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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                   FORM 10-KSB

                 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended: DECEMBER 31, 2001
                                             -----------------

                         Commission file number: 0-21083
                                                 -------

                          SOUTH STREET FINANCIAL CORP.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

                    NORTH CAROLINA                         56-1973261
                    --------------                         ----------
            (State or other jurisdiction of             (I.R.S. Employer
             incorporation or organization)            Identification No.)

                  155 WEST SOUTH STREET
                ALBEMARLE, NORTH CAROLINA                    28001
                -------------------------                    -----
         (Address of principal executive office)           (Zip Code)

       Registrant's telephone number, including area code: (704) 982-9184
                                                           --------------

        Securities Registered Pursuant to Section 12(b) of the Act: NONE
                                                                    ----

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

                           COMMON STOCK, NO PAR VALUE
                           --------------------------
                                (Title of class)

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

Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]

State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing.
$21,783,069 OF COMMON STOCK, NO PAR VALUE, BASED ON THE CLOSING PRICE OF SUCH
COMMON STOCK ON MARCH 11, 2002.

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. 3,111,867 SHARES OF COMMON
STOCK, NO PAR VALUE, OUTSTANDING AT MARCH 11, 2002.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report to stockholders of South Street Financial Corp.
for the year ended December 31, 2001 ("2001 Annual Report"), are incorporated by
reference into Part I, Part II and Part IV.

Portions of the Proxy Statement for the 2002 Annual Meeting of Shareholders of
South Street Financial Corp. to be held on May 28, 2002, are incorporated by
reference into Part III.


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                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

         South Street Financial Corporation ("The Company") was founded in 1996
as a bank holding company registered with the Board of Governors of the Federal
Reserve System (the "Federal Reserve") under the Bank Holding Company Act of
1956, as amended (the "BHCA"), and the savings bank holding company laws of
North Carolina. The Company's office is located at 155 West South Street,
Albemarle, North Carolina. The Company's primary activity is owning the Home
Savings Bank of Albemarle, Inc. ("the Bank"), a North Carolina-chartered stock
savings bank. The Company's principal sources of income are earnings on its
investments and interest payments received from the Bank's Employee Stock
Ownership Plan ("ESOP") with respect to the loan made from the Company to the
Bank to finance the ESOP. In addition, the Company will receive any dividends
that are declared and paid by the Bank on its capital stock.

         The Bank was originally chartered in 1911. It has been a member of the
Federal Home Loan Bank ("FHLB") system since 1954 and its deposits are federally
insured up to allowable limits.

         The Bank is engaged primarily in the business of attracting retail
deposits from the general public and using such deposits to make mortgage loans
secured by real estate. The Bank makes mortgage loans secured by residential
real property, including one-to-four family residential real estate loans, home
equity line of credit loans and other subordinate lien loans, loans secured by
improved nonresidential real property, loans secured by undeveloped real
property, and construction loans. It also makes a limited number of loans that
are not secured by real property, such as loans secured by savings accounts. The
Bank's primary source of revenue is interest income from its lending activities.
Its other major sources of revenue are interest and dividend income from
investments and mortgage-backed securities, interest income from its
interest-bearing deposit balances in other depository institutions and fee
income from its lending and deposit activities. The major expenses of the Bank
are interest on deposits and non-interest expenses such as compensation and
fringe benefits, federal deposit insurance premiums, data processing expenses
and branch occupancy and related expenses.

         In June 1998, Park Ridge Associates, L.L.C., a joint venture between
the Bank's wholly-owned subsidiary, South Street Development Corporation, and a
local real estate developer, acquired 25.6 acres of prime real estate located
within the city limits of Albemarle, North Carolina, with the intention of
developing the property into a premier residential subdivision. During 2000, the
Bank purchased all of the developer's interest in property. As of December 31,
2001, fifteen of the original thirty lots had been sold, and the rest of the
property is currently being marketed. There can be no assurances that the Bank
will be successful in recovering its investment in the venture due to the
uncertainty inherent in the construction industry and in the real estate market.

         The Bank is a member of the STAR network and the CIRRUS network for
ATMs and Point of Sale ("POS") terminals, which allows the Bank's cardholders to
enjoy the convenience and accessability of approximately 324,000 ATMs and over
400,000 POS terminals worldwide.

         The operations of the Bank and depository institutions in general are
significantly influenced by general economic conditions and by related monetary
and fiscal policies of depository institution regulatory agencies, including the
Federal Reserve, the Federal Deposit Insurance Corporation (the "FDIC") and the
Commissioner of Banks, North Carolina Department of Commerce ("the
Commissioner"). Deposit flows and cost of funds are influenced by interest rates
on competing investments and general market rates of interest. Lending
activities are affected by the demand for financing of real estate and other
types of loans, which in turn are affected by the interest rates at which such
financing may be offered and other factors affecting local demand and
availability of funds.

         At December 31, 2001, the Company had total assets of $212.3 million,
net loans of $173.1 million, deposits of $167.5 million, investment securities
of $31.5 million and stockholders' equity of $23.8 million.

         At December 31, 2001, the Company and the Bank had a total of 42
employees, all of whom are full-time.


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Employees are not represented by any union or collective bargaining group, and
the Bank considers its employee relations to be good.

