by commercial banks to insure bank
deposits was reduced retroactive to June 1995 to the benefit of Lincoln Bank.
This reduction resulted in a pretax savings of approximately $231,229 and is
expected to increase in the coming years as the annualized effect of this
savings is realized. It appears likely, however, that an assessment will be
levied on all deposits of current or former savings banks. This type of
assessment would result in a one time charge to earnings for the deposits of
Cabarrus Bank and a small amount of Lincoln Bank deposits that were formerly
savings association deposits. While the amount of this assessment is not known,
it is currently anticipated that the after tax effect will range from $400,000
to $450,000 assuming the assessment will be approximately 80 basis points of
those deposits affected. The Company's operating efficiency ratio has improved
from 71% in 1993 to 64% in 1995. The Company is committed to the continued
improvement of this ratio.

---------
5
<PAGE> 3

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 securities have 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)

<TABLE>
<CAPTION>
1995 1994 1993
---------------------------- ---------------------------- ----------------------------
INTEREST Interest Interest
AVERAGE INCOME/ AVERAGE Average Income/ Average Average Income/ Average
BALANCE EXPENSE RATE Balance Expense Rate Balance Expense Rate
-------- ------- ------- -------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest bearing
deposits in other
banks................. $ 352 $ 24 6.82% $ 252 $ 31 12.30% $ 2,293 $ 121 5.28%
Taxable securities...... 64,821 3,870 5.97% 65,200 3,717 5.70% 62,159 3,812 6.13%
Non-taxable
securities............ 10,503 1,083 10.31% 10,536 1,135 10.77% 11,072 1,138 10.28%
Federal funds sold...... 4,973 289 5.81% 2,408 98 4.07% 5,129 151 2.94%
Loans................... 234,581 23,279 9.92% 206,442 18,859 9.14% 182,697 16,938 9.27%
-------- ------- -------- ------ -------- ------
Interest earning
assets............ 315,230 28,545 9.06% 284,838 23,840 8.37% 263,350 22,160 8.41%
------- ------- ------ ------- ------ ------
Other assets............ 27,056 23,749 21,902
-------- -------- --------
$342,286 $308,587 $285,252
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing
deposits
Demand................ $ 77,267 2,100 2.72% $ 71,785 1,715 2.39% $ 59,153 1,350 2.28%
Savings............... 41,465 1,219 2.94% 40,674 1,181 2.90% 33,240 1,000 3.01%
Time.................. 166,711 9,352 5.61% 148,987 6,835 4.59% 149,199 7,274 4.88%
Notes payable and other
interest bearing
liabilities........... 620 46 7.42% 804 43 5.35% 317 17 5.36%
-------- ------- -------- ------ -------- ------
Interest bearing
liabilities....... 286,063 12,717 4.45% 262,250 9,774 3.73% 241,909 9,641 3.99%
-------- ------- ------- -------- ------ ------- -------- ------ -------
Other liabilities....... 29,425 23,583 23,001
Shareholders' equity.... 26,798 22,754 20,342
-------- -------- --------
Total liabilities and
shareholders'
equity................ $342,286 $308,587 $285,252
======== ======== ========
Interest rate spread.... 4.61% 4.64% 4.42%
======= ======= =======
Net interest earned and
net yield on earning
assets (Margin)....... $15,828 5.02% $14,066 4.94% $12,519 4.75%
======= ======= ======= ======= ======= =======
</TABLE>

- ---------
6
<PAGE> 4

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)

<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
INCOME/ Income/ Income/
EXPENSE Volume Rate Expense Volume Rate Expense
------- ------ ----- ------- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Interest bearing deposits in other banks.... $ 24 $ 7 $ (14) $ 31 $ (251) $ 161 $ 121
Taxable investment securities............... 3,870 (23) 176 3,717 173 (268) 3,812
Non-taxable investment securities........... 1,083 (3) (49) 1,135 (58) 55 1,138
Federal funds sold and securities purchased
with agreements to resell................. 289 149 42 98 (111) 58 151
Loans....................................... 23,279 2,792 1,628 18,859 2,169 (248) 16,938
------- ------ ------ ------- ------ ----- -------
Total interest income.................. 28,545 2,922 1,783 23,840 1,922 (242) 22,160
======= ====== ====== ======= ====== ====== =======
Interest bearing liabilities:
Interest bearing demand deposits............ 2,100 149 236 1,715 302 63 1,350
Savings deposits............................ 1,219 23 15 1,181 216 (35) 1,000
Time deposits............................... 9,352 994 1,523 6,835 (10) (429) 7,274
Notes payable and other interest bearing
liabilities............................... 46 (14) 17 43 26 -- 17
------- ------ ------ ------- ------ ----- -------
Total interest expense................. 12,717 1,152 1,791 9,774 534 (401) 9,641
------- ------ ------ ------- ------ ----- -------
Net interest income.................... $15,828 $1,770 $ (8) $14,066 $1,388 $ 159 $12,519
======= ====== ====== ======= ====== ===== =======
</TABLE>

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 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, 1995, the cumulative
one-year gap for the consolidated Company was a positive or asset sensitive
$46.4 million, 12.56% of total assets. A gap of $46.4 million could affect
pre-tax net income by $464,000 per year with each one percent change in interest
rate assuming all repricing assets and liabilities reprice simultaneously. As
interest rates remained relatively constant during 1995, depositors were willing
to extend the maturity of time deposits, thus causing the Company to be asset
sensitive in the one-year category. As interest rates are expected to decrease
during the next year adjustable rate loans will reprice downward and the net
interest margin will contract; however, deposit rates, which traditionally lag
asset rates, will eventually decrease and the traditional margin should return.

