<PAGE>   1

                                                                   EXHIBIT 13


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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. CERTAIN OF THE MATTERS DISCUSSED UNDER THE
CAPTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" AND ELSEWHERE IN THIS ANNUAL REPORT MAY CONSTITUTE
FORWARD-LOOKING STATEMENTS FOR PURPOSES OF THE SECURITIES ACT OF 1933, AS
AMENDED AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED AND AS SUCH MAY
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE
THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY
DIFFERENT FROM FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED
BY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS DUE
TO A VARIETY OF FACTORS, INCLUDING, WITHOUT LIMITATION: THE EFFECTS OF FUTURE
ECONOMIC CONDITIONS, GOVERNMENTAL MONETARY AND FISCAL POLICIES, AS WELL AS
LEGISLATIVE AND REGULATORY CHANGES; THE RISKS OF CHANGES IN INTEREST RATES ON
THE LEVEL AND COMPOSITION OF DEPOSITS, LOAN DEMAND, LOAN COLLATERAL VALUES,
SECURITIES PORTFOLIO VALUES AND INTEREST RATE RISKS; THE EFFECTS OF COMPETITION
FROM OTHER COMMERCIAL BANKS, THRIFTS, MORTGAGE BANKING FIRMS, CONSUMER FINANCE
COMPANIES, CREDIT UNIONS, SECURITIES BROKERAGE FIRMS, INSURANCE COMPANIES, MONEY
MARKET AND OTHER MUTUAL FUNDS AND OTHER FINANCIAL INSTITUTIONS OPERATING IN THE
COMPANY'S MARKET AREA AND ELSEWHERE, INCLUDING INSTITUTIONS OPERATING LOCALLY,
REGIONALLY, NATIONALLY AND INTERNATIONALLY, TOGETHER WITH SUCH COMPETITORS
OFFERING BANKING PRODUCTS AND SERVICES BY MAIL, TELEPHONE, AND COMPUTER AND THE
INTERNET; AND THE FAILURE OF ASSUMPTIONS UNDERLYING THE ESTABLISHMENT OF
RESERVES FOR POSSIBLE LOAN LOSSES. ALL WRITTEN OR ORAL FORWARD-LOOKING
STATEMENTS ATTRIBUTABLE TO THE COMPANY ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY
BY THESE CAUTIONARY STATEMENTS.

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, currently operates in 12
offices and 10 communities in areas primarily north and west of Charlotte, North
Carolina with one office in southeast Charlotte. Lincoln has assets of $315
million and expects to acquire $10 million of deposits in the community of Lake
Lure, North Carolina during the second quarter of 1997.

    Cabarrus Bank was organized in 1889 as Cabarrus Savings Bank and converted
to a stock association in 1989. 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. Cabarrus has assets of $110 million and expects to acquire $30
million of deposits in Kannapolis and Mount Pleasant during the second quarter
of 1997. Cabarrus acquired $3.5 million of local deposits during July of 1996.

    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. First Gaston, of which the Company's chairman
was an organizer, is located in a market contiguous to others served by Lincoln
Bank. First Gaston opened in July of 1995 and operates three branches in markets
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. The Company's
investment in First Gaston is accounted for under the equity method of
accounting and thus their portion of income or losses are reflected in current
period earnings. During 1996, the Company recognized losses, net of applicable
income taxes, of $107,000.

 6
<PAGE>   2

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

    The Company continues to actively consider possible acquisitions, including
purchases of branches and deposits. In 1996, the Company acquired one branch and
related deposits, and signed definitive agreements to purchase three other
branches and related deposits.

RESULTS OF OPERATIONS

    Carolina First continued the recent trend of record earnings. Earnings were
$4.7 million, or $2.23 per share in 1996, a 22% increase over 1995. Earnings in
1995 were $4.1 million, or $2.09 per share, a 23% increase over 1994. The
economically strong locations and sound loan philosophy has rewarded the Company
well by providing a large volume of quality loans complimented by a conservative
securities portfolio. This combination has provided an impressive net interest
margin that stands out among peers. The growth in current markets has been
captured by the growth of existing branches as well as de novo branches and
acquisition of other institutions' divested branch sites.

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

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

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

    Noninterest income has continued to grow as reflected in the 6.5% increase
from 1995 to 1996 and the 10.5% increase from 1994 to 1995. Our growth in
deposit accounts has led the way for this increase. Additionally, Cabarrus Bank
has been successful in changing from a savings and loan with few deposit service
charges to that of a commercial bank with fees for services rendered. During the
fourth quarter of 1995, Lincoln Bank sold its insurance subsidiary which
translated into lower insurance commissions in 1995 and considerably lower
commissions in 1996. The remaining insurance commissions relate to the fees
generated by the Financial Services company from the sale of annuity products
and mutual funds. Other service fees and commissions relate to the Company's
growth in the recently organized trust and credit/debit card divisions. These
divisions were organized in late 1994 and have steadily grown. Management
believes this growth will continue with the further maturity of these divisions.
Included in other income are fees of $141,959 generated from services provided
to First Gaston. These services include account operations, item processing,
bookkeeping and internal auditing that are terminable by either party. Other
income also reflects gains resulting from the sale of other real estate owned.

    Operating expenses decreased as a percentage of average assets in both 1995
and 1996. The larger categories within this group remained constant as a
percentage of the total category in each of the last three years. Salaries and
benefits account for approximately half of total operating expenses. This is an
area that presents a challenge to maintain favorable operating efficiency ratios
while maintaining adequate staffing levels to support the Company's growth, and
fairly compensating the staff for performance. The Company is utilizing
technology to more fully employ staff expertise. The expense for the added
technology is included in equipment expense and represents a capital outlay of
approximately $200,000 annually. Deposit insurance premiums expense represent
several changes in the premiums over the past two years. During 1995, the FDIC
reduced the premium assessed to commercial banks insured under the Bank
Insurance Fund for insurance coverage of deposits. This reduction benefitted
Lincoln Bank primarily and resulted in pretax savings of approximately $231,000
in 1995 and continued in 1996. Cabarrus Bank, until 1992, had been a savings
bank and its deposits are insured under the Savings Association Insurance Fund
of the FDIC. This fund assessed a one time fee of $569,000 pretax during the
third quarter of 1996, with a reduction of ongoing insurance premiums afterward.
Management does not expect any additional material assessments or premium
changes in the foreseeable future. The

                                                                               7
<PAGE>   3

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

Company's operating efficiency ratio has continued to improve falling from 71%
in 1993 to 62% in 1996. Absent deposit insurance assessments or other unusual
expenses, management seeks to further reduce the operating efficiency ratio,
however this ratio will be effected by insurance assessments or other unusual
expenses.

ASSET/LIABILITY MANAGEMENT

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

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

<TABLE>
<CAPTION>
                                              1996                             1995                             1994
                                  -----------------------------    -----------------------------    -----------------------------
                                             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...................  $    457    $    46    10.07%    $    352    $    17     4.83%    $    252    $    31    12.30%
Taxable securities..............    72,837      4,440     6.10%      64,821      3,870     5.97%      65,200      3,717     5.70%
Non-taxable securities..........     9,712        891     9.17%      10,503      1,083    10.31%      10,536      1,135    10.77%
Federal funds sold..............     4,186        214     5.11%       4,971        296     5.95%       2,408         98     4.07%
Loans...........................   282,553     27,389     9.69%     234,581     23,279     9.92%     206,442     18,859     9.14%
                                  --------    -------              --------    -------              --------    -------
    Interest earning assets.....   369,745     32,980     8.92%     315,228     28,545     9.06%     284,838     23,840     8.37%
                                              -------    -----                 -------    -----                 -------    -----
Other assets....................    30,269                           27,061                           23,749
                                  --------                         --------                         --------
                                  $400,014                         $342,289                         $308,587
                                  ========                         ========                         ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits
  Demand........................  $ 85,897      2,016     2.35%    $ 77,266      2,100     2.72%    $ 71,785      1,715     2.39%
  Savings.......................    40,849      1,032     2.53%      41,465      1,219     2.94%      40,674      1,181     2.90%
  Time..........................   197,833     11,098     5.61%     166,711      9,352     5.61%     148,987      6,835     4.59%
Notes payable and other interest
  bearing liabilities...........     5,902        294     4.98%         620         46     7.42%         804         43     5.35%
                                  --------    -------              --------    -------              --------    -------
    Interest bearing
      liabilities...............   330,481     14,440     4.37%     286,062     12,717     4.45%     262,250      9,774     3.73%
                                  --------    -------    -----     --------    -------    -----     --------    -------    -----
Other liabilities...............    37,116                           29,425                           23,583
Shareholders' equity............    32,417                           26,802                           22,754
                                  --------                         --------                         --------
Total liabilities and
  shareholders' equity..........  $400,014                         $342,289                         $308,587
                                  ========                         ========                         ========
Interest rate spread............                          4.55%                            4.61%                            4.64%
                                                         =====                            =====                            =====
Net interest earned and net
  yield on earning assets
  (Margin)......................              $18,540     5.01%                $15,828     5.02%                $14,066     4.94%
                                              =======    =====                 =======    =====                 =======    =====
</TABLE>