SUBSIDIARIES

         The Company has no subsidiaries other than the Bank. The Bank has a
wholly-owned subsidiary, South Street Development Corp. ("SSDC"), which is an
owner of a premier residential subdivision. In June 1998, SSDC and Park Ridge
Associates, L.L.C. acquired 25.6 acres of prime real estate located within the
city limits of Albemarle, North Carolina, to develop it into a residential
subdivision. The upscale subdivision consists of thirty building lots of which
fifteen have now been sold. There can be no assurances that the Bank will be
successful in recovering its investment in the joint venture, due to the
uncertainty inherent in the construction industry and in the real estate market.

COMPETITION

         The Bank faces strong competition both in attracting deposits and
making real estate and other loans. Its most direct competition for deposits has
historically come from other savings institutions, credit unions and commercial
banks located in its primary market area, including large financial institutions
that have greater financial and marketing resources available to them. The Bank
also has faced significant competition for investors' funds from short-term
money market securities and other corporate and government securities. At
December 31, 2001, there were at least 6 other commercial banks, credit unions
and mortgage companies as well as numerous other financial services providers
located in the Bank's market area. At June 30, 2001, the Bank was first in
market share with approximately 23% of the deposits in Stanly County. The
ability of the Bank to attract and retain savings deposits depends on its
ability generally to provide a rate of return, liquidity and risk comparable to
that offered by competing investment opportunities.

         The Bank experiences strong competition for real estate loans from
other savings institutions, commercial banks, and mortgage banking companies.
The Bank competes for loans primarily through the interest rates and loan fees
it charges, the efficiency and quality of services it provides borrowers, and
its more flexible underwriting standards. Competition may increase as a result
of the continuing reduction of restrictions on the interstate operations of
financial institutions.

MARKET AREA

         The Bank's primary market area is Stanly County, North Carolina. The
Bank's principal office is in Albemarle, North Carolina and it has one
full-service branch in Locust, North Carolina. Stanly County is located in south
central North Carolina; Albemarle is approximately 30 miles from Charlotte,
North Carolina.

         The Bank's loans and deposits are primarily generated from the areas
where its offices are located. It does not solicit deposits and loans outside
its primary market area and does not use brokers to obtain deposits.
Approximately 80% of the Bank's deposits are at the Albemarle office. Stanly
County is largely rural with a population of 58,100. Its economy is diversified
among manufacturing, trade and services. Major area employers include Collins
and Aikman Corporation, Michelin Aircraft Tire Company, Oakwood Homes, Stanley
County and Alcoa Aluminum Company. Within the past five years, several large
manufacturing companies have closed operations in Stanly County, resulting in a
significant loss of jobs. Over the past five years, the local economy has
weakened as a result of layoffs and plant closings by local employers. The North
Carolina Department of Commerce has declared Stanly County a "distressed county"
entitling it to use state grants and tax credits to lure industry to the area.
Population and household growth, and median and per capita income levels for
Stanly County are generally lower than comparable levels for North Carolina and
the nation, while unemployment levels are generally higher. Management regards
the Stanly County market area as a low growth area in which there is significant
competition among financial services providers for market share. Management
believes that opportunities for future earnings growth in the Bank's primary
market area are limited in light of these factors.


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SUPERVISION AND REGULATION

         Bank holding companies and state savings banks are extensively
regulated under both federal and state law. The following is a brief summary of
certain statutes and rules and regulations that affect or will affect the
Company and the Bank. This summary is qualified in its entirety by reference to
the particular statute and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations
applicable to the business of the Company and the Bank. Supervision, regulation
and examination of the Company and the Bank by the regulatory agencies are
intended primarily for the protection of depositors rather than shareholders of
the Company.

         SUPERVISION AND REGULATION OF THE COMPANY

         GENERAL. The Company was organized for the purpose of acquiring and
holding all of the capital stock of the Bank to be issued in the conversion. As
a savings bank holding company subject to the Bank Holding Company Act of 1956,
as amended, the Company is subject to certain regulations of the Federal
Reserve. Under the Bank Holding Company Act, a bank holding company such as the
Company, which does not qualify as a financial holding company, is prohibited
from engaging in activities other than banking, managing or controlling banks or
other permissible subsidiaries, furnishing services to or performing services
for its subsidiaries or engaging in any other activity which the Federal Reserve
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. The Bank Holding Company Act also prohibits
the Company from acquiring direct or indirect control of more than 5% of the
outstanding voting stock or substantially all of the assets of any bank or
savings bank or merging or consolidating with another bank holding company or
savings bank holding company without prior approval of the Federal Reserve.

         Additionally, the Bank Holding Company Act prohibits the Company from
engaging in, or acquiring ownership or control of, more than 5% of the
outstanding voting stock of any company engaged in a non-banking business unless
such business is determined by the Federal Reserve to be so closely related to
banking as to be properly incident thereto. The Bank Holding Company Act does
not place territorial restrictions on the activities of such non-banking related
activities.

         Similarly, Federal Reserve approval (or, in certain cases,
non-objection) must be obtained prior to any person acquiring control of the
Company. Control is conclusively presumed to exist if, among other things, a
person owns, controls, or has the power to vote 25% or more of any class of
voting stock of the holding company or controls in any manner the election of a
majority of the directors of the holding company. Control is presumed to exist
if a person owns, controls, or has the power to vote more than 10% of any class
of voting stock and the stock is registered under Section 12 of the Securities
Exchange Act of 1934 or the acquiror will be the largest shareholder after the
acquisition.