---------
7
<PAGE> 5

The following table reflects the Company's rate sensitive assets and
liabilities by maturity as of December 31, 1995. Variable rate loans are shown
in the category of due "within one year" because they reprice with changes in
the prime lending rate. Maturing within one year are $33.1 million of variable
rate loans, with an additional $26.0 million maturing within five years, and
$60.8 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, 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% within one to five years. (In
thousands)

<TABLE>
<CAPTION>
WITHIN 1-5 NON-
PRIME LOANS ONE YEAR YEARS 5 YEARS MARKET TOTAL
----------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Securities held to maturity:
U.S. Treasury....................... -- $ 8,033 $ 7,070 -- -- $ 15,103
U.S. government agencies............ -- 4,009 13,637 $ 2,000 -- 19,646
States and political subdivisions... -- 1,899 5,262 2,968 -- 10,129
Mortgage-backed securities.......... -- 139 3,271 8,274 -- 11,684
Other............................... -- -- -- -- -- --
-------- ------- -------- ------- ------- --------
Total securities held to
maturity....................... -- 14,080 29,240 13,242 -- 56,562
Securities available for sale:
U.S. Treasury....................... -- 7,523 9,604 -- -- 17,127
U.S. government agencies............ -- 5,020 499 -- -- 5,519
States and political subdivisions... -- -- -- 2,500 -- 2,500
Mortgage-backed securities.......... -- -- -- 1,218 -- 1,218
Other(1)............................ -- -- -- -- $ 1,099 1,099
-------- ------- -------- ------- ------- --------
Total securities available for
sale........................... -- 12,543 10,103 3,718 1,099 27,463
Federal funds sold.................... -- 1,030 -- -- -- 1,030
Loans:
Commercial and financial............ $ 21,735 1,193 7,602 2,553 -- 33,083
Real estate:
Construction..................... 16,002 3,027 815 1,094 -- 20,938
Mortgage(2)...................... 76,056 3,408 41,247 49,292 -- 170,003
Consumer(3)......................... 2,436 3,133 21,543 5,869 173 33,154
-------- ------- -------- ------- ------- --------
Total loans...................... 116,229 10,761 71,207 58,808 173 257,178
Other(4).............................. -- -- -- -- 350 350
-------- ------- -------- ------- ------- --------
Total earning assets............. 116,229 38,414 110,550 75,768 1,622 342,583
Noninterest-earning assets............ -- -- -- -- 27,250 27,250
-------- ------- -------- ------- ------- --------
Total assets..................... $116,229 $38,414 $110,550 $75,768 $28,872 $369,833
======== ======= ======== ======= ======= ========
</TABLE>

- ---------
8
<PAGE> 6

<TABLE>
<CAPTION>
WITHIN 1-5 NON-
PRIME LOANS ONE YEAR YEARS 5 YEARS MARKET TOTAL
----------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Interest-bearing checking........... -- $ 12,319 $ 49,277 -- -- $ 61,596
Savings............................. -- 8,350 33,401 -- -- 41,751
Market deposit accounts............. -- 3,915 15,661 -- -- 19,576
Time, $100,000 and over............. -- 15,290 15,268 $ 100 -- 30,658
Other time(5)....................... -- 68,304 83,395 28 -- 151,727
-------- -------- -------- ------- -------- --------
Total interest-bearing
deposits....................... -- 108,178 197,002 128 -- 305,308
Notes payable and capital lease
obligations......................... -- 16 -- 134 -- 150
-------- -------- -------- ------- -------- --------
Total interest-bearing
liabilities.................... -- 108,194 197,002 262 -- 305,458
Noninterest-bearing liabilities....... -- -- -- -- $ 33,252 33,252
Shareholders' equity.................. -- -- -- -- 31,123 31,123
-------- -------- -------- ------- -------- --------
Total liabilities and
shareholders' equity........... -- 108,194 197,002 262 64,375 369,833
======== ======== ======== ======= ======== ========
Gap......................... $116,229 $(69,780) $(86,452) $75,506 $(35,503) --
======== ======== ======== ======= ======== ========
Cumulative Gap.............. $116,229 $ 46,449 $(40,003) $35,503 -- --
======== ======== ======== ======= ======== ========
Adjustments:
Exclude noninterest-earning assets,
noninterest-bearing liabilities
and shareholders' equity......... -- -- -- -- 37,499 --
-------- -------- -------- ------- -------- --------
Adjusted cumulative gap............. $116,229 $ 46,449 $(40,003) $35,503 $ 37,499 --
======== ======== ======== ======= ======== ========
</TABLE>

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

(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 $35,890 maturing within three
months and $32,365 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 under
which they can borrow funds to meet short term liquidity needs. Lines available
for Lincoln Bank through Wachovia Bank are $4 million and The Georgia Banker's
Bank are $5 million and for Cabarrus Bank through FHLB of $8.5 million. The
funds generated from these sources have proven adequate to provide the necessary
liquidity for the Banks.

---------
9
<PAGE> 7

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 $1.2 million in 1995 and $1.0 million in 1994. This cash was
available during 1995 to increase earning assets and to pay dividends.

FINANCIAL CONDITION

The Company's consolidated assets increased 16.1%, 5.76%, and 12.13% during
1995, 1994 and 1993, respectively. Asset growth is directly related to deposit
growth. The Company purchased $19.1 million of deposits of the former Crown
National Bank from the FDIC as receiver in May 1993. Certain of these deposits
bore abnormally high interest rates and were allowed to be withdrawn. The
remaining deposits totaled approximately $13 million, and have grown to
approximately $19 million by the end of 1995. The Company has also attracted new
deposits by expanding geographically through the opening of one branch in 1993
and two branches in 1995, and also increasing the Company's market share within
the markets serviced by these new and previously existing offices.

New loan generation during 1995 continued the growth begun during 1992. The
strong economy in areas served by Carolina First have allowed the Company to
take advantage of a thriving market. The Company's commercial loan portfolio has
increased, as have loans secured by real estate. Since Cabarrus Bank converted
into a commercial bank, consumer and commercial loans have increased while
traditional mortgage loans paid down, resulting in minimal overall growth.
Lincoln Bank continued to experience growth in loans secured by real estate.

Management believes that 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.