 8
<PAGE>   4

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

    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>
                                                         1996                          1995                           1994
                                                        -------                       -------                        -------
                                                        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..............  $    46    $  11     $  18    $    17    $   5     $  (19)   $    31
Taxable investment securities.........................    4,440      489        81      3,870      (23)       176      3,717
Non-taxable investment securities.....................      588      (48)      (79)       715       (2)       (32)       749
Federal funds sold and securities purchased with
  agreements to resell................................      214      (40)      (42)       296      153         45         98
Loans.................................................   27,389    4,650      (540)    23,279    2,792      1,628     18,859
                                                        -------    -----     -----    -------    -----     ------    -------
    Total interest income.............................   32,677    5,062      (562)    28,177    2,925      1,798     23,454
                                                        =======    =====     =====    =======    =====     ======    =======
Interest bearing liabilities:
Interest bearing demand deposits......................    2,016      202      (286)     2,100      149        236      1,715
Savings deposits......................................    1,032      (16)     (171)     1,219       23         15      1,181
Time deposits.........................................   11,098    1,746        --      9,352      994      1,523      6,835
Notes payable and other interest bearing
  liabilities.........................................      294      263       (15)        46      (14)        17         43
                                                        -------    -----     -----    -------    ------    ------    -------
    Total interest expense............................   14,440    2,195      (472)    12,717    1,152      1,791      9,774
                                                        -------    -----     -----    -------    -----     ------    -------
    Net interest income...............................  $18,237   $2,867     $ (90)   $15,460   $1,773     $    7    $13,680
                                                        =======   ======     =====    =======   ======     ======    =======
</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, 1996, the cumulative
one-year gap for the consolidated Company was a negative or liability sensitive
$1.6 million, or .37% of total assets. Such a gap is considered immaterial and
pretax net income would be virtually unchanged with a one percent change in
interest rates. As interest rates remained relatively constant during 1996,
depositors were unwilling to extend the maturity of time deposits, as the yield
curve was somewhat flat and did not reward depositors sufficiently for longer
maturities. Intense competition in the Company's markets continues to pressure
quality loan rates downward while conversely pressuring deposit rates upward.

                                                                               9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Continued
Carolina First BancShares, Inc. and Subsidiaries

    The following table reflects the Company's rate sensitive assets and
liabilities by maturity as of December 31, 1996. Variable rate loans are shown
in the category of due "within one year" because they reprice with changes in
the prime lending rate. These variable rate loans have actual maturities of
$40.4 million maturing within one year, with an additional $40.7 million
maturing within five years, and $71.8 million maturing after five years. Fixed
rate loans are presented assuming the entire loan matures on the final due date.
Actually, payments are made at regular intervals and are not reflected in this
schedule. Additionally, demand deposits and savings accounts have no stated
maturity, however, it has been the Company's experience that these accounts are
not totally rate sensitive, and thus, 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........................................         --     $   4,507    $  7,581         --          --    $ 12,088
  U.S. government agencies.............................         --         1,498       8,383         --          --       9,881
  States and political subdivisions....................         --         1,277       4,264    $ 2,238          --       7,779
  Mortgage-backed securities...........................         --           593       1,713      6,866          --       9,172
                                                          --------     ---------    --------    -------    --------    --------
    Total securities held to maturity..................         --         7,875      21,941      9,104          --      38,920
Securities available for sale:
  U.S. Treasury........................................         --        10,518       7,969         --          --      18,487
  U.S. government agencies.............................         --        14,804      13,053         --          --      27,857
  Mortgage-backed securities...........................         --            --          --      1,005          --       1,005
  Other(1).............................................         --            --          --         --    $  1,347       1,347
                                                          --------     ---------    --------    -------    --------    --------
    Total securities available for sale................         --        25,322      21,022      1,005       1,347      48,696
Federal funds sold.....................................         --         2,982          --         --          --       2,982
Loans:
  Commercial and financial.............................   $ 25,741         2,446      12,797      1,830          --      42,814
  Real estate:
    Construction.......................................     18,499         2,815       1,641      2,673          --      25,628
    Mortgage(2)........................................    105,350         5,711      43,022     43,819          --     197,902
  Consumer(3)..........................................      3,226         3,654      33,466      2,389          33      42,768
                                                          --------     ---------    --------    -------    --------    --------
    Total loans........................................    152,816        14,626      90,926     50,711          33     309,112
Other(4)...............................................         --            --          --         --         427         427
                                                          --------     ---------    --------    -------    --------    --------
    Total earning assets...............................    152,816        50,805     133,889     60,820       1,807     400,137
Noninterest-earning assets.............................         --            --          --         --      29,574      29,574
                                                          --------     ---------    --------    -------    --------    --------
    Total assets.......................................   $152,816     $  50,805    $133,889    $60,820    $ 31,381    $429,711
                                                          ========     =========    ========    =======    ========    ========
</TABLE>

 10
<PAGE>   6

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

<TABLE>
<CAPTION>
                                                                        WITHIN       1 - 5                   NON-
                                                         PRIME LOANS   ONE YEAR      YEARS      5 YEARS     MARKET      TOTAL
                                                         -----------   ---------    --------    -------    --------    --------
<S>                                                      <C>           <C>          <C>         <C>        <C>         <C>
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
  Interest-bearing checking............................         --     $  14,775    $ 59,101         --          --    $ 73,876
  Savings..............................................         --         7,889      31,557         --          --      39,446
  Market deposit accounts..............................         --         3,900      15,600         --          --      19,500
  Time, $100,000 and over..............................         --        32,400       7,956         --          --      40,356
  Other time(5)........................................         --       140,369      33,586    $    11          --     173,966
                                                          --------     ---------    --------    -------    --------    --------
    Total interest-bearing deposits....................         --       199,333     147,800         11          --     347,144
Borrowed funds.........................................         --         5,862          --         --          --       5,862
Other liabilities......................................         --            11          --        120          --         131
                                                          --------     ---------    --------    -------    --------    --------
    Total interest-bearing liabilities.................         --       205,206     147,800        131          --     353,137
Noninterest-bearing liabilities........................         --            --          --         --    $ 41,572      41,572
Shareholders' equity...................................         --            --          --         --      35,002      35,002
                                                          --------     ---------    --------    -------    --------    --------
    Total liabilities and shareholders' equity.........         --       205,206     147,800        131      76,574     429,711
                                                          ========     =========    ========    =======    ========    ========
      Gap..............................................   $152,816     $(154,401)   $(13,911)   $60,689    $(45,193)         --
                                                          ========     =========    ========    =======    ========    ========
      Cumulative Gap...................................   $152,816     $  (1,585)   $(15,496)   $45,193          --          --
                                                          ========     =========    ========    =======    ========    ========
Adjustments:
  Exclude noninterest-earning assets,
    noninterest-bearing liabilities and
    shareholders' equity...............................         --            --          --         --      46,765          --
                                                          --------     ---------    --------    -------    --------    --------
    Adjusted cumulative gap............................   $152,816     $  (1,585)   $(15,496)   $45,193    $ 46,765          --
                                                          ========     =========    ========    =======    ========    ========
</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 $42,633 maturing within three
    months and $35,475 maturing after three months but within six months.

LIQUIDITY

    Liquidity refers to the Company's ability to adjust its future cash flows to
meet the needs of daily operations. The Company relies primarily on dividends
and management assessments from the Banks for liquidity. These sources have
provided adequate liquidity for the Company. The Banks' liquidity refers to the
ability or financial flexibility to adjust its future cash flows to meet the
needs of depositors and borrowers and to fund operations on a timely and cost
effective basis. The Banks' primary sources of funds are cash generated by
repayments of outstanding loans, interest payments on loans and new deposits.
Additional liquidity is available from the maturity and earnings on securities
and liquid assets, as well as the ability to liquidate securities available for
sale. The Banks also had lines of credit of $17.5 million at year end 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 been adequate to provide the necessary
liquidity for the Banks.

    Net cash provided from operations results primarily from net income,
adjusted for the following noncash accounting items: provision for loan losses,
depreciation and amortization, and deferred income taxes or benefits. These
items amounted to $1.6 million in 1996 and $1.2 million in 1995. This cash was
available during 1996 to increase earning assets and to pay dividends. As of
December 31, 1996, the Banks had

                                                                              11
<PAGE>   7

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

combined retained earnings of approximately $22,022,000, all of which are
available to be paid as dividends without prior regulatory approval provided the
Banks maintain adequate capital.