         There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by law and
regulatory policy that are designed to minimize potential loss to the depositors
of such depository institutions and FDIC insurance funds in the event the
depository institution becomes in danger of default or is in default. For
example, to avoid receivership of an insured depository institution subsidiary,
a bank holding company is required to guarantee the compliance of any insured
depository institution subsidiary that has become "undercapitalized" with the
terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of the institution's total assets at the time the institution became
undercapitalized, or (ii) the amount which is necessary to bring the institution
into compliance with all acceptable capital standards as of the time the
institution initially fails to comply with such capital restoration plan. Under
a policy of the Federal Reserve with respect to bank holding company operations,
a bank holding company is required to serve as a source of financial strength to
its subsidiary depository institutions and to commit resources to support such
institutions in circumstances where it might not do so absent such policy. The
Federal Reserve under the Bank Holding Company Act also has the authority to
require a bank holding company to terminate any activity or to relinquish
control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon
the Federal Reserve's determination that such activity or control constitutes a
serious risk to the financial soundness and stability of any bank subsidiary of
the bank holding company.

         In addition, the "cross-guarantee" provisions of the Federal Deposit
Insurance Act, as amended, require


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insured depository institutions under common control to reimburse the FDIC for
any loss suffered as a result of the default of a commonly controlled insured
depository institution or for any assistance provided by the FDIC to a commonly
controlled insured depository institution in danger of default. The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best interest of the deposit insurance funds. The FDIC's claim for
damages is superior to claims of stockholders of the insured depository
institution or any affiliate but is subordinate to claims of depositors, secured
creditors and holders of subordinated debt (other than affiliates) of the
commonly controlled insured depository institutions.

         As a result of the Company's ownership of the Bank, the Company is
registered under the savings bank holding company laws of North Carolina.
Accordingly, the Company is also subject to regulation and supervision by the
Commissioner.

         FINANCIAL SERVICES MODERNIZATION LEGISLATION. The Gramm-Leach-Bliley
Act (the "GLB Act") was signed into law on November 12, 1999 to remove barriers
separating banking, securities and insurance firms and to make other reforms.
All provisions of the GLB are effective now.

         Financial Affiliations. Title I of the GLB Act facilitates affiliations
among banks, securities firms and insurance companies. Financial organizations
may structure new financial affiliations through a holding company structure, or
a financial subsidiary (with limitations on activities and appropriate
safeguards). A bank holding company may now qualify as a financial holding
company and expand into a wide variety of services that are financial in nature,
provided that its subsidiary depository institutions are well-managed,
well-capitalized and have received a "satisfactory" rating on their last
Community Reinvestment Act (the "CRA") examination. A bank holding company which
does not qualify as a financial holding company under the GLB Act is generally
limited in the types of activities in which it may engage to those that the
Federal Reserve had recognized as permissible for a bank holding company prior
to the date of enactment of the GLB Act.

         National banks remain limited in the scope of activities they may
exercise directly within the bank, but an eligible national bank may have a
financial subsidiary that exercises many of the expanded financial services
authorized for a financial holding company. A national bank cannot engage in
merchant banking either directly or through a subsidiary, but a financial
holding company is authorized to have an affiliate company that engages in
merchant banking.

         State banks may have financial subsidiaries that, upon meeting
eligibility criteria, can engage in activities permitted for financial
subsidiaries of national banks.

         Functional Regulation. The GLB Act designates the Federal Reserve as
the overall umbrella supervisor of the new financial services holding companies.
The GLB Act adopts a system of functional regulation where the primary regulator
is determined by the nature of activity rather than the type of institution.
Under this principle, securities activities are regulated by the SEC and other
securities regulators, insurance activities by the state insurance authorities,
and banking activities by the appropriate banking regulator.

         Insurance. The GLB Act reaffirms that states are the regulators for
insurance activities of all persons, including acting as the functional
regulator for the insurance activities of federally-chartered banks. However,
states may not prevent depository institutions and their affiliates from
conducting insurance activities.

         Privacy. The GLB Act imposes restrictions on the ability of financial
services firms to share customer information with nonaffiliated third parties.
The GLB Act: (i) requires financial services firms to establish privacy policies
and disclose them annually to customers, explaining how nonpublic personal
information is shared with affiliates and third parties; (ii) directs regulatory
agencies to adopt standards for sharing customer information; (iii) permits
customers to prohibit ("opt-out") of the disclosure of personal information to
nonaffiliated third parties; (iv) prohibits the sharing with marketers of credit
card and other account numbers; and, (v) prohibits "pretext" calling. The
privacy provisions do allow, however, a community bank to share information with
third parties that sell financial products, such as insurance companies or
securities firms. The privacy provisions became effective November 2000, and
full compliance was required by July 1, 2001.

         Other. The GLB Act reforms the Federal Home Loan Bank System to provide
small banks with greater


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access to funds for making loans to small business and small farmers. Also, the
GLB Act obligates operators of automated teller machines to provide notices to
customers regarding surcharge practices. The GLB Act provides that CRA
agreements between financial institutions and community groups must be disclosed
and reported to the public.

         CAPITAL ADEQUACY GUIDELINES FOR HOLDING COMPANIES. The Federal Reserve
has adopted capital adequacy guidelines for bank holding companies and banks
that are members of the Federal Reserve system and have consolidated assets of
$150 million or more. For bank holding companies with less than $150 million in
consolidated assets, the guidelines are applied on a bank-only basis unless the
parent bank holding company (i) is engaged in nonbank activity involving
significant leverage or (ii) has a significant amount of outstanding debt that
is held by the general public.