(GRAPH) (GRAPH)
Total Assets & Deposits Loan Mix
(Millions) (Millions)

10
<PAGE> 8

As interest rates decreased in recent years, 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 1993 to 1994 has decreased, but became
more vulnerable to rising interest rates which enhanced the need for effective
asset liability management. When interest rates began to increase during 1994
and early 1995, the Company experienced a shift back to certificates of deposit
and longer-term, higher costing deposits.

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 the recent declining interest rates, the majority of
securities purchased have been relatively short term and categorized as
available for sale in anticipation 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
1995, securities available for sale increased as a percentage of total assets,
however, total securities remained relatively constant.

Deposit Mix Securites Held to Maturity Securities Held for Sale
(Millions) (Million) (Million)

(GRAPH) (GRAPH) (GRAPH)

<PAGE> 9

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 the lack of
historical experience on such loans.

The following table depicts the allocation of the allowance for loan losses
at December 31, 1995, 1994, 1993, 1992 and 1991. The allocation is based on
management's grading of the loan portfolio with the remaining portion allocated
to the general category, however, the entire allowance is available to be used
for write-offs in any category. (In thousands)

<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
--------------- --------------- --------------- --------------- ---------------
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
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and financial... $ 327 13% $ 289 10% $ 152 9% $ 73 6% $ 298 6%
Real estate:
Residential
construction........... 21 8 14 6 15 4 18 2 23 3
Commercial construction.. -- -- -- -- -- -- 35 3 29 4
Residential mortgage..... 397 37 468 47 509 58 620 63 708 56
Commercial mortgage...... 320 30 226 23 138 16 318 14 193 11
Consumer................... 299 12 228 14 216 13 204 12 246 20
General.................... 2,224 -- 1,933 -- 1,550 -- 968 -- 456 --
------ ----- ------ ------ ------ ----- ------ ---- ------ ----
Total loans................ $3,588 100% $3,158 100% $2,580 100% $2,236 100% $1,953 100%
====== ===== ====== ====== ====== ===== ====== ==== ====== ====
</TABLE>

Non-performing assets include non-accrual loans, accruing loans
contractually past due 90 days or more, restructured or potential problem 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 $39,457 was reported on these
loans during 1995 and an additional amount of $8,834 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 adversely affect borrowers and result in increased
losses. (In thousands)

- ---------
12
<PAGE> 10

<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans..................................... $ 790 $ 570 $ 744 $ 995 $ 846
Loans 90 days or more past due and still accruing
interest........................................... 22 20 35 59 93
------ ------ ------ ------ ------
Total non-performing loans........................... 812 590 779 1,054 939
Other real estate.................................... 683 1,017 1,385 2,091 1,854
------ ------ ------ ------ ------
Total non-performing assets.......................... $1,495 $1,607 $2,164 $3,145 $2,793
====== ====== ====== ====== ======
</TABLE>

Net charge-offs as a percentage of average loans outstanding increased from
1994 to 1995; however, this ratio continues to reflect the moderate level of
losses experienced by the Company.

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year............. $ 3,158 $ 2,580 $ 2,236 $ 1,953 $ 1,385
Charge-offs:
Commercial, financial and
agricultural...................... (95) (9) (43) (324) (52)
Real estate:
Construction...................... -- -- (180) -- --
Mortgage.......................... (77) (24) (40) (114) (66)
Consumer............................ (219) (130) (270) (151) (310)
-------- -------- -------- -------- --------
Total charge-offs.............. (391) (163) (533) (589) (428)
Recoveries:
Commercial, financial and
agricultural...................... 3 19 -- 22 --
Real estate:
Construction...................... -- -- -- -- --
Mortgage.......................... 23 2 3 2 3
Consumer............................ 85 53 53 54 40
-------- -------- -------- -------- --------
Total recoveries............... 111 74 56 78 43
-------- -------- -------- -------- --------
Net charge-offs.......................... (280) (89) (477) (511) (385)
Provision for loan losses................ 710 667 821 794 953
-------- -------- -------- -------- --------
Balance at end of year................... $ 3,588 $ 3,158 $ 2,580 $ 2,236 $ 1,953
========= ======== ======== ======== ========
Loans, net of unearned interest at end of
year................................... $257,178 $223,999 $197,934 $173,793 $166,540
Ratio of allowance for loan losses to net
loans at end of year................... 1.40% 1.41% 1.30% 1.29% 1.17%
Average loans, net of unearned
interest............................... $234,581 $206,442 $182,697 $168,250 $165,217
Ratio of net charge-offs to average loans
outstanding during the year............ 0.12% 0.04% 0.26% 0.30% 0.23%
</TABLE>

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13
<PAGE> 11

CAPITAL RESOURCES

Banks and bank holding companies, as regulated institutions, must meet
required levels of capital. The Federal Deposit Insurance Corporation ("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.

<TABLE>
<CAPTION>
WELL ADEQUATELY CAROLINA LINCOLN CABARRUS
CAPITALIZED CAPITALIZED FIRST BANK BANK
----------- ----------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Tier I capital to risk adjusted assets......... 6.00% 4.00% 12.58% 10.57% 9.21%
Total capital to risk adjusted assets.......... 10.00% 8.00% 13.72% 11.82% 10.55%
Leverage ratio................................. 5.00% 4.00% 9.28% 7.86% 7.50%
</TABLE>

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 Investments 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.

The FASB has issued 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. This Standard is required for fiscal years beginning after December 15,
1995. The Company has not yet adopted this Standard; however, it has determined
that the Standard should have no material impact on its consolidated financial
statements.

The FASB also issued 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

- ---------
14
<PAGE> 12

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. This Standard is required for fiscal years beginning after December 15,
1995. The Company has not yet adopted this Standard; however, it believes that
the Standard should have no material impact on its consolidated financial
statements.

The FASB has issued 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. This Standard is required for fiscal
years beginning after December 15, 1995. The Company has not yet adopted this
Standard; however, it believes that the Standard should have no material impact
on its consolidated financial statements.