FINANCIAL CONDITION

    The Company's consolidated assets increased 16.2%, 16.1% and 5.76% during
1996, 1995 and 1994, respectively. Asset growth is directly related to deposit
growth and the funds available to the Company for investment. The Company has
been successful in expanding existing market share as well as adding new branch
locations. During 1996, Cabarrus Bank purchased approximately $3.5 million of
deposit accounts and consolidated them with its Copperfield branch. Cabarrus has
agreed to acquire $30 million of deposit accounts within Cabarrus County and
Lincoln Bank has agreed to acquire $10 million of deposit accounts west of
Lincolnton in Lake Lure, pursuant to branch acquisitions expected to close in
the second quarter of 1997. This acquired growth, as well as the natural growth
generated within the Company's existing markets are expected to produce
continued strong growth trends. These deposits will allow the Company to
continue to take advantage of the vibrant economy and quality loan demand
experienced over the past several years.

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

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

 12
<PAGE>   8

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

    Securities have been segregated into two categories, "held to maturity" and
"securities available for sale." While the Company has no plans to liquidate a
significant amount of any securities, the securities available for sale may be
used for liquidity purposes should management deem it to be in the best interest
of the Company. Due to declines in interest rates, the majority of securities
purchased have been relatively short term and categorized as available for sale
in anticipation that these would be available to the Company should interest
rates reverse or quality loan demand increase. United States government and
government agency securities continue to represent the majority of both
securities held to maturity and securities available for sale. During 1996,
securities available for sale increased as a percentage of total assets,
however, total securities remained relatively constant.

                                                                              13
<PAGE>   9

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

ASSET QUALITY

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

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

<TABLE>
<CAPTION>
                                                                           December 31,
                                 ------------------------------------------------------------------------------------------------
                                       1996                1995                1994                1993                1992
                                 ----------------    ----------------    ----------------    ----------------    ----------------
                                           Loan                Loan                Loan                Loan                Loan
                                          Percent             Percent             Percent             Percent             Percent
                                           Total               Total               Total               Total               Total
                                 Amount    Loans     Amount    Loans     Amount    Loans     Amount    Loans     Amount    Loans
                                 ------   -------    ------   -------    ------   -------    ------   -------    ------   -------
<S>                              <C>      <C>        <C>      <C>        <C>      <C>        <C>      <C>        <C>      <C>
Commercial and financial.......  $  215      13%     $ 327       13%     $ 289       10%     $ 152        9%     $  73        6%
Real estate:
  Residential construction.....     109       8         21        8         14        6         15        4         18        2
  Commercial construction......      --      --         --       --         --       --         --       --         35        3
  Residential mortgage.........     453      37        397       37        468       47        509       58        620       63
  Commercial mortgage..........     221      30        320       30        226       23        138       16        318       14
Consumer.......................     293      12        299       12        228       14        216       13        204       12
General........................   3,198      --      2,224       --      1,933       --      1,550       --        968       --
                                 ------     ---      ------     ---      ------     ---      ------     ---      ------     ---
Total loans....................  $4,489     100%     $3,588     100%     $3,158     100%     $2,580     100%     $2,236     100%
                                 ======     ===      ======     ===      ======     ===      ======     ===      ======     ===
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                ----------------------------------------------------
                                                                1996       1995        1994        1993        1992
                                                                ----      ------      ------      ------      ------
<S>                                                             <C>       <C>         <C>         <C>         <C>
Nonaccrual loans............................................    $576      $  790      $  570      $  744      $  995
Loans 90 days or more past due and still accruing
  interest..................................................      43          22          20          35          59
                                                                ----      ------      ------      ------      ------
Total non-performing loans..................................     619         812         590         779       1,054
Other real estate...........................................     141         683       1,017       1,385       2,091
                                                                ----      ------      ------      ------      ------
Total non-performing assets.................................    $760      $1,495      $1,607      $2,164      $3,145
                                                                ====      ======      ======      ======      ======
</TABLE>

 14
<PAGE>   10

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

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

<TABLE>
<CAPTION>
                                                                1996        1995        1994        1993        1992
                                                              --------    --------    --------    --------    --------
<S>                                                           <C>         <C>         <C>         <C>         <C>
Balance at beginning of year................................  $  3,588    $  3,158    $  2,580    $  2,236    $  1,953
  Charge-offs:
    Commercial, financial and agricultural..................       (39)        (95)         (9)        (43)       (324)
    Real estate:
      Construction..........................................        --          --          --        (180)         --
      Mortgage..............................................       (18)        (77)        (24)        (40)       (114)
    Consumer................................................      (312)       (219)       (130)       (270)       (151)
                                                              --------    --------    --------    --------    --------
        Total charge-offs...................................      (369)       (391)       (163)       (533)       (589)
  Recoveries:
    Commercial, financial and agricultural..................         3           3          19          --          22
    Real estate:
      Construction..........................................        --          --          --          --          --
      Mortgage..............................................        24          23           2           3           2
    Consumer................................................        64          85          53          53          54
                                                              --------    --------    --------    --------    --------
        Total recoveries....................................        91         111          74          56          78
                                                              --------    --------    --------    --------    --------
Net charge-offs.............................................      (278)       (280)        (89)       (477)       (511)
Provision for loan losses...................................     1,179         710         667         821         794
                                                              --------    --------    --------    --------    --------
Balance at end of year......................................  $  4,489    $  3,588    $  3,158    $  2,580    $  2,236
                                                              ========    ========    ========    ========    ========
Loans, net of unearned interest at end of year..............  $309,112    $257,178    $223,999    $197,934    $173,793
Ratio of allowance for loan losses to net loans at end of
  year......................................................      1.45%       1.40%       1.41%       1.30%       1.29%
Average loans, net of unearned interest.....................  $282,553    $234,581    $206,442    $182,697    $168,250
Ratio of net charge-offs to average loans outstanding during
  the year..................................................      0.10%       0.12%       0.04%       0.26%       0.30%
</TABLE>

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%       11.64%     11.00%    10.15%
Total capital to risk adjusted assets.......................     10.00%         8.00%       12.90%     12.24%    11.41%
Leverage ratio..............................................      5.00%         4.00%        8.67%      8.07%     6.91%
</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 Investment in Debt and Equity Securities", for regulatory and
capital purposes. The effect of this Standard causes fluctuations in
shareholders' equity based on changes in values of debt and equity securities
available for sale. Such gains and losses, however, are not currently added or
subtracted for purposes of computing the adequacy of capital for regulatory

                                                                              15
<PAGE>   11

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

purposes. Gains and losses on such securities are recognized for income
statement and regulatory capital purposes only when a security is sold.

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

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

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

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

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

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

 16
<PAGE>   12

--------------------------------------------------------------------------------
                                                    INDEPENDENT AUDITORS' REPORT

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

    We have audited the accompanying consolidated balance sheets of Carolina
First BancShares, Inc. and subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Carolina
First BancShares, Inc. and subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.

/s/ KPMG Peat Marwick LLP

Charlotte, North Carolina
February 7, 1997

                                                                              17
<PAGE>   13

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

<TABLE>
<CAPTION>
                                                                  1996              1995
                                                              ------------      ------------
<S>                                                           <C>               <C>
                           ASSETS
Cash and due from banks.....................................  $ 16,343,459      $ 14,361,366
Federal funds sold..........................................     2,982,000         1,030,000
                                                              ------------      ------------
    Total cash and cash equivalents.........................    19,325,459        15,391,366
Interest bearing deposits in other banks....................       426,766           350,128
Securities held to maturity (market value $39,275,715 in
  1996 and $57,660,405 in 1995).............................    38,920,273        56,561,646
Securities available for sale (cost of $48,612,087 in 1996
  and $27,335,383 in 1995)..................................    48,696,412        27,462,764
Loans, net of unearned income ($405,263 in 1996; $327,450 in
  1995).....................................................   309,112,008       257,177,863
    Allowance for loan losses...............................    (4,488,958)       (3,588,489)
                                                              ------------      ------------
    Loans, net..............................................   304,623,050       253,589,374
Premises and equipment, net.................................     9,509,172         8,572,044
Other real estate owned.....................................       141,067           683,409
Other assets................................................     8,069,092         7,222,708
                                                              ------------      ------------
Total Assets................................................  $429,711,291      $369,833,439
                                                              ============      ============

            LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
    Demand..................................................  $ 37,858,889      $ 30,295,524
    Interest bearing transaction accounts...................    93,376,439        81,171,081
    Savings.................................................    39,445,821        41,751,256
    Time, $100,000 and over.................................    40,355,803        30,658,383
    Other time..............................................   173,966,334       151,726,502
                                                              ------------      ------------
    Total deposits..........................................   385,003,286       335,602,746
Borrowed funds..............................................     5,862,026                --
Other liabilities...........................................     3,844,123         3,107,714
                                                              ------------      ------------
Total Liabilities...........................................   394,709,435       338,710,460
Shareholders' Equity:
    Common stock, $2.50 par value; authorized -- 5,000,000
     shares; issued and outstanding -- 2,052,971 in 1996,
     and 1,632,458 shares in 1995...........................     5,132,428         4,081,145
    Additional paid in capital..............................    16,442,810        17,377,333
    Retained earnings.......................................    13,378,236         9,585,436
    Net unrealized gain on securities available for sale....        48,382            79,065
                                                              ------------      ------------
    Total Shareholders' Equity..............................    35,001,856        31,122,979
                                                              ------------      ------------
Commitments and Contingent Liabilities
Total Liabilities and Shareholders' Equity..................  $429,711,291      $369,833,439
                                                              ============      ============
</TABLE>

See accompanying notes to consolidated financial statements.