         Bank holding companies subject to the Federal Reserve's capital
adequacy guidelines are required to comply with the Federal Reserve's risk-based
capital guidelines. Under these regulations, the minimum ratio of total capital
to risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) is 8%. At least half of the total capital is required
to be "Tier I capital," principally consisting of common stockholders' equity,
non-cumulative perpetual preferred stock, and a limited amount of cumulative
perpetual preferred stock, less certain goodwill items. The remainder ("Tier II
capital") may consist of a limited amount of subordinated debt, certain hybrid
capital instruments and other debt securities, perpetual preferred stock, and a
limited amount of the general loan loss allowance. In addition to the risk-based
capital guidelines, the Federal Reserve has adopted a minimum Tier I capital
(leverage) ratio, under which a bank holding company must maintain a minimum
level of Tier I capital to average total consolidated assets of at least 3% in
the case of a bank holding company which has the highest regulatory examination
rating and is not contemplating significant growth or expansion. All other bank
holding companies are expected to maintain a Tier I capital (leverage) ratio of
at least 1% to 2% above the stated minimum.

         DIVIDEND AND REPURCHASE LIMITATIONS. The Company must obtain Federal
Reserve approval in order to use more than 10% of its net worth to make stock
repurchases during any 12 month period unless the Company (i) both before and
after the redemption satisfies capital requirements for "well capitalized" state
member banks; (ii) received a one or two rating in its last examination; and
(iii) is not the subject of any unresolved supervisory issues. Although the
payment of dividends and repurchase of stock by the Company are subject to the
requirements and limitations of North Carolina corporate law, except as set
forth in this paragraph, neither the Commissioner nor the FDIC have promulgated
any regulations specifically limiting the right of the Company to pay dividends
and repurchase shares. The ability of the Company to pay dividends or repurchase
shares may be dependent upon the Company's receipt of dividends from the Bank.
The Bank's ability to pay dividends is limited.

         CAPITAL MAINTENANCE AGREEMENT. In order to acquire control of the Bank,
the Company was required to execute a capital maintenance agreement whereby it
has agreed to maintain the Bank's capital in an amount sufficient to enable the
Bank to satisfy all regulatory capital requirements.

         FEDERAL SECURITIES LAWS. The Company has registered its common stock
with the Securities Exchange Commission pursuant to Section 12(g) of the
Securities Exchange Act of 1934. As a result of such registration, the proxy and
tender offer rules, insider trading reporting requirements, annual and periodic
reporting and other requirements of the Securities Exchange Act of 1934, as
amended, are applicable to the Company.

         SUPERVISION AND REGULATION OF THE BANK

         The following is a summary of certain statutes and regulations
applicable to the Bank but is not intended to be exhaustive and is qualified in
its entirety by reference to all particular statutory or regulatory provisions.
The business of state savings banks is subject to extensive regulation and
supervision under both federal and state law.

         GENERAL. The Bank is an insured North Carolina-chartered savings bank
that is a member of the Federal Home Loan Bank system. Its deposits are insured
through the Savings Association Insurance Fund of the FDIC, and it is subject to
supervision and examination by and the regulations and reporting requirements of
the FDIC and the Commissioner, which are its primary federal and state banking
regulators respectively.


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         As an insured institution, the Bank is prohibited from engaging as
principal in any activity, or acquiring or retaining any equity investment of a
type or in an amount, that is not permitted for national banks unless (i) the
FDIC determines that the activity or investment would pose no significant risk
to the Savings Association Insurance Fund, and (ii) the Bank is, and continues
to be, in compliance with all applicable capital standards. A savings bank
generally is prohibited from investing more than 15% of its total assets in
business, commercial, corporate and agricultural loans and from directly or
indirectly acquiring or retaining any corporate debt security that is not of
investment grade (generally referred to as "junk bonds").

         Subject to limitation by the Commissioner, North Carolina-chartered
savings banks may make any loan or investment or engage in any activity that is
permitted to federally-chartered institutions. However, a North
Carolina-chartered savings bank cannot invest more than 15% of its total assets
in business, commercial, corporate and agricultural loans. In addition to such
lending authority, North Carolina-chartered savings banks are authorized to
invest funds, in excess of loan demand, in certain statutorily permitted
investments, including but not limited to (i) obligations of the United States,
or those guaranteed by it; (ii) obligations of the State of North Carolina;
(iii) bank demand or time deposits; (iv) stock or obligations of the federal
deposit insurance fund or a Federal Home Loan Bank; (v) savings accounts of any
savings institution as approved by the board of directors; and (vi) stock or
obligations of any agency of the State of North Carolina or of the United States
or of any corporation doing business in North Carolina whose principal business
is to make education loans.

         In addition, the Bank is subject to various regulations promulgated by
the Federal Reserve including, without limitation, Regulation B (Equal Credit
Opportunity), Regulation D (Reserves), Regulation E (Electronic Fund Transfers),
Regulation O (Loans to Executive Officers, Directors and Principal
Shareholders), Regulation Z (Truth in Lending), Regulation CC (Availability of
Funds) and Regulation DD (Truth in Savings).

         The FDIC and the Commissioner have broad powers to enforce laws and
regulations applicable to the Bank. Among others, these powers include the
ability to assess civil money penalties, to issue cease and desist or removal
orders, and to initiate injunctive actions. In general, these enforcement
actions may be initiated in response to violations of laws and regulations and
the conduct of unsafe and unsound practices.