---------
15
<PAGE> 13

- --------------------------------------------------------------------------------
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, 1995 and 1994 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,
1995. 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, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995 in conformity with generally accepted
accounting principles.

As discussed in notes 1 and 2 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" on January 1, 1994.

/s/ KPMG Peat Marwick LLP

Charlotte, North Carolina
January 19, 1996

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16
<PAGE> 14

- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Carolina First BancShares, Inc. and Subsidiaries

<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks................................................ $ 14,361,366 $ 10,576,564
Federal funds sold..................................................... 1,030,000 950,000
------------ ------------
Total cash and cash equivalents................................... 15,391,366 11,526,564
Interest bearing deposits in other banks............................... 350,128 50,632
Securities held to maturity (market value $57,660,405 in 1995 and
$50,916,612 in 1994)................................................. 56,561,646 51,670,001
Securities available for sale (cost of $27,335,383 in 1995 and
$18,855,290 in 1994)................................................. 27,462,764 18,073,981
Loans, net of unearned income ($327,450 in 1995; $299,472 in 1994)..... 257,177,863 223,999,059
Allowance for loan losses......................................... (3,588,489) (3,158,168)
------------ ------------
Loans, net........................................................ 253,589,374 220,840,891
Premises and equipment, net............................................ 8,572,044 8,174,108
Other real estate owned................................................ 683,409 1,017,020
Other assets........................................................... 7,222,708 7,251,813
------------ ------------
Total Assets........................................................... $369,833,439 $318,605,010
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand............................................................ $ 30,295,524 $ 25,303,176
Interest bearing transaction accounts............................. 81,171,081 74,582,598
Savings........................................................... 41,751,256 42,516,535
Time, $100,000 and over........................................... 30,658,383 19,859,638
Other time........................................................ 151,726,502 130,359,329
------------ ------------
Total deposits.................................................... 335,602,746 292,621,276
Other liabilities...................................................... 3,107,714 2,094,896
------------ ------------
Total Liabilities...................................................... 338,710,460 294,716,172
Shareholders' Equity:
Common stock, $2.50 par value; authorized -- 5,000,000 shares;
issued and outstanding -- 1,632,458 in 1995, and 1,402,028 shares
in 1994.......................................................... 4,081,145 3,505,070
Additional paid in capital........................................ 17,377,333 12,661,483
Retained earnings................................................. 9,585,436 8,231,596
Net unrealized gain (loss) on securities available for sale....... 79,065 (509,311)
------------ ------------
Total Shareholders' Equity........................................ 31,122,979 23,888,838
------------ ------------
Commitments and Contingent Liabilities
Total Liabilities and Shareholders' Equity............................. $369,833,439 $318,605,010
============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

---------
17
<PAGE> 15

- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Carolina First BancShares, Inc. and Subsidiaries

<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans................................. $23,279,164 $18,858,565 $16,937,889
Interest and dividends on securities:
Taxable income........................................ 3,870,017 3,716,990 3,812,042
Non-taxable income.................................... 714,716 748,785 750,293
Other interest income...................................... 313,327 129,231 272,489
----------- ----------- -----------
Total interest income................................. 28,177,224 23,453,571 21,772,713
INTEREST EXPENSE:
Interest on deposits....................................... 12,670,832 9,731,281 9,624,195
Interest on other borrowed funds........................... 46,214 43,088 16,861
----------- ----------- -----------
Total interest expense................................ 12,717,046 9,774,369 9,641,056
----------- ----------- -----------
NET INTEREST INCOME........................................ 15,460,178 13,679,202 12,131,657
PROVISION FOR LOAN LOSSES.................................. 710,200 667,303 821,385
----------- ----------- -----------
NET CREDIT INCOME.......................................... 14,749,978 13,011,899 11,310,272
OTHER INCOME:
Charges on deposit accounts................................ 1,676,264 1,538,019 1,255,409
Insurance commissions...................................... 811,811 907,953 976,970
Other service fees and commissions......................... 639,733 477,100 425,696
Mortgage banking income.................................... 382,663 295,643 359,689
Securities gains (losses), net............................. 2,048 (33,180) 18,288
Other income............................................... 661,847 592,003 330,963
----------- ----------- -----------
Total other income.................................... 4,174,366 3,777,538 3,367,015
OPERATING EXPENSES:
Salaries and benefits...................................... 6,773,540 6,223,894 5,639,662
Occupancy and equipment.................................... 1,447,252 1,280,601 1,222,705
Federal and other insurance premiums....................... 499,636 708,442 608,644
Office supplies............................................ 398,086 339,015 406,409
Data processing............................................ 389,495 381,231 385,352
Other expenses............................................. 3,132,551 2,938,429 2,777,951
----------- ----------- -----------
Total operating expenses.............................. 12,640,560 11,871,612 11,040,723
----------- ----------- -----------
INCOME BEFORE INCOME TAXES................................. 6,283,784 4,917,825 3,636,564
INCOME TAXES............................................... 2,154,051 1,547,951 1,017,392
----------- ----------- -----------
NET INCOME................................................. $ 4,129,733 $ 3,369,874 $ 2,619,172
=========== =========== ===========
EARNINGS PER SHARE
Net Income Per Common Share................................ $ 2.61 $ 2.29 $ 1.78
=========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

- ---------
18
<PAGE> 16

- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Carolina First BancShares, Inc. and Subsidiaries

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL NET
---------------------- PAID-IN RETAINED UNREALIZED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS GAIN/(LOSS) EQUITY
--------- ---------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992.... 1,209,717 $3,024,293 $ 9,794,692 $ 6,645,287 $ (44,427) $19,419,845
10% Stock dividend............ 120,206 300,515 1,712,935 (2,028,027) -- (14,577)
Exercise of stock options..... 4,582 11,455 29,969 -- -- 41,424
Cash dividend ($.40 per
share)...................... -- -- -- (483,895) -- (483,895)
Retirement of stock........... (3,508) (8,770) (41,557) -- -- (50,327)
Dividend reinvestment plan.... 2,327 5,817 33,159 -- -- 38,976
Unrealized gain on securities
available for sale.......... -- -- -- -- 44,427 44,427
Net income.................... -- -- -- 2,619,172 -- 2,619,172
--------- ---------- ----------- ----------- ----------- -------------
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 (Note 3).......... -- -- -- -- 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 gain 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
========= ========== =========== =========== =========== ============
</TABLE>

See accompanying notes to consolidated financial statements.