 18
<PAGE>   14

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

<TABLE>
<CAPTION>
                                                                 1996             1995             1994
                                                              -----------      -----------      -----------
<S>                                                           <C>              <C>              <C>
INTEREST INCOME:
Interest and fees on loans..................................  $27,388,938      $23,279,164      $18,858,565
Interest and dividends on securities:
    Taxable income..........................................    4,440,219        3,870,017        3,716,990
    Non-taxable income......................................      588,209          714,716          748,785
Other interest income.......................................      259,980          313,327          129,231
                                                              -----------      -----------      -----------
    Total interest income...................................   32,677,346       28,177,224       23,453,571
INTEREST EXPENSE:
Interest on deposits........................................   14,145,984       12,670,832        9,731,281
Interest on borrowed funds..................................      293,662           46,214           43,088
                                                              -----------      -----------      -----------
    Total interest expense..................................   14,439,646       12,717,046        9,774,369
                                                              -----------      -----------      -----------
NET INTEREST INCOME.........................................   18,237,700       15,460,178       13,679,202
PROVISION FOR LOAN LOSSES...................................    1,178,925          710,200          667,303
                                                              -----------      -----------      -----------
NET CREDIT INCOME...........................................   17,058,775       14,749,978       13,011,899

OTHER INCOME:
Charges on deposit accounts.................................    2,116,069        1,676,264        1,538,019
Insurance commissions.......................................      532,444          811,811          907,953
Other service fees and commissions..........................      758,500          639,733          477,100
Mortgage banking commission income..........................      394,138          382,663          295,643
Securities gains (losses), net..............................      (10,482)           2,048          (33,180)
Other income................................................      656,530          661,847          592,003
                                                              -----------      -----------      -----------
    Total other income......................................    4,447,199        4,174,366        3,777,538

OPERATING EXPENSES:
Salaries and benefits.......................................    7,381,676        6,773,540        6,223,894
Occupancy and equipment.....................................    1,657,552        1,447,252        1,280,601
Federal and other insurance premiums........................      818,816          499,636          708,442
Office supplies.............................................      447,842          398,086          339,015
Data processing.............................................      384,597          389,495          381,231
Other expenses..............................................    3,449,265        3,132,551        2,938,429
                                                              -----------      -----------      -----------
    Total operating expenses................................   14,139,748       12,640,560       11,871,612
                                                              -----------      -----------      -----------
INCOME BEFORE INCOME TAXES..................................    7,366,226        6,283,784        4,917,825
INCOME TAXES................................................    2,687,927        2,154,051        1,547,951
                                                              -----------      -----------      -----------
NET INCOME..................................................  $ 4,678,299      $ 4,129,733      $ 3,369,874
                                                              ===========      ===========      ===========
EARNINGS PER SHARE
Net Income Per Common Share.................................  $      2.23      $      2.09      $      1.83
                                                              ===========      ===========      ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                                                              19
<PAGE>   15

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

See accompanying notes to consolidated financial statements.

 20
<PAGE>   16

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

<TABLE>
<CAPTION>
                                                                  1996           1995           1994
                                                              ------------   ------------   ------------
<S>                                                           <C>            <C>            <C>
OPERATING ACTIVITIES:
Net Income..................................................  $  4,678,299   $  4,129,733   $  3,369,874
Adjustments to reconcile net income to net cash provided by
  operating activities:
    Depreciation and amortization...........................     1,017,442        863,267        776,038
    Accretion and amortization of securities discounts and
      premiums, net.........................................       230,389        264,877        408,456
    Provision for loan losses...............................     1,178,925        710,200        667,303
    Deferred taxes (benefit)................................      (634,148)      (345,186)      (395,463)
    Gains on sales of securities available for sale.........       (26,839)        (1,160)       (34,936)
    Losses on sales of securities available for sale........            --          1,006         68,903
    Gains on calls and maturities of securities held to
      maturity..............................................        (8,490)        (1,989)        (4,397)
    Losses on calls and maturities of securities held to
      maturity..............................................         2,131             95          3,165
    Gains on sales of equipment, net........................       (63,273)        (1,277)        (1,301)
    Gains on sales of real estate, net......................      (141,750)       (71,384)      (110,298)
    Increase in other assets................................      (244,529)          (509)    (1,625,947)
    Increase in other liabilities...........................       754,953      1,030,324        373,505
                                                              ------------   ------------   ------------
    Net cash provided by operating activities...............     6,743,110      6,577,997      3,494,902
                                                              ------------   ------------   ------------
INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale...     7,701,659      8,581,972      2,666,713
Proceeds from sales of securities available for sale........     6,586,841      1,009,785      4,511,950
Purchases of securities available for sale..................   (35,699,300)   (18,148,361)   (11,010,710)
Proceeds from calls and maturities of securities held to
  maturity..................................................    22,606,274     13,129,521     16,052,605
Purchases of securities held to maturity....................    (5,074,375)   (18,207,484)    (8,288,740)
Purchases and maturities of certificates of deposit, net....       (76,638)      (299,496)       693,000
Originations of loans, net..................................   (52,527,250)   (33,618,383)   (26,206,328)
Proceeds from sale of real estate...........................       999,241        506,874        728,267
Decrease in investment in joint ventures....................            --         28,307        163,254
Proceeds from sale of premises and equipment................       221,380         36,519          5,006
Capital expenditures........................................    (2,022,132)    (1,212,445)      (270,584)
                                                              ------------   ------------   ------------
    Net cash used in investing activities...................   (57,284,300)   (48,193,191)   (20,955,567)
                                                              ------------   ------------   ------------
FINANCING ACTIVITIES:
Increase (decrease) in time deposits........................    31,937,252     32,165,918       (957,736)
Net increase in other deposits..............................    17,463,288     10,815,552     15,680,511
Net increase in borrowed funds..............................     5,862,026             --             --
Repayment of notes payable..................................       (18,544)       (17,506)       (23,706)
Repurchase of stock.........................................      (111,076)       (25,352)       (95,898)
Payment of cash dividends and fractional shares.............      (910,794)      (648,257)      (580,114)
Issuance of stock...........................................       253,131      3,189,641         89,242
                                                              ------------   ------------   ------------
    Net cash provided by financing activities...............    54,475,283     45,479,996     14,112,299
                                                              ------------   ------------   ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........     3,934,093      3,864,802     (3,348,366)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................    15,391,366     11,526,564     14,874,930
                                                              ------------   ------------   ------------
CASH AND CASH EQUIVALENTS, END OF YEAR......................  $ 19,325,459   $ 15,391,366   $ 11,526,564
                                                              ============   ============   ============
Supplemental disclosures of cash flow information:
    Interest paid...........................................  $ 14,241,426   $ 12,353,527   $  9,774,369
    Income taxes paid.......................................     3,507,975      2,127,700      2,128,399
                                                              ============   ============   ============
Supplemental disclosure of noncash investing and financing
  activities:
    Effect of change in accounting principle (net of tax
      effect of $31,665)....................................            --             --   $     61,466
Effect on equity of change in unrealized gain (loss) on
  securities available for sale.............................  $    (30,683)       588,376       (570,777)
Assets transferred to other real estate.....................       314,649        231,820         51,963
Transferred from securities held to maturity to securities
  available for sale........................................            --             --      1,855,497
</TABLE>

See accompanying notes to consolidated financial statements.

                                                                              21
<PAGE>   17

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

    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 allowance for loan losses for all years after 1994 relating to

 22
<PAGE>   18

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

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

    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.

    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 five-for-four stock split in 1996, and the 5%
stock dividend in 1995 and 1994. Fully diluted per share amounts are not
presented since the differences are not significant.

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

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

    Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no active market readily exists for a portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. 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.

                                                                              23
<PAGE>   19

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

    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.

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

    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.