         TRANSACTIONS WITH AFFILIATES. Under current federal law, transactions
between the Bank and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of the Bank is any company or entity that
controls, is controlled by or is under common control with the savings bank. The
Company and the Bank are affiliates of each other. Generally, Sections 23A and
23B (i) limit the extent to which the Bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
the Bank's capital stock and surplus, and contain an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital stock
and surplus and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the Bank or the subsidiary
as those provided to a nonaffiliate. The term "covered transaction" includes the
making of loans or other extensions of credit to an affiliate, the purchase of
assets from an affiliate, the purchase of, or an investment in, the securities
of an affiliate, the acceptance of securities of an affiliate as collateral for
a loan or extension of credit to any person, or issuance of a guarantee,
acceptance or letter of credit on behalf of an affiliate.

         Further, current federal law has extended to savings banks the
restrictions contained in Section 22(h) of the Federal Reserve Act with respect
to loans to directors, executive officers and principal stockholders. Under
Section 22(h), loans to directors, executive officers and stockholders who,
directly or indirectly, own more than 10% of any class of voting securities of a
savings bank, and certain affiliated entities of any of the foregoing, may not
exceed, together with all other outstanding loans to such person and affiliated
entities, the savings bank's loans-to-one borrower limit as established by
federal law (as discussed below). Section 22(h) also prohibits loans above
amounts prescribed by the appropriate federal banking agency to directors,
executive officers or stockholders who own more than 10% of a savings bank, and
their respective affiliates, unless such loan is approved in advance by a
majority of the disinterested directors of the board of directors of the savings
bank and the Company. Any "interested" director may not participate in the
voting. The Federal Reserve has prescribed the loan amount (which includes all
other outstanding loans to such person), as to which such prior board of
director approval is required, as being the greater of $25,000 or 5% of
unimpaired capital and unimpaired surplus (up to $500,000). Further, pursuant to
Section 22(h) the Federal Reserve requires that loans to directors, executive
officers, and principal stockholders be made on terms substantially the same as
offered in comparable transactions to other persons and not involve more than
the normal


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risk of repayment or present other unfavorable features. Section 22(h) also
imposes additional limits on amounts a savings bank can loan to an executive
officer or director.

         FDIC INSURANCE ASSESSMENTS. The Bank is also subject to insurance
assessments imposed by the FDIC. The FDIC currently uses a risk-based assessment
system that takes into account the risks attributable to different categories
and concentrations of assets and liabilities for purposes of calculating deposit
insurance assessments payable by insured depository institutions. The risk-based
assessment system categorizes institutions as "well capitalized," "adequately
capitalized" or "undercapitalized." These three categories are substantially
similar to the prompt corrective action categories (see "-Prompt Corrective
Action"), with the "undercapitalized" category including institutions that are
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized" for prompt corrective action purposes. Institutions also are
assigned by the FDIC to one of three supervisory subgroups within each capital
group. The particular supervisory subgroup to which an institution is assigned
is based on a supervisory evaluation provided to the FDIC by the institution's
primary federal banking regulator and information which the FDIC determines to
be relevant to the institution's financial condition and the risk posed to the
deposit insurance fund. An institution's insurance assessment rate then is
determined based on the capital category and supervisory subgroup to which it is
assigned. Under the risk-based assessment system, there are nine assessment risk
classifications (i.e., combinations of capital groups and supervisory subgroups)
to which different assessment rates (ranging from zero to 31 basis points) are
applied. In addition, the Bank pays premiums assessed against all banks based on
their deposit levels to service debt on bonds issued to recapitalize the deposit
insurance funds.

         An institution's deposit insurance may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe and unsound practices, is in
an unsafe or unsound condition, or has violated any applicable law, regulation,
rule, order, or condition imposed by the FDIC.

         COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act as
implemented by regulations of the FDIC, an insured institution has a continuing
and affirmative obligation consistent with its safe and sound operation to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The Community Reinvestment Act does not establish specific
lending requirements or programs for financial institutions, nor does it limit
an institution's discretion to develop, consistent with the Community
Reinvestment Act, the types of products and services that it believes are best
suited to its particular community. The Community Reinvestment Act requires the
federal banking regulators, in connection with their examinations of insured
institutions, to assess the institutions' records of meeting the credit needs of
their communities, using the ratings of "outstanding," "satisfactory," "needs to
improve," or "substantial noncompliance," and to take that record into account
in its evaluation of certain applications by those institutions. All
institutions are required to make public disclosure of their Community
Reinvestment Act performance ratings. The Bank received a "satisfactory" rating
in its last Community Reinvestment Act examination.

         NET WORTH AND CAPITAL ADEQUACY REQUIREMENTS APPLICABLE TO THE BANK. The
Bank is required to comply with the capital adequacy standards established by
state and federal laws and regulations. The Commissioner requires that savings
banks maintain net worth not less than 5% of its total assets. Intangible assets
must be deducted from net worth and assets when computing compliance with this
requirement. The Bank complied with the net worth requirements as of December
31, 2001.