---------
19
<PAGE> 17

- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Carolina First BancShares, Inc. and Subsidiaries

<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income............................................................ $ 4,129,733 $ 3,369,874 $ 2,619,172
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization..................................... 863,267 776,038 654,874
Accretion and amortization of securities discounts and premiums,
net............................................................. 264,877 408,456 454,888
Provision for loan losses......................................... 710,200 667,303 821,385
Deferred taxes (benefit).......................................... (345,186) (395,463) (338,730)
Gains on sales of securities available for sale................... (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...... (1,989) (4,397) (23,301)
Losses on calls and maturities of securities held to maturity..... 95 3,165 5,013
(Gains) losses on sales of equipment, net......................... (1,277) (1,301) 21,609
(Gains) losses on sales of real estate, net....................... (71,384) (110,298) 35,127
Federal Home Loan Bank stock dividend............................. (78,452) (66,671) (57,900)
Decrease (increase) in other assets............................... 77,943 (1,559,276) (229,256)
Increase (decrease) in other liabilities.......................... 1,030,324 373,505 (657,785)
------------ ------------ ------------
Net cash provided by operating activities......................... 6,577,997 3,494,902 3,305,096
------------ ------------ ------------
INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale............. 8,581,972 2,666,713 836,441
Proceeds from sales of securities available for sale.................. 1,009,785 4,511,950 --
Purchases of securities available for sale............................ (18,148,361) (11,010,710) (12,450,859)
Proceeds from calls and maturities of securities held to maturity..... 13,129,521 16,052,605 19,774,707
Purchases of securities held to maturity.............................. (18,207,484) (8,288,740) (13,933,838)
Purchases and maturities of certificates of deposit, net.............. (299,496) 693,000 1,286,000
Originations of loans, net............................................ (33,618,383) (26,206,328) (25,358,612)
Proceeds from sale of real estate..................................... 506,874 728,267 1,407,109
Decrease in investment in joint ventures.............................. 28,307 163,254 195,078
Proceeds from sale of premises and equipment.......................... 36,519 5,006 70,323
Capital expenditures.................................................. (1,212,445) (270,584) (1,156,024)
------------ ------------ ------------
Net cash used in investing activities............................. (48,193,191) (20,955,567) (29,329,675)
------------ ------------ ------------
FINANCING ACTIVITIES:
Increase (decrease) in time deposits.................................. 32,165,918 (957,736) 6,508,560
Net increase in other deposits........................................ 10,815,552 15,680,511 24,714,301
Proceeds from issuance of notes payable............................... -- -- 165,000
Repayment of notes payable............................................ (17,506) (23,706) (4,271)
Repurchase of stock................................................... (25,352) (95,898) (50,327)
Payment of cash dividends and fractional shares....................... (648,257) (580,114) (498,472)
Issuance of stock..................................................... 3,189,641 89,242 80,401
------------ ------------ ------------
Net cash provided by financing activities......................... 45,479,996 14,112,299 30,915,192
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. 3,864,802 (3,348,366) 4,890,613
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.......................... 11,526,564 14,874,930 9,984,317
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR................................ $ 15,391,366 $ 11,526,564 $ 14,874,930
============= ============== ==============
Supplemental disclosures of cash flow information:
Interest paid..................................................... $ 12,353,527 $ 9,774,369 $ 9,672,579
Income taxes paid................................................. 2,127,700 2,128,399 1,957,000
============= ============== ==============
Supplemental disclosure of noncash investing and financing activities:
Effect of change in accounting principle (net of tax effect of
$31,665)........................................................ -- $ 61,466 --
Increase (decrease) in net unrealized loss (net of tax effect of
$320,314 in 1995)............................................... $ 588,376 (570,777) $ (44,427)
Assets transferred to other real estate........................... 231,820 51,963 739,781
Transferred from securities held to maturity to securities
available for sale.............................................. -- 1,855,497 --
</TABLE>

See accompanying notes to consolidated financial statements.

- ---------
20
<PAGE> 18

- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
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 include retail and commercial banking and mortgage lending.

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 1994 and 1993 amounts have been reclassified to conform
with 1995 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.

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

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.

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, 1995, is
carried at cost since it has no quoted market value.

Prior to January 1, 1994, debt securities included in securities held to
maturity were carried at amortized cost adjusted for amortization of premiums
and accretion of discounts, whereas debt securities included in securities
available for sale were carried at the lower of cost or market value. Mutual
fund investments and other equity securities were carried at the lower of cost
or market value with any unrealized loss shown as a reduction to shareholders'
equity.

The market value of securities is generally based on quoted market prices
or dealer quotes.

---------
21
<PAGE> 19

- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Carolina First BancShares, Inc. and Subsidiaries

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.

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 1995 allowance for loan losses 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.

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 serious 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.

Premises and Equipment -- Premises and equipment are stated at cost less
accumulated depreciation. Additions and major replacement 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.

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.

- ---------
22
<PAGE> 20

- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS -- CONTINUED
Carolina First BancShares, Inc. and Subsidiaries

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 5% stock dividend in 1995 and 1994 and the 10%
stock dividend in 1993. Fully diluted per share amounts are not presented since
the differences are not significant.

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, 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.

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. 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.

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.

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.