 24
<PAGE>   20

--------------------------------------------------------------------------------
                         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
                                                               DECEMBER 31, 1996
                                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, 1996 and 1995 are summarized as follows:

<TABLE>
<CAPTION>
                                                               AMORTIZED     UNREALIZED    UNREALIZED      MARKET
                     DECEMBER 31, 1996                           COST          GAINS         LOSSES         VALUE
                     -----------------                        -----------    ----------    ----------    -----------
<S>                                                           <C>            <C>           <C>           <C>
HELD TO MATURITY
    U.S. Treasury securities................................  $12,088,819   $   55,044     $ (32,148)    $12,111,715
    U.S. government agencies................................    9,880,637       64,329       (13,620)      9,931,346
    Mortgage-backed securities..............................    9,171,725       53,825       (82,086)      9,143,464
    State and political subdivisions........................    7,779,092      310,503          (405)      8,089,190
                                                              -----------   ----------     ---------     -----------
        Total...............................................  $38,920,273   $  483,701     $(128,259)    $39,275,715
                                                              ===========   ==========     =========     ===========

AVAILABLE FOR SALE
    U.S. Treasury securities................................  $18,484,978   $   31,190     $ (30,037)    $18,486,131
    U.S. government agencies................................   27,919,073       49,353      (110,947)     27,857,479
    Mortgage-backed securities..............................      976,067       29,148            --       1,005,215
    Mutual funds and marketable equity securities...........    1,231,969      168,655       (53,837)      1,346,787
                                                              -----------   ----------     ---------     -----------
        Total...............................................  $48,612,087   $  278,346     $(194,821)    $48,695,612
                                                              ===========   ==========     =========     ===========

DECEMBER 31, 1995
HELD TO MATURITY
    U.S. Treasury securities................................  $15,102,308   $  171,731     $  (6,609)    $15,267,430
    U.S. government agencies................................   19,646,292      289,756        (6,932)     19,929,116
    Mortgage-backed securities..............................   11,683,322      121,821       (24,517)     11,780,626
    State and political subdivisions........................   10,129,724      553,590           (81)     10,683,233
                                                              -----------   ----------     ---------     -----------
        Total...............................................  $56,561,646   $1,136,898     $ (38,139)    $57,660,405
                                                              ===========   ==========     =========     ===========

AVAILABLE FOR SALE
    U.S. Treasury securities................................  $17,113,732   $   62,806     $ (49,298)    $17,127,240
    U.S. government agencies................................    5,499,540       22,088        (2,963)      5,518,665
    Mortgage-backed securities..............................    1,182,048       35,873            --       1,217,921
    State and political subdivisions........................    2,500,000           --            --       2,500,000
  Mutual funds and marketable equity securities.............    1,040,063      107,279       (48,404)      1,098,938
                                                              -----------   ----------     ---------     -----------
        Total...............................................  $27,335,383   $  228,046     $(100,665)    $27,462,764
                                                              ===========   ==========     =========     ===========
</TABLE>

                                                                              25
<PAGE>   21

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

    Amortized cost and market values of securities at December 31, 1996, 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........................................  $ 7,878,644    $ 7,942,492      $25,334,145    $25,321,890
Due after one year but within 5 years......................   21,937,576     22,151,948       21,069,906     21,022,520
Due after 5 years but within 10 years......................    4,332,229      4,439,122               --             --
Due after 10 years.........................................    4,771,824      4,742,153          976,067      1,005,215
Mutual funds and marketable equity securities..............           --             --        1,231,969      1,346,787
                                                             -----------    -----------      -----------    -----------
        Total..............................................  $38,920,273    $39,275,715      $48,612,087    $48,696,412
                                                             ===========    ===========      ===========    ===========
</TABLE>

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

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

3. LOANS

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

<TABLE>
<CAPTION>
                                                                  1996              1995
                                                              ------------      ------------
<S>                                                           <C>               <C>
Commercial..................................................  $ 43,121,946      $ 33,082,877
Real estate:
    Construction............................................    25,589,843        20,873,525
    Mortgage................................................   197,898,770       170,000,535
Consumer....................................................    39,047,715        30,259,379
Other.......................................................     3,453,734         2,961,547
                                                              ------------      ------------
            Total loans.....................................   309,112,008       257,177,863
Allowance for loan losses...................................    (4,488,958)       (3,588,489)
                                                              ------------      ------------
            Total loans, net................................  $304,623,050      $253,589,374
                                                              ============      ============
</TABLE>

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

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

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

 26
<PAGE>   22

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

earned in 1996 and 1995, respectively, if the nonaccrual loans as of each year
end had been earning throughout each year. Income of $40,819 and $39,457 was
recognized on these loans during 1996 and 1995, respectively.

    The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities. The estimated fair
market value of loans outstanding is approximately $309,811,000 and $256,231,000
at December 31, 1996 and 1995, respectively.

4. ALLOWANCE FOR LOAN LOSSES

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

<TABLE>
<CAPTION>
                                                                 1996          1995          1994
                                                              ----------    ----------    ----------
<S>                                                           <C>           <C>           <C>
Balance at beginning of year................................  $3,588,489    $3,158,168    $2,580,004
Charge-offs.................................................    (369,549)     (390,392)     (163,347)
Recoveries..................................................      91,093       110,513        74,208
                                                              ----------    ----------    ----------
Net charge-offs.............................................    (278,456)     (279,879)      (89,139)
                                                              ----------    ----------    ----------
Provision for loan losses...................................   1,178,925       710,200       667,303
                                                              ----------    ----------    ----------
Balance at end of year......................................  $4,488,958    $3,588,489    $3,158,168
                                                              ==========    ==========    ==========
</TABLE>

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

5. PREMISES AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                                 1996             1995
                                                              -----------      -----------
<S>                                                           <C>              <C>
Land........................................................  $ 2,968,275      $ 2,419,093
Buildings and improvements..................................    6,248,774        5,787,652
Furniture, fixtures and equipment...........................    4,703,963        3,902,969
                                                              -----------      -----------
Total cost..................................................  $13,921,012      $12,109,714
Accumulated depreciation....................................    4,411,840        3,537,670
                                                              -----------      -----------
Carrying value..............................................  $ 9,509,172      $ 8,572,044
                                                              ===========      ===========
</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 $386,920,000 and $336,557,000 at December 31, 1996 and
1995, respectively.

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

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

                                                                              27

<PAGE>   23

--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
DECEMBER 31, 1996
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, 1996
    Federal.................................................  $2,887,925      $(547,874)     $2,340,051
    State...................................................     434,150        (86,274)        347,876
                                                              ----------      ---------      ----------
        Total...............................................  $3,322,075      $(634,148)     $2,687,927
                                                              ==========      =========      ==========
Year ended December 31, 1995
    Federal.................................................  $2,182,056      $(256,693)     $1,925,363
    State...................................................     317,181        (88,493)        228,688
                                                              ----------      ---------      ----------
        Total...............................................  $2,499,237      $(345,186)     $2,154,051
                                                              ==========      =========      ==========
Year ended December 31, 1994
    Federal.................................................  $1,749,009      $(287,833)     $1,461,176
    State...................................................     194,405       (107,630)         86,775
                                                              ----------      ---------      ----------
        Total...............................................  $1,943,414      $(395,463)     $1,547,951
                                                              ==========      =========      ==========
</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>
                                                                 1996          1995          1994
                                                              ----------    ----------    ----------
<S>                                                           <C>           <C>           <C>
Tax provision at statutory rate.............................  $2,559,641    $2,136,487    $1,672,060
Increase (reduction) in income taxes resulting from:
    Tax-exempt interest income..............................    (203,354)     (210,500)     (225,591)
    Change in the beginning-of-the-year balance of the
      valuation allowance for deferred tax assets allocated
      to income tax expense.................................      38,030        20,676       (64,524)
    State income taxes, net of federal tax benefit..........     229,598       150,934        57,272
    Other...................................................      64,012        56,454       108,734
                                                              ----------    ----------    ----------
        Total income taxes..................................  $2,687,927    $2,154,051    $1,547,951
                                                              ==========    ==========    ==========
</TABLE>

 28
<PAGE>   24

--------------------------------------------------------------------------------
                         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
                                                               DECEMBER 31, 1996
                                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, 1996 and
1995, respectively, are presented below:

<TABLE>
<CAPTION>
                                                                 1996            1995
                                                              ----------      ----------
<S>                                                           <C>             <C>
Deferred tax assets:
    Loan loss reserves......................................  $1,544,446      $1,217,432
    Foreclosed property, tax basis in excess of financial
     reporting amount.......................................      85,471         108,632
    Accrued expenses, deductible when paid..................     506,082         235,102
    Other...................................................     102,574         131,001
                                                              ----------      ----------
        Total gross deferred tax assets.....................   2,238,573       1,692,167
        Less valuation allowance............................     (63,016)        (29,699)
                                                              ----------      ----------
        Net deferred tax assets.............................   2,175,557       1,662,468
                                                              ----------      ----------
Deferred tax (liabilities):
    Bad debt reserve recapture, tax accounting adjustment...    (116,652)       (234,294)
    Financial reporting stock basis in excess of tax
     basis..................................................    (178,235)       (178,990)
    Depreciable basis of fixed assets.......................    (141,262)       (238,464)
    Deductible expenses for tax in excess of financial
     reporting..............................................     (71,576)        (50,696)
    Unrealized gain on securities available for sale........     (53,740)        (51,942)
    Other...................................................    (138,695)        (69,748)
                                                              ----------      ----------
        Total gross deferred tax liability..................    (700,160)       (824,134)
                                                              ----------      ----------
        Net deferred tax asset included in other assets.....  $1,475,397      $  838,334
                                                              ==========      ==========
</TABLE>

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

8. STOCK BASED COMPENSATION

    In 1990, the Board of Directors of the Company adopted the Carolina First
BancShares, Inc. 1990 Stock Option and Stock Appreciation Rights Plan (the "1990
Plan"), and certain amendments to the 1990 Plan were approved in 1991
(collectively "the Plan"). In January 1991, stock appreciation rights were
granted in accordance with the 1990 Plan. These rights were granted at market
value on the date of the grant and 20% of each grant becomes exercisable on each
anniversary of the date of the grant and expires five years after they become
exercisable. Stock appreciation rights totaling 41,783 have been granted and all
have a measurement price of $9.42. The expense related to these rights is
included in compensation expense and for the years ended December 31, 1996, 1995
and 1994 were $504,000, $290,000 and $140,000, respectively.