         In addition, the FDIC has promulgated risk-based capital and leverage
capital guidelines for determining the adequacy of a bank's capital, and all
applicable capital standards must be satisfied for the Bank to be considered in
compliance with the FDIC's requirements. Under the FDIC's risk-based capital
measure, the minimum ratio ("Total Risk-Based Capital Ratio") of a bank's total
capital to its risk-weighted assets (including certain off-balance-sheet items,
such as standby letters of credit) is 8.0%. At least half of total capital must
be composed of common equity, undivided profits, minority interests in the
equity accounts of consolidated subsidiaries, qualifying non-cumulative
perpetual preferred stock, and a limited amount of cumulative perpetual
preferred stock, less goodwill and certain other intangible assets ("Tier 1
Capital"). The remainder may consist of certain subordinated debt, certain
hybrid capital instruments and other qualifying preferred stock, a limited
amount of loan loss reserves, and net unrealized holding gains on equity
securities ("Tier 2 Capital"). At December 31, 2001, the Bank's Total Risk-Based
Capital Ratio and its ratio of Tier 1 Capital to risk-weighted assets ("Tier 1
Risk-Based Capital Ratio") were 18.30% and 18.01%, respectively, which were well
above the FDIC's minimum risk-based capital guidelines.


                                       8
<PAGE>

         Under the FDIC's leverage capital measure, the minimum ratio (the
"Leverage Capital Ratio") of Tier 1 Capital to total assets is 3.0% for banks
that meet certain specified criteria, including having the highest regulatory
rating. All other banks generally are required to maintain an additional cushion
of 100 to 200 basis points above the stated minimum. The FDIC's guidelines also
provide that banks experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
levels without significant reliance on intangible assets, and the FDIC has
indicated that it will consider a bank's "Tangible Leverage Ratio" (deducting
all intangible assets) and other indicia of capital strength in evaluating
proposals for expansion or new activities. At December 31, 2001, the Bank's
Leverage Capital Ratio was 10.09% which was well above the FDIC's minimum
leverage capital guidelines.

         Failure to meet the FDIC's capital guidelines could subject a bank to a
variety of enforcement remedies, including issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on the taking of
brokered deposits, and certain other restrictions on its business. As described
below, substantial additional restrictions can be imposed upon FDIC-insured
depository institutions that fail to meet applicable capital requirements. See
"- Prompt Corrective Action." The FDIC also considers interest rate risk
(arising when the interest rate sensitivity of an institution's assets does not
match the sensitivity of its liabilities or its off-balance-sheet position) in
the evaluation of a bank's capital adequacy. Banks with excessive interest rate
risk exposure may be required to maintain higher levels of capital to protect
them against that exposure.

         LOANS-TO-ONE-BORROWER. The Bank is subject to the Commissioner's
loans-to-one-borrower limits. Under these limits, no loans and extensions of
credit to any borrower outstanding at one time and not fully secured by readily
marketable collateral shall exceed 15% of the net worth of the savings bank.
Loans and extensions of credit fully secured by readily marketable collateral
may comprise an additional 10% of net worth. These limits also authorize savings
banks to make loans-to-one-borrower, for any purpose, in an amount not to exceed
$500,000. A savings bank also is authorized to make loans-to-one-borrower to
develop domestic residential housing units, not to exceed the lesser of $30
million or 30% of the savings bank's net worth, provided that the purchase price
of each single-family dwelling in the development does not exceed $500,000 and
the aggregate amount of loans made pursuant to this authority does not exceed
150% of the savings bank's net worth. These limits also authorize a savings bank
to make loans-to-one-borrower to finance the sale of real property acquired in
satisfaction of debts in an amount up to 50% of the savings bank's net worth.

         As of December 31, 2001, the largest aggregate amount of loans that the
Bank had to any one borrower was $4,070,839. The Bank does not believe that the
loans-to-one-borrower limits will have a significant impact on its business,
operations and earnings.

         LIMITS ON RATES PAID ON DEPOSITS AND BROKERED DEPOSITS. Regulations
promulgated by the FDIC place limitations on the ability of insured depository
institutions to accept, renew or roll-over deposits by offering rates of
interest which are significantly higher than the prevailing rates of interest on
deposits offered by other insured depository institutions in the depository
institution's normal market area. Under these regulations, "well capitalized"
depository institutions may accept, renew or roll-over such deposits without
restriction, "adequately capitalized" depository institutions may accept, renew
or roll-over such deposits with a waiver from the FDIC (subject to certain
restrictions on payments of rates) and "undercapitalized" depository
institutions may not accept, renew, or roll-over such deposits. The regulations
contemplate that the definitions of "well capitalized," "adequately capitalized"
and "undercapitalized" will be the same as the definitions adopted by the FDIC
to implement the corrective action provisions discussed below. See "-Prompt
Corrective Action." As of December 31, 2001, the Bank was considered "well
capitalized," and, thus, was not subject to the limitations on rates payable on
its deposits.

         FEDERAL HOME LOAN BANK SYSTEM. The Federal Home Loan Bank system
provides a central credit facility for member institutions. As a member of the
Federal Home Loan Bank of Atlanta, the Bank is required to own capital stock in
the Federal Home Loan Bank of Atlanta in an amount at least equal to the greater
of 1% of the aggregate principal amount of its unpaid residential mortgage
loans, home purchase contracts and similar obligations at the end of each
calendar year, or 5% of its outstanding advances (borrowings) from the Federal
Home Loan Bank of Atlanta. On December 31, 2001, the Bank was in compliance with
this requirement, with an investment in Federal Home Loan Bank of Atlanta of
$1,348,000.00.


                                       9
<PAGE>

         RESERVE REQUIREMENTS. Pursuant to regulations of the Federal Reserve
Board, all FDIC-insured depository institutions must maintain average daily
reserves against their transaction accounts equal to specified percentages of
the balances of such accounts. These percentages are subject to adjustment by
the Federal Reserve Board. Because the Bank's reserves are required to be
maintained in the form of vault cash or in a non-interest-bearing account at a
Federal Reserve Bank, one effect of the reserve requirement is to reduce the
amount of the Bank's interest-earning assets. At December 31, 2001, the Bank met
FDIC reserve requirements.