---------
23
<PAGE> 21

- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Carolina First BancShares, Inc. and Subsidiaries

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, 1995 and 1994 are summarized as follows:

<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1995 COST GAINS LOSSES VALUE
------------------------------------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
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
=========== ========== =========== ===========
DECEMBER 31, 1994
-------------------------------------------
HELD TO MATURITY
U. S. Treasury securities............. $21,045,969 $ 1,436 $ (464,905) $20,582,500
U.S. government agencies.............. 11,038,069 7,114 (184,561) 10,860,622
Mortgage-backed securities............ 8,945,264 11,667 (450,475) 8,506,456
State and political subdivisions...... 10,640,699 376,594 (50,259) 10,967,034
----------- ---------- ----------- -----------
Total............................ $51,670,001 $ 396,811 $(1,150,200) $50,916,612
=========== ========== =========== ===========
AVAILABLE FOR SALE
U. S. Treasury securities............. $15,776,270 -- $ (735,030) $15,041,240
U.S. government agencies.............. 1,000,000 -- (23,800) 976,200
Mortgage-backed securities............ 1,300,861 $ 2,104 (45,974) 1,256,991
Mutual funds and marketable equity
securities.......................... 778,159 21,391 -- 799,550
----------- ---------- ----------- -----------
Total............................ $18,855,290 $ 23,495 $ (804,804) $18,073,981
=========== ========== =========== ===========
</TABLE>

- ---------
24
<PAGE> 22

- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS -- CONTINUED
Carolina First BancShares, Inc. and Subsidiaries

Amortized cost and market values of securities at December 31, 1995, by
maturity, are shown below.

<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
-------------------------- --------------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due within one year..................... $14,080,479 $14,138,574 $ 7,538,713 $ 7,522,400
Due after one year but within 5 years... 29,239,763 29,993,214 15,074,559 15,123,505
Due after 5 years but within 10 years... 7,541,671 7,757,107 -- --
Due after 10 years...................... 5,699,733 5,771,510 3,682,048 3,717,921
Mutual funds and marketable equity
securities............................ -- -- 1,040,063 1,098,938
----------- ----------- ----------- -----------
Total.............................. $56,561,646 $57,660,405 $27,335,383 $27,462,764
=========== =========== =========== ===========
</TABLE>

Investment securities with an amortized cost of $9,845,088 at December 31,
1995 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 $1,290,000
at December 31, 1995. The investment, which represents an approximate 17%
interest in the bank, is accounted for under the equity method whereby the
Company adjusts the carrying value of the investment for its portion of the
bank's earnings or losses. The Company has committed that it will also serve as
a source of strength, as defined by the Federal Reserve, for First Gaston Bank.
Also included in other assets is an investment in the stock of the Federal Home
Loan Bank of Atlanta of $1,082,100 at December 31, 1995 and 1994. No ready
market exists for the stock, which is carried at cost.

3. LOANS

Major classifications of loans as of December 31, 1995 and 1994 are as
follows:

<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Commercial..................................................... $ 33,082,877 $ 22,860,588
Real estate:
Construction.............................................. 20,873,525 12,491,652
Mortgage.................................................. 170,000,535 158,546,059
Consumer....................................................... 30,259,379 28,948,926
Other.......................................................... 2,961,547 1,151,834
------------ ------------
Total loans.......................................... 257,177,863 223,999,059
Allowance for loan losses...................................... (3,588,489) (3,158,168)
------------ ------------
Total loans, net..................................... $253,589,374 $220,840,891
============ ============
</TABLE>

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
$1,982,531 and $1,532,012 at December 31, 1995 and 1994, respectively. During
1995, additions to such loans were $1,998,645 and repayments totaled $1,548,126.
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 $21,814
for December 31, 1995 and $19,692 for December 31, 1994, while nonaccrual loans
as of December 31, 1995 and 1994 were $790,359 and $569,667 respectively.
Nonaccrual loans at December 31, 1995 consist of 42 loans, the largest of which
had a balance of $147,296. Management considers collateral on nonaccrual loans
to be adequate to preclude any significant losses on the loans, exclusive of
allowance for loan losses. Additional interest of $8,834 and $15,726 would have
been earned

---------
25
<PAGE> 23

- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Carolina First BancShares, Inc. and Subsidiaries

in 1995 and 1994, respectively, if the nonaccrual loans as of each year end had
been earning throughout each year. Income of $39,457 and $29,134 was recognized
on these loans during 1995 and 1994, 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 $256,231,000 and $215,181,000
at December 31, 1995 and 1994, respectively.

4. ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses for the years ended December 31,
1995, 1994 and 1993 were as follows:

<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year.......................... $3,158,168 $2,580,004 $2,236,501
Charge-offs........................................... (390,392) (163,347) (533,570)
Recoveries............................................ 110,513 74,208 55,688
---------- ---------- ----------
Net charge-offs....................................... (279,879) (89,139) (477,882)
---------- ---------- ----------
Provision for loan losses............................. 710,200 667,303 821,385
---------- ---------- ----------
Balance at end of year................................ $3,588,489 $3,158,168 $2,580,004
========== ========== ==========
</TABLE>

At December 31, 1995, the recorded investment in loans that are considered
to be impaired under Statement 114 was $134,998 (of which $80,007 were on a
nonaccrual basis). Included in this amount is $123,961 of impaired loans for
which the related allowance for credit losses is $61,980. For the year ended
December 31, 1995, the Company recognized interest income on those impaired
loans of $9,205, which included $4,960 of interest income recognized using the
cash basis method of income recognition.

5. PREMISES AND EQUIPMENT

Major classifications of these assets as of December 31, 1995 and 1994 are
as follows:

<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Land.............................................................. $ 2,419,093 $ 2,040,399
Buildings and improvements........................................ 5,787,652 5,391,970
Furniture, fixtures and equipment................................. 3,902,969 3,682,767
----------- -----------
Total cost........................................................ $12,109,714 11,115,136
Accumulated depreciation.......................................... 3,537,670 2,941,028
----------- -----------
Carrying value.................................................... $ 8,572,044 $ 8,174,108
=========== ===========
</TABLE>

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 $336,557,000 and $291,464,000 at December 31, 1995 and
1994, respectively.