    Since the inception of the Plan, options to purchase shares of Company
common stock have been granted to key employees of the Company and 43,140 such
options are still available. The Plan provides that options are granted at
market value on the date of the grant and 20% of each grant becomes exercisable
on each anniversary of the date of the grant. All currently outstanding options
have been granted for a ten-year term or until the recipient leaves the
Company's employment. A summary of all stock option activity for 1996 and the
status at December 31, 1996 follows. All share and per share amounts give
retroactive effect to stock dividends declared by the Company.

                                                                              29

<PAGE>   25

--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
DECEMBER 31, 1996
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, 1993..................................  102,284       $ 8.81        41,564       $7.99
Additional Options Granted..................................    4,893        12.64            --          --
Became Exercisable..........................................       --           --        16,462        9.43
Less:
  Exercised.................................................   (6,971)        4.65        (7,282)       4.65
  Forfeited.................................................   (1,407)        9.23            --          --
                                                              -------       ------       -------       -----
Balance, December 31, 1994..................................   98,799         9.33        50,744        8.93
Additional Options Granted..................................    1,313        19.81            --          --
Became Exercisable..........................................       --           --        16,565        9.55
Less:
  Exercised.................................................   (3,024)        9.11        (3,024)       9.11
  Forfeited.................................................   (2,413)       13.63            --          --
                                                              -------       ------       -------       -----
Balance, December 31, 1995..................................   94,675         9.38        64,285        9.09
Additional Options Granted..................................   22,062        25.08            --          --
Became Exercisable..........................................       --           --        10,685        9.44
Less:
  Exercised.................................................  (11,072)        8.33       (11,072)       8.33
  Forfeited.................................................   (2,304)       18.14            --          --
                                                              -------       ------       -------       -----
Balance, December 31, 1996..................................  103,361       $12.65        63,898       $9.28
                                                              =======       ======       =======       =====
</TABLE>

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

<TABLE>
<CAPTION>
                                OPTIONS OUTSTANDING
                 -------------------------------------------------
                   NUMBER      WEIGHTED-AVERAGE
   RANGE OF      OUTSTANDING      REMAINING       WEIGHTED-AVERAGE
EXERCISE PRICES  AT 12/31/96   CONTRACTUAL LIFE    EXERCISE PRICE
---------------  -----------   ----------------   ----------------
<C>              <C>           <C>                <C>
  Less than $10     77,071           4.77               $ 9
       11 to 15      3,850           6.98                11
       16 to 20      1,313           8.90                20
       21 to 32     21,127           9.31                25
---------------    -------
       $1 to 32    103,361
===============    =======
</TABLE>

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

30
<PAGE>   26

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

9. BENEFIT PLANS

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

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

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

10. REGULATION AND REGULATORY RESTRICTIONS

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

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

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

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

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

                                                                              31

<PAGE>   27
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
DECEMBER 31, 1996
Carolina First BancShares, Inc. and Subsidiaries

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

<TABLE>
<CAPTION>
                                                                                   MINIMUM
                                                                                REQUIRED FOR           MINIMUM REQUIRED BY
                                                                             REGULATORY CAPITAL         REGULATORS TO BE
                                                          ACTUAL              ADEQUACY PURPOSES         WELL CAPITALIZED
                                                   --------------------     ---------------------     ---------------------
                                                     AMOUNT       RATIO        AMOUNT       RATIO        AMOUNT       RATIO
                                                   -----------    -----     ------------    -----     ------------    -----
<S>                                                <C>            <C>       <C>             <C>       <C>             <C>
AS OF DECEMBER 31, 1996:
Total Capital (to Risk Weighted Assets)
    Consolidated.................................  $38,393,000    12.9%     >$23,815,000    >8.0%
                                                                            -               -
    Lincoln Bank.................................  $28,341,000    12.2%     >$18,526,000    >8.0%     >$23,158,000    >10.0%
                                                                            -               -         -               -
    Cabarrus Bank................................  $ 8,211,000    11.4%     >$ 5,758,000    >8.0%     >$ 7,197,000    >10.0%
                                                                            -               -         -               -
Tier I Capital (to Risk Weighted Assets)
    Consolidated.................................  $34,662,000    11.6%     >$11,908,000    >4.0%
                                                                            -               -
    Lincoln Bank.................................  $25,442,000    11.0%     >$ 9,263,000    >4.0%     >$13,895,000     >6.0%
                                                                            -               -         -                -
    Cabarrus Bank................................  $ 7,307,000    10.2%     >$ 2,879,000    >4.0%     >$ 4,318,000     >6.0%
                                                                            -               -         -                -
Tier I Capital (to Average Assets)

    Consolidated.................................  $34,662,000     8.7%     >$16,828,000    >4.0%
                                                                            -               -
    Lincoln Bank.................................  $25,442,000     8.1%     >$12,607,000    >4.0%     >$15,759,000     >5.0%
                                                                            -               -         -                -
    Cabarrus Bank................................  $ 7,307,000     6.9%     >$ 4,227,000    >4.0%     >$ 5,284,000     >5.0%
                                                                            -               -         -                -
AS OF DECEMBER 31, 1995:
Total Capital (to Risk Weighted Assets)
    Consolidated.................................  $34,155,000    13.9%     >$19,717,000    >8.0%
                                                                            -               -
    Lincoln Bank.................................  $22,677,000    11.8%     >$15,343,000    >8.0%     >$19,178,000    >10.0%
                                                                            -               -         -               -
    Cabarrus Bank................................  $ 7,964,000    10.6%     >$ 6,032,000    >8.0%     >$ 7,540,000    >10.0%
                                                                            -               -         -               -
Tier I Capital (to Risk Weighted Assets)
    Consolidated.................................  $31,069,000    12.6%     >$ 9,858,000    >4.0%
                                                                            -               -
    Lincoln Bank.................................  $20,281,000    10.6%     >$ 7,671,000    >4.0%     >$11,507,000     >6.0%
                                                                            -               -         -                -
    Cabarrus Bank................................  $ 6,952,000     9.2%     >$ 3,016,000    >4.0%     >$ 4,524,000     >6.0%
                                                                            -               -         -                -
Tier I Capital (to Average Assets)
    Consolidated.................................  $31,069,000     9.3%     >$13,392,000    >4.0%
                                                                            -               -
    Lincoln Bank.................................  $20,281,000     7.9%     >$10,327,000    >4.0%     >$12,909,000     >5.0%
                                                                            -               -         -                -
    Cabarrus Bank................................  $ 6,952,000     7.5%     >$ 3,710,000    >4.0%     >$ 4,637,000     >5.0%
                                                                            -               -         -                -
</TABLE>

32
<PAGE>   28

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

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,
                                                              ----------------------------
                                                                 1996             1995
                                                              -----------      -----------
<S>                                                           <C>              <C>
Commitments for additional loans............................  $73,677,000      $50,298,000
Standby letters of credit...................................    1,090,000          876,000
                                                              ===========      ===========
</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, 1996 are as follows: 1997, $242,000; 1998, $254,000; 1999,
$255,000; 2000, $248,000; 2001, $215,000; and subsequent years, $692,000. Rental
expense for all operating leases for the three years ended December 31, was
$251,000, 1996; $247,000, 1995; $262,000, 1994.