         RESTRICTIONS ON ACQUISITIONS. Federal law generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire "control," as that term is defined in FDIC
regulations, of a state savings bank without giving at least 60 days written
notice to the FDIC and providing the FDIC an opportunity to disapprove the
proposed acquisition. Pursuant to regulations governing acquisitions of control,
control of an insured institution is conclusively deemed to have been acquired
by, among other things, the acquisition of more than 25% of any class of voting
stock. In addition, control is presumed to have been acquired, subject to
rebuttal, upon the acquisition of more than 10% of any class of voting stock.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings bank or prejudice the interests of its depositors; or
(iii) the competency, experience or integrity of the acquiring person or the
proposed management personnel indicates that it would not be in the interest of
the depositors or the public to permit the acquisitions of control by such
person.

         LIQUIDITY. The Bank is subject to the liquidity requirements
established by the Commissioner. North Carolina law requires savings banks to
maintain cash and readily marketable investments of not less that 10% of the
savings bank's total assets. The computation of liquidity under North Carolina
regulation allows the inclusion of mortgage-backed securities and investments
that, in the judgment of the Commissioner, have a readily marketable value,
including investments with maturities in excess of five years. On December 31,
2001, the Bank's liquidity ratio, calculated in accordance with North Carolina
regulations, was approximately 14.6%.

         PROMPT CORRECTIVE ACTION. Current federal law establishes a system of
prompt corrective action to resolve the problems of undercapitalized
institutions. Under this system, the FDIC has established five capital
categories ("well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized"). The FDIC
is required to take certain mandatory supervisory actions and is authorized to
take other discretionary actions with respect to institutions in the three
undercapitalized categories. The severity of any action taken will depend upon
the capital category in which an institution is placed. Generally, subject to a
narrow exception, current federal law requires the FDIC to appoint a receiver or
conservator for an institution that is critically undercapitalized.

         Under the FDIC's rules implementing the prompt corrective action
provisions, an insured, state-chartered savings bank that (i) has a Total
Risk-Based Capital Ratio of 10.0% or greater, a Tier 1 Risk-Based Capital Ratio
of 6.0% or greater, and a Leverage Capital Ratio of 5.0% or greater, and (ii) is
not subject to any written agreement, order, capital directive, or prompt
corrective action directive issued by the FDIC, is deemed to be "well
capitalized." A savings bank with a Total Risk-Based Capital Ratio of 8.0% or
greater, a Tier 1 Risk-Based Capital Ratio of 4.0% or greater, and a Leverage
Capital Ratio of 4.0%" or greater, is considered to be "adequately capitalized."
A savings bank that has a Total Risk-Based Capital Ratio of less than 8.0%, a
Tier 1 Risk-Based Capital Ratio of less than 4.0%, or a Leverage Capital Ratio
of less than 4.0%, is considered to be "undercapitalized." A bank that has a
Total Risk-Based Capital Ratio of less than 6.0%, a Tier 1 Risk-Based Capital
Ratio of less than 3.0%, or a Leverage Capital Ratio of less than 3.0%, is
considered to be "significantly undercapitalized," and a savings bank that has a
ratio of tangible equity capital to assets equal to or less than 2.0% is deemed
to be "critically undercapitalized." For purposes of these rules, the term
"tangible equity" includes core capital elements counted as Tier 1 Capital for
purposes of the risk-based capital standards (see "- Net Worth and Capital
Adequacy Requirements of the Bank"), plus the amount of outstanding cumulative
perpetual preferred stock (including related surplus), minus all intangible
assets (with certain exceptions). A savings bank may be deemed to be in a
capitalization category lower than indicated by its actual capital position if
it receives an unsatisfactory examination rating.

         A savings bank that is categorized as "undercapitalized,"
"significantly undercapitalized," or "critically undercapitalized," is required
to submit an acceptable capital restoration plan to the FDIC. An
"undercapitalized"


                                       10
<PAGE>

savings bank also is generally prohibited from increasing its average total
assets, making acquisitions, establishing any branches, or engaging in any new
line of business, except in accordance with an accepted capital restoration plan
or with the approval of the FDIC. In addition, the FDIC is given authority with
respect to any "undercapitalized" savings bank to take any of the actions it is
required to or may take with respect to a "significantly undercapitalized"
savings bank if it determines that those actions are necessary to carry out the
purpose of the law.

         At December 31, 2001, the Bank had the requisite capital levels to
qualify as "well capitalized."

         INTERSTATE BANKING. The Bank Holding Company Act, as amended by the
interstate banking provisions of the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994, permits adequately capitalized and managed
bank holding companies to acquire control of the assets of banks in any state.
Acquisitions are subject to antitrust provisions that cap at 10% the portion of
the total deposits of insured depository institutions in the United States that
a single bank holding company may control and generally cap at 30% the portion
of the total deposits of insured depository institutions in a state that a
single bank holding company may control. Under certain circumstances, states
have the authority to increase or decrease the 30% cap, and states may set
minimum age requirements of up to five years on target banks within their
borders.