Included in other liabilities are notes payable of $149,311 and $166,817 as
of December 31, 1995 and 1994, respectively.

- ---------
26
<PAGE> 24

- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS -- CONTINUED
Carolina First BancShares, Inc. and Subsidiaries

7. INCOME TAXES

Income tax expense consists of:

<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
---------- --------- ----------
<S> <C> <C> <C>
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
========== ========= ==========
Year ended December 31, 1993
Federal............................................. $1,237,058 $(330,242) $ 906,816
State............................................... 119,064 (8,488) 110,576
---------- --------- ----------
Total.......................................... $1,356,122 $(338,730) $1,017,392
========== ========= ==========
</TABLE>

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:

<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Tax provision at statutory rate....................... $2,136,487 $1,672,060 $1,236,432
Increase (reduction) in income taxes resulting from:
Tax-exempt interest income....................... (210,500) (225,591) (229,183)
Change in the beginning-of-the-year balance of
the valuation allowance for deferred tax assets
allocated to income tax expense................ 20,676 (64,524) 39,203
State income taxes, net of federal tax benefit... 150,934 57,272 72,980
Effect of change in tax law relative to
amortization................................... -- -- (58,535)
Other............................................ 56,454 108,734 (43,505)
---------- ---------- ----------
Total Income taxes.......................... $2,154,051 $1,547,951 $1,017,392
========== ========== ==========
</TABLE>

---------
27
<PAGE> 25

- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Carolina First BancShares, Inc. and Subsidiaries

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and (liabilities) at December 31, 1995 and
1994, respectively, are presented below:

<TABLE>
<CAPTION>
1995 1994
---------- -----------
<S> <C> <C>
Deferred tax assets:
Loan loss reserves.......................................... $1,217,432 $ 1,055,544
Loan fees, net, deferred for financial reporting............ -- 117,297
Tax interest income on joint ventures in excess of financial
reporting amount.......................................... -- 99,881
Foreclosed property, tax basis in excess of financial
reporting amount.......................................... 108,632 60,005
Accrued expenses, deductible when paid...................... 235,102 122,642
Unrealized ordinary loss on securities available for sale... -- 312,370
Other....................................................... 131,001 100,669
---------- -----------
Total gross deferred tax assets........................ 1,692,167 1,868,408
Less valuation allowance............................... (29,699) (53,021)
---------- -----------
Net deferred tax assets................................ 1,662,468 1,815,387
---------- -----------
Deferred tax (liabilities):
Bad debt reserve recapture, tax accounting adjustment....... (234,294) (351,916)
Financial reporting stock basis in excess of tax basis...... (178,990) (179,232)
Depreciable basis of fixed assets........................... (238,464) (249,183)
Deductible expenses for tax in excess of financial
reporting................................................. (50,696) (163,434)
Unrealized capital gain on securities available for sale.... (51,942) --
Other....................................................... (69,748) (58,160)
---------- -----------
Total gross deferred tax liability..................... (824,134) (1,001,925)
---------- -----------
Net deferred tax asset included in other assets........ $ 838,334 $ 813,462
========== ===========
</TABLE>

The net change in the total valuation allowance for deferred tax assets for
the year ended December 31, 1995 was a decrease of $23,322. 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 expense
of $320,314, which is net of a decrease of $43,998 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 $345,186. 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 OPTIONS

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"), under which 57,635 options to purchase shares of
Company common stock is still available to be granted to key employees of the
Company. The Plan provides that options are granted at market value on the date
of the grant and 20% of each grant is exercisable one year from the date of the
grant. The options are granted for a ten-year term or until the recipient is
terminated from the Company. Stock appreciation rights totaling 33,426 have been
granted with 26,739 exercisable at a price of $11.78. A summary of all stock
option activity for 1995 and the status at December 31, 1995 follows. All share
and per share amounts give retroactive effect to stock dividends declared by the
Company.

- ---------
28
<PAGE> 26

- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS -- CONTINUED
Carolina First BancShares, Inc. and Subsidiaries

Employee Stock Option Plan:

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
----------------------- -----------------------
AVERAGE AVERAGE
SHARES OPTION PRICE SHARES OPTION PRICE
------ ------------ ------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994....................... 79,039 $11.66 40,595 $11.16
Additional Options Granted....................... 1,050 24.76 -- --
Became Exercisable............................... -- -- 13,252 11.94
Less:
Exercised................................... (2,419) 11.39 (2,419) 11.39
Forfeited................................... (1,930) 17.04 -- --
------ --------- ------ ---------
Balance, December 31, 1995....................... 75,740 $11.72 51,428 $11.36
====== ========= ====== =========
</TABLE>

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,
1995, 1994 and 1993 were $517,000, $455,620 and $331,216, 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
Postretirement Benefits Other Than Pensions".

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, 1995, the Banks
had combined retained earnings of approximately $16,387,000, all of which is
available to be paid as dividends.

The Company is required by federal regulations to maintain various ratios
of capital to assets. The new capital standards call for 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
December 31, 1995, the Company's ratio of total Tier I capital to total assets,
adjusted for the loan loss allowance and intangibles, was 9.28% and the
Company's ratio of total capital to risk-adjusted assets was 13.72% which
includes 12.58% Tier I capital.

Various legislative proposals related to the future of the Bank Insurance
Fund ("BIF") and Savings Association Insurance Fund ("SAIF") have been under
consideration. Several of these proposals are being

---------
29
<PAGE> 27

- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Carolina First BancShares, Inc. and Subsidiaries

considered by Congress including a one-time special assessment for SAIF deposits
with a discount for certain SAIF deposits held by BIF member banks. This type of
assessment would result in a one time charge to earnings for the deposits of
Cabarrus Bank and a small amount of Lincoln Bank deposits that were formerly
savings association deposits and a subsequent reduced level of annual premiums
for SAIF deposits. While the amount of this assessment is not known, it is
currently anticipated that the after tax effect will range from $400,000 to
$450,000 assuming the assessment will be approximately 80 basis points of those
deposits affected. It is not known when and if any such proposal or any other
related proposal may be adopted.