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

                                                                              33

<PAGE>   29

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

12. CONDENSED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                     December 31,
                                                              --------------------------
                                                                 1996           1995
                                                              -----------    -----------
<S>                                                           <C>            <C>
CONDENSED BALANCE SHEET
Assets:
    Cash on deposit with subsidiary banks...................  $   502,164    $ 1,866,401
    Investment in subsidiary banks..........................   32,967,141     27,331,641
    Other investments.......................................    1,015,617        646,092
    Other assets............................................    1,849,808      1,859,038
                                                              -----------    -----------
        Total...............................................  $36,334,730    $31,703,172
                                                              ===========    ===========
Liabilities.................................................  $ 1,332,874    $   580,193
Shareholders' equity........................................   35,001,856     31,122,979
                                                              -----------    -----------
        Total...............................................  $36,334,730    $31,703,172
                                                              ===========    ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                        Years ended December 31,
                                                              ---------------------------------------------
                                                                 1996             1995             1994
                                                              -----------      -----------      -----------
<S>                                                           <C>              <C>              <C>
CONDENSED RESULTS OF OPERATIONS
Equity in earnings of subsidiary Banks:
    Dividends...............................................  $        --      $   154,272      $ 1,929,752
    Undistributed...........................................    5,707,517        4,422,452        1,547,559
Other income (expense), net.................................   (1,029,218)        (446,991)        (107,437)
                                                              -----------      -----------      -----------
Net income..................................................  $ 4,678,299      $ 4,129,733      $ 3,369,874
                                                              ===========      ===========      ===========
CONDENSED CASH FLOW
Cash flows from operating activities:
    Net income..............................................  $ 4,678,299      $ 4,129,733      $ 3,369,874
Adjustments to reconcile net income to net cash provided by
  (used in) operating activities:
    Equity in undistributed earnings of subsidiary banks....   (5,707,517)      (4,422,452)      (1,547,559)
    Decrease in other assets................................      (12,961)        (464,584)      (1,386,678)
    Increase in liabilities.................................      752,681          369,169          158,024
                                                              -----------      -----------      -----------
Net cash provided by (used in) operating activities.........     (289,498)        (388,134)         593,661
                                                              -----------      -----------      -----------
Cash flows from investing activities:
    Purchases of investments................................     (306,000)        (271,779)              --
                                                              -----------      -----------      -----------
Net cash used in investing activities.......................     (306,000)        (271,779)              --
                                                              -----------      -----------      -----------
Cash flows from financing activities:
    Proceeds from issuance of common stock..................      253,131        3,189,641           89,242
    Dividends and fractional shares paid....................     (910,794)        (648,257)        (580,114)
    Other, net..............................................     (111,076)         (25,352)         (95,898)
                                                              -----------      -----------      -----------
Net cash provided by (used in) financing activities.........     (768,739)       2,516,032         (586,770)
                                                              -----------      -----------      -----------
Net increase (decrease) in cash.............................   (1,364,237)       1,856,119            6,891
Cash at beginning of year...................................    1,866,401           10,282            3,391
                                                              -----------      -----------      -----------
Cash at end of year.........................................  $   502,164      $ 1,866,401      $    10,282
                                                              ===========      ===========      ===========
</TABLE>

34
<PAGE>   30

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

                            [Mission Statement CRC]

                                                                              35
<PAGE>   31

--------------------------------------------------------------------------------
OFFICERS
Carolina First BancShares, Inc. and Subsidiaries

CAROLINA FIRST BANCSHARES, INC.

D. MARK BOYD, III
  Chairman and Chief Executive Officer

JAMES E. BURT, III
  President

JAN H. HOLLAR
  Vice President, Secretary and Treasurer

JAMES A. ATKINSON, III
  Vice President, Auditor

JOY G. KEEVER
  Vice President, Human Resources

JAMES H. MAUNEY, II
  Vice President, Loan Administration

CABARRUS BANK OF NORTH CAROLINA

RONALD D. SMITH
  President and Chief Executive Officer

JAN H. HOLLAR
  Senior Vice President

GARY L. BUNN
  Vice President

THOMAS M. MORTON, JR.
  Vice President

SHAROYN A. BURROUGHS
  Assistant Vice President

R. KEITH CHALMERS
  Assistant Vice President

DIANE L. TALBERT
  Assistant Vice President

MELISSA H. VOGLER
  Assistant Vice President and Assistant Secretary

PAUL R. ROWE
  Loan Officer

TAMMY D. RORIE
  Branch Sales Manager

ROBERT K. LUKACH
  Security Officer

LINCOLN BANK OF NORTH CAROLINA

JAMES E. BURT, III
  President and Chief Executive Officer

JAMES R. BEAM
  Executive Vice President and Assistant Secretary

STEPHEN S. ROBINSON
  Executive Vice President

GUY E. CLINE, III
  Senior Vice President, Lending and Investments

CARROLL G. HEAVNER
  Senior Vice President and Secretary

JAN H. HOLLAR
  Senior Vice President and Chief Financial Officer

B. LANE HOLMES
  Senior Vice President, Operations

JOSEPH M. ARUNDELL
  Vice President, Marketing

GEORGE E. COLLINS, JR.
  Vice President, Trust Services

THOMAS C. DUTTON
  Vice President

J. LOUIS FLETCHER
  Vice President, Business Development

JOY G. KEEVER
  Vice President, Human Resources

ROBERT K. LUKACH
  Vice President, Security Officer and Cashier

TIMOTHY J. REILLY
  Vice President, Charlotte City Executive

PATSY D. BLACK
  Assistant Vice President

C. TOMMY DAVIS
  Assistant Vice President

RANDALL E. FORD
  Assistant Vice President

HAROLD A HOWARD, JR.
  Assistant Vice President

GERALD E. HUFFMAN
  Assistant Vice President

ELEANOR H. MCINTIRE
  Assistant Vice President

DARRELL O. MELTON
  Assistant Vice President

BEN D. ROUTH, SR.
  Assistant Vice President

BETTY B. SETZER
  Assistant Vice President

DOUGLAS E. WILLIAMS
  Assistant Vice President

MARTHA O. BENFIELD
  Banking Officer

GLENDA W. NOLES
  Banking Officer

H.D. REID
  Banking Officer

36
<PAGE>   32

--------------------------------------------------------------------------------
                                                                    SUBSIDIARIES
                                Carolina First BancShares, Inc. and Subsidiaries

CAROLINA FIRST FINANCIAL
SERVICES CORPORATION

OFFICERS

WALTER H. JONES, JR.
  President

STEPHEN S. ROBINSON
  Executive Vice President

JAN H. HOLLAR
  Treasurer

MARK W. GUSTAFSON
  Secretary

CAROLINA FIRST MORTGAGE CORP.

OFFICERS

JAMES E. BURT, III
  President

JANE D. PEELER
  Vice President and Manager

JAN H. HOLLAR
  Treasurer

CABARRUS BANK

<TABLE>
<S>          <C>                             <C>                                <C>
LOCATIONS    CONCORD
             Main Office                     71 McCachern Blvd.                 782-1193
             Copperfield Office              271 Copperfield Blvd.              786-1195
             In-Store Branch                 545 Hwy 29 North                   788-9336
             (Super Kmart Center)

             KANNAPOLIS
             Kannapolis Office               725 South Loop Road                933-1193
</TABLE>

LINCOLN BANK

<TABLE>
<S>          <C>                             <C>                                <C>
LOCATIONS    LINCOLNTON
             Main Office                     402 East Main Street               732-2222
             Boger City Office               2586 East Main Street              732-3333
             Lincoln Center Office           479 North Generals Blvd.           732-4040
             Drive-In Office                 502 East Main Street               732-6080

             DENVER
             Denver Office                   Hwy. 16 & Hwy. 150                 483-9723
             Triangle Office                 Hwy. 16 & State Road 1387          483-2222

             MOORESVILLE
             Mooresville Office              329 North Main Street              664-4488
             Port Village Office             Hwy. 150 & I-77                    664-4499

             CORNELIUS
             Cornelius Office                Hwy. 73 & I-77                     892-5553

             HUNTERSVILLE
             Huntersville Office             500 Gilead Road                    875-1500

             CHARLOTTE
             SouthPark Office                4500 Cameron Valley Pky.           365-2880
             Sunset Road                     5330 Sunset Road                   598-2540

             TROUTMAN
             Troutman Office                 205 North Main Street              528-0760
</TABLE>

                                                                              37

<PAGE>   33

--------------------------------------------------------------------------------
DIRECTORS
Carolina First BancShares, Inc. and Subsidiaries

CAROLINA FIRST BANCSHARES, INC.

CHAIRMAN

D. MARK BOYD, III
  President, Times Oil Corporation

JOHN R. BOGER, JR.
  Attorney, Williams, Boger, Grady, Davis & Tuttle, P.A.

JAMES E. BURT, III
  President, Carolina First BancShares, Inc.

SAMUEL C. KING, JR.
  President, Kings Office Supply, Inc.

HARRY D. RITCHIE
  Co-Owner Ritchie Bros. Dairy Farm

L.D. WARLICK, JR.
  President, Warlick Funeral Home, Inc.

ESTUS B. WHITE
  Retired Clerk, Cabarrus County Superior Court

PHIL W. WIDENHOUSE -- ADVISORY
  Retired Executive Vice President, The Concord Telephone Co.

CABARRUS BANK OF NORTH CAROLINA

CHAIRMAN

JOHN R. BOGER, JR.
  Attorney, Williams, Boger, Grady, Davis & Tuttle, P.A.

J. THOMPSON BROWN, JR.
  President, Brown Utility Co.

JAMES E. BURT, III
  President, Carolina First BancShares, Inc.

CYNTHIA M. CHILDRESS
  President, Ben Mynatt Pontiac-Buick-GMC Truck, Inc.

JOHN H. MORRISON, JR.
  Chairman of the Board and Secretary, E.L. Morrison Lumber Co., Inc.

F.A. RANKIN, III
  Vice President, Concord Engineering & Survey, Inc.

RONALD D. SMITH
  President, Cabarrus Bank

DR. EDWARD B. TYSON
  Superintendent, Kannapolis City Schools

ESTUS B. WHITE
  Retired Clerk, Cabarrus County Superior Court

BACHMAN S. BROWN, JR. -- ADVISORY
  Attorney, Alexander & Brown

PHIL W. WIDENHOUSE -- ADVISORY
  Retired Executive Vice President, The Concord Telephone Co.

LINCOLN BANK OF NORTH CAROLINA

CHAIRMAN

D. MARK BOYD, III
  President, Times Oil Corporation

VICE CHAIRMAN

SAMUEL C. KING, JR.
  President, Kings Office Supply, Inc.

JAMES R. BEAM
  Executive Vice President and Assistant Secretary

JAMES E. BURT, III
  President, Lincoln Bank

SARA K. HAIRE
  Secretary and Treasurer, Pless Haire Insurance Agency, Inc.

DOUGLAS S. HOWARD
  Manager, Denver Equipment

DONALD J. HOWIE
  Vice President, Hipp Construction

WALTER H. JONES, JR.
  Attorney, Homesley, Jones, Gaines & Homesley

DAVID E. KEEVER
  Co-Owner, Lincoln Drugs, Inc.

WILLIAM M. LENTZ, JR.
  President, Lincoln Food Systems, Inc.

JAMES A. MUNDY
  Retired Principal, Rock Springs School

HARRY D. RITCHIE
  Co-Owner, Ritchie Bros. Dairy Farm

STEPHEN S. ROBINSON
  Executive Vice President, Lincoln Bank

L.D. WARLICK, JR.
  President, Warlick Funeral Home, Inc.

DAVID A. WILSON, DVM
  Owner, East Lincoln Animal Hospital

HOLLIS C. HENDERSON -- ADVISORY
  Consultant, Vermont American Corp.

JAMES C. MOORE -- ADVISORY
  Life Insurance Sales

PETER J. BAUMBERGER, JR. -- EMERITUS
  Optometrist

38
<PAGE>   34

LINCOLN BANK ADVISORY BOARDS
CHARLOTTE

CHAIRMAN

TIMOTHY J. REILLY
  Vice President & City Executive, Lincoln Bank

KLAUS E. BECKER
  Chairman, SouthStar Steel Corp.

ROBEY C. BEST, JR.
  President, AmeriSouth Mortgage Co.

D.R. ("DOC") BOYD
  General Manager, Jeff Boyd Chrysler-Plymouth-Dodge, Inc.

ALVA W. GUTHRIE
  Certified Public Accountant

STAN R. ELROD, JR.
  President, Elrod Construction Co.

ERSKIN L. HARKEY, JR.
  President, Harkey Corp.

JOSEPH B. HENNINGER, JR.
  Partner, Wishart, Norris, Henninger & Pittman P.A.

JOHN POLITES
  Chairman, John Polites Realty Co.

EAST LINCOLN

CHAIRMAN

JAMES A. MUNDY
  Retired Principal, Rock Springs School

WILLIAM G. CLEMMER
  Manager, Cowans Ford Country Club

ANNE CLONINGER
  Owner, Cloninger Trophies

WARREN F. HOYLE, DDS
  Dentist, Lowesville

DOUGLAS S. HOWARD
  Manager, Denver Equipment

GARY MURDOCK
  Manager, Duke Power

W. HAROLD REDMON
  President, Westport Properties, Inc.

BRENDA B. SCHLIE
  Manager, Claremont Wholesale

TONY L. STUTTS
  Sr. Engineering Assistant, Duke Power

DAVID A. WILSON, DVM
  Owner, East Lincoln Animal Hospital

MOORESVILLE/SOUTH IREDELL

CHAIRMAN

STEPHEN S. ROBINSON
  Executive Vice President, Lincoln Bank

ROBERT N. CARRINGTON
  Commercial Sales Consultant, Randy Marion Chevrolet, Inc.

DAVID A. ERVIN, PGA
  Partner, The Professional Group

FLOYD E. GREENE
  Owner, Floyd Greene Realty

SARA K. HAIRE
  Secretary and Treasurer, Pless Haire Insurance Agency, Inc.

MIKE HEINEN, DVM
  Owner, Lake Norman Animal Hospital

WALTER H. JONES, JR.
  Attorney, Homesley, Jones, Gaines & Homesley

VIKI WEST
  Attorney, Viki M. West, Attorney at Law

NORTH MECKLENBURG

CHAIRMAN

DONALD F. HOWIE
  Vice President, Hipp Construction Co.

THOMAS L. BROTHERTON
  Retired, Mecklenburg County Building Standards Dept.

ROBERT J. ("BUB") CASHION
  Retired Owner, Cashion's Gulf

RALPH A. COFFEY, DDS
  Dentist, Davidson

DEBRA H. HIX, DDS
  Dentist, Huntersville

KENNETH E. JACKSON, JR.
  Retired, Southern Bell

HAROLD B. LITTLE
  Retired President, Davidson Ice & Fuel Co.

WALTON G. NEIL
  Owner, Neil Drug Co.

CAROLINA FIRST FINANCIAL SERVICES CORPORATION

CHAIRMAN

WALTER H. JONES, JR.
  Attorney, Homesley, Jones, Gaines & Homesley

JAMES E. BURT, III
  President, Carolina First BancShares, Inc.

JAN H. HOLLAR
  Vice President, Secretary and Treasurer, Carolina First BancShares, Inc.

RONALD D. SMITH
  President, Cabarrus Bank

STEPHEN S. ROBINSON
  Executive Vice President, Lincoln Bank

CAROLINA FIRST MORTGAGE CORP.

CHAIRMAN

JAMES E. BURT, III
  President, Carolina First BancShares, Inc.

JAN H. HOLLAR
  Vice President, Secretary and Treasurer, Carolina First BancShares, Inc.

STEPHEN S. ROBINSON
  Executive Vice President, Lincoln Bank

RONALD D. SMITH
  President, Cabarrus Bank

JANE D. PEELER
  Vice President and Manager, Carolina First Mortgage Corp.

                                                                              39

<PAGE>   35

--------------------------------------------------------------------------------
SHAREHOLDER INFORMATION AND STOCK PRICES
Carolina First BancShares, Inc. and Subsidiaries

<TABLE>
<S>                                                             <C>
CORPORATE OFFICES                                               ANNUAL MEETING
Carolina First BancShares, Inc.                                 April 15, 1997
402 East Main Street                                            7:00 p.m. local time
Post Office Box 657                                             Lincoln Cultural Center
Lincolnton, North Carolina 28092                                403 East Main Street
(704) 732-2222                                                  Lincolnton, North Carolina
</TABLE>

STOCK TRANSFER AND DIVIDEND REINVESTMENT PLAN AGENT

Wachovia Bank of North Carolina, N.A. Corporate Trust Department acts as a Stock
Transfer Agent and Registrar and Dividend Reinvestment Agent for Carolina First
BancShares, Inc. common stock. For information regarding address changes,
dividend checks, dividend direct deposit, account consolidation, registration
changes, lost stock certificates, stock holdings and participation in the
dividend reinvestment plan write or call Wachovia at Post Office Box 8218,
Boston, Massachusetts, 00266-8218-2207; 800-633-4236.

REPORT TO SEC AVAILABLE TO SHAREHOLDERS

A copy of Carolina First BancShares, Inc.'s Annual Report on form 10-K for the
year ended December 31, 1995 to the Securities and Exchange Commission may be
obtained without charge by writing to Jan H. Hollar -- Secretary, Carolina First
BancShares, Inc., 402 East Main Street, Post Office Box 657, Lincolnton, N.C.
28093.

<TABLE>
<S>                                                          <C>
LEGAL COUNSEL                                                ACCOUNTANTS
Alston & Bird LLP                                            KPMG Peat Marwick LLP
One Atlantic Center                                          Two First Union Center
1201 West Peachtree Street                                   Suite 2800
Atlanta, GA 30309-3424                                       Charlotte, NC 28282-8207
</TABLE>

Broker-dealers that trade shares of Company common stock:

<TABLE>
<S>                                                          <C>
INTERSTATE/JOHNSON LANE CORP.                                J.C. BRADFORD & CO.
P.O. Box 700                                                 P.O. Box 3857
Newton, NC 28658                                             Hickory, NC 28603
800-929-0175                                                 800-222-1082
</TABLE>

STOCK PRICES

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 Charlotte Observer under the Interdealer stock
section. The following table sets forth the high and low bid quotations for the
common stock for the indicated periods. Such quotations reflect interdealer
prices without markup, markdown, or commissions and may not necessarily
represent actual transactions.

<TABLE>
<CAPTION>
                                    1st Quarter      2nd Quarter      3rd Quarter      4th Quarter
                                   -------------    -------------    -------------    -------------
<S>                                <C>              <C>              <C>              <C>
1996.............................  $21.60-24.00     $24.00-26.00     $26.00-30.00     $30.00-32.00
1995.............................  $15.62-16.38     $16.38-16.67     $16.76-18.29     $18.29-21.60
</TABLE>

As of December 31, 1996 Carolina First BancShares, Inc. had approximately 3,300
shareholders of record.

40