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:

<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
Commitments for additional loans.................................. $50,298,000 $44,380,000
Standby letters of credit......................................... 876,000 1,329,000
=========== ===========
</TABLE>

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, 1995 are as follows: 1996, $223,000; 1997, $211,000; 1998,
$220,000; 1999, $225,000; 2000, $219,000; and subsequent years, $894,000. Rental
expense for all operating leases for the three years ended December 31, 1995 was
$238,000, 1995; $253,000, 1994; $236,000, 1993.

- ---------
30
<PAGE> 28

- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS -- CONTINUED
Carolina First BancShares, Inc. and Subsidiaries

12. CONDENSED BALANCE SHEET

<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
CONDENSED BALANCE SHEET
Assets:
Cash on deposit with subsidiary banks................................ $ 1,866,401 $ 10,282
Investment in subsidiary banks....................................... 27,331,641 22,304,318
Other investments.................................................... 646,092 386,448
Other assets......................................................... 1,859,038 1,398,814
----------- -----------
Total........................................................... $31,703,172 $24,099,862
=========== ===========
Liabilities............................................................... $ 580,193 $ 211,024
Shareholders' equity...................................................... 31,122,979 23,888,838
----------- -----------
Total........................................................... $31,703,172 $24,099,862
=========== ===========
</TABLE>

<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CONDENSED RESULTS OF OPERATIONS
Equity in earnings of subsidiary Banks:
Dividends............................................. $ 154,272 $ 1,929,752 $ 483,895
Undistributed......................................... 4,422,452 1,547,559 2,130,432
Other income (expense), net................................ (446,991) (107,437) 4,845
----------- ----------- -----------
Net income................................................. $ 4,129,733 $ 3,369,874 $ 2,619,172
=========== =========== ===========
CONDENSED CASH FLOW
Cash flows from operating activities:
Net income............................................ $ 4,129,733 $ 3,369,874 $ 2,619,172
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Equity in undistributed earnings of subsidiary
banks............................................... (4,422,452) (1,547,559) (2,130,432)
Increase in other assets.............................. (736,363) (1,386,678) (12,136)
Increase (decrease) in liabilities.................... 369,169 158,024 (32,000)
----------- ----------- -----------
Net cash provided by operating activities.................. (659,913) 593,661 444,604
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock................ 3,189,641 89,242 80,401
Dividends and fractional shares paid.................. (648,257) (580,114) (483,895)
Other, net............................................ (25,352) (95,898) (64,903)
----------- ----------- -----------
Net cash provided by (used in) financing activities........ 2,516,032 (586,770) (468,397)
----------- ----------- -----------
Net increase (decrease) in cash............................ 1,856,119 6,891 (23,793)
Cash at beginning of year.................................. 10,282 3,391 27,184
----------- ----------- -----------
Cash at end of year........................................ $ 1,866,401 $ 10,282 $ 3,391
=========== =========== ===========
</TABLE>

---------
31

<PAGE> 1

Exhibit 21

<TABLE>
<CAPTION>
Subsidiaries of Carolina First BancShares, Inc. Jurisdiction of
----------------------------------------------- ---------------
Incorporation
---------------
<S> <C>

Cabarrus Bank of North Carolina North Carolina
Concord, North Carolina

Carolina First Mortgage Corp. North Carolina
Mooresville, North Carolina

Carolina First Financial Services Corp. North Carolina
Mooresville, North Carolina

Lincoln Bank of North Carolina, Inc. North Carolina
Lincolnton, North Carolina

</TABLE>

<PAGE> 1

EXHIBIT 23

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
Carolina First Bancshares, Inc.

We consent to the incorporation by reference in the registration statement (No.
33-63390) on Form S-3 of Carolina First Bancshares, Inc. of our report dated
January 19, 1996 relating to the consolidated balance sheets of Carolina First
Bancshares, Inc. and subsidiaries as of December 31, 1995 and 1994 and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for the years in the three-year period ended December 31, 1995, which
report appears in the December 31, 1995 annual report on Form 10-K of Carolina
First Bancshares, Inc. Our report contains an explanatory paragraph relating to
the changes in methods of accounting for certain investments in debt and equity
securities and income taxes.

KPMG Peat Marwick LLP

Charlotte, North Carolina
March 22, 1996

<ARTICLE> 9

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 14,361,366
<INT-BEARING-DEPOSITS> 350,128
<FED-FUNDS-SOLD> 1,030,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,462,764
<INVESTMENTS-CARRYING> 56,661,646
<INVESTMENTS-MARKET> 57,660,405
<LOANS> 257,177,863
<ALLOWANCE> 3,588,489
<TOTAL-ASSETS> 369,833,439
<DEPOSITS> 335,602,746
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,107,714
<LONG-TERM> 0
0
0
<COMMON> 4,081,145
<OTHER-SE> 27,041,834
<TOTAL-LIABILITIES-AND-EQUITY> 369,833,439
<INTEREST-LOAN> 23,279,164
<INTEREST-INVEST> 4,584,733
<INTEREST-OTHER> 313,327
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 12,670,832
<INTEREST-EXPENSE> 46,214
<INTEREST-INCOME-NET> 15,460,178
<LOAN-LOSSES> 710,200
<SECURITIES-GAINS> 2,048
<EXPENSE-OTHER> 12,640,560
<INCOME-PRETAX> 6,283,784
<INCOME-PRE-EXTRAORDINARY> 6,282,784
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,129,733
<EPS-PRIMARY> 2.61
<EPS-DILUTED> 2.61
<YIELD-ACTUAL> 5.02
<LOANS-NON> 790,359
<LOANS-PAST> 21,814
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,158,168
<CHARGE-OFFS> 390,392
<RECOVERIES> 110,513
<ALLOWANCE-CLOSE> 3,688,489
<ALLOWANCE-DOMESTIC> 3,588,489
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0

</TABLE>