         Subject to certain conditions and the states' right to opt out of
certain provisions, the interstate banking laws also permit interstate branching
by allowing a bank in one state to merge with a bank located in a different
state. Each state was allowed to accelerate the effective date for interstate
mergers by adopting a law authorizing merger transactions prior to June 1, 1997,
or it could "opt out" and thereby prohibit interstate branching by enacting
legislation to that effect prior to that date. The interstate banking laws also
permit banks to establish branches in other states by opening new branches or
acquiring existing branches of other banks, provided the laws of those other
states specifically permit that form of interstate branching. North Carolina has
adopted statutes that, under certain conditions, authorize out-of-state bank
holding companies and banks to acquire or merge with North Carolina banks and to
establish or acquire branches in North Carolina.

         RESTRICTIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. A North
Carolina-chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal and state regulations.

         In addition, the Bank is not permitted to declare or pay a cash
dividend or repurchase any of its capital stock if the effect thereof would be
to cause its net worth to be reduced below the amount required for the
liquidation account established in connection with the Bank's mutual to stock
conversion.

         OTHER FEDERAL AND NORTH CAROLINA REGULATIONS. The federal banking
agencies, including the FDIC, have developed joint regulations requiring
disclosure of contingent assets and liabilities and, to the extent feasible and
practicable, supplemental disclosure of the estimated fair market value of
assets and liabilities. Additional joint regulations require annual examinations
of all insured depository institutions by the appropriate federal banking
agency, with some exceptions for small, well-capitalized institutions and
state-chartered institutions examined by state regulators, and establish
operational and managerial, asset quality, earnings and stock valuation
standards for insured depository institutions, as well as compensation standards
when such compensation would endanger the insured depository institution or
would constitute an unsafe practice.

         The grounds for appointment of a conservator or receiver for a North
Carolina savings bank on the basis of an institution's financial condition
include: (i) insolvency, in that the assets of the savings bank are less than
its liabilities to depositors and others; (ii) substantial dissipation of assets
or earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the savings bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business; and (v)
insufficient capital or the incurring or likely incurring of losses that will
deplete substantially all of the institution's capital with no reasonable
prospect of replenishment of capital without federal assistance.

         North Carolina law provides a procedure by which savings institutions
may consolidate or merge, subject


                                       11
<PAGE>

to approval of the Commissioner. The approval is conditioned upon findings by
the Commissioner that, among other things, such merger or consolidation will
promote the best interests of the members or stockholders of the merging
institutions. North Carolina law also provides for simultaneous mergers and
conversions and for supervisory mergers conducted by the Administrator.

         FUTURE REQUIREMENTS. Statutes and regulations that contain wide-ranging
proposals for altering the structures, regulations and competitive relationships
of financial institutions are introduced regularly. Neither the Company nor the
Bank can predict whether or in what form any proposed statute or regulation will
be adopted or the extent to which the business of the Company and the Bank may
be affected by such statute or regulation.

ITEM 2. DESCRIPTION OF PROPERTY

PROPERTIES

         The following table sets forth the location of the Bank's principal
office in Albemarle, North Carolina and its full service branch office in
Locust, North Carolina, as well as certain other information relating to these
offices as of December 31, 2001. The Bank owns both the Albemarle and Locust
offices. The Bank also owns two vacant lots which are adjacent to its Albemarle
office and a lot in Oakboro, but has no plans for these lots at the present
time.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                                               NET BOOK VALUE
                       ADDRESS                                   OF PROPERTY                     DEPOSITS

--------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>                              <C>
Albemarle:
  155 West South Street                                          $  609,224                    $134,068,000
  Albemarle, North Carolina 28001

--------------------------------------------------------------------------------------------------------------------
  Two (2) Vacant Lots
  South Second Street                                            $   32,667                    $          0
  Albemarle, North Carolina 28001

--------------------------------------------------------------------------------------------------------------------
Locust:
  406 West Main Street                                           $  207,010                    $ 33,534,000
  Locust, North Carolina 28097

--------------------------------------------------------------------------------------------------------------------
Oakboro:
  Highway 205                                                    $  273,483                    $          0
  Oakboro, North Carolina 28129

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

Totals                                                           $1,122,384                    $167,602,000

--------------------------------------------------------------------------------------------------------------------
</TABLE>

         The Bank's management considers the property to be in good condition
and is of the opinion that it is adequately covered by insurance. The total net
book value of the Bank's furniture, fixtures and equipment on December 31, 2001
was $275,000. Any property acquired as a result of foreclosure or by deed in
lieu of foreclosure is classified as real estate owned until such time as it is
sold or otherwise disposed of by the Bank to recover its investment. As of
December 31, 2001, the Bank had recorded $18,000 for real estate acquired in
settlement of loans.

ITEM 3. LEGAL PROCEEDINGS

         On or about March 6, 2000, the Office of the United States Attorney for
the Middle District of North Carolina filed an in rem civil forfeiture action
against a piece of real property upon which the Bank has a security interest. On
February 7, 2001, the Bank received a copy of the Verified Complaint of
Forfeiture filed by the United


                                       12
<PAGE>

States. On February 20, 2001, the Bank filed a Verified Claim as an "innocent
owner" of the property within the meaning of 18 U.S.C. ss. 983(d). The Bank
intends to pursue its interests in the subject property as an innocent mortgagee
to the fullest extent possible under the law. The value of the security interest
is approximately $26,000.

         In the opinion of management, neither the Company nor the Bank is
involved in any other pending legal proceedings other than routine, non-material
proceedings occurring in the ordinary course of business.

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

         No matter was submitted to a vote of the Company's stockholders during
the quarter ended December 31, 2001.

                                     PART II

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

         See the information under the section captioned "Common Stock
Information" on page 46 in the Company's 2001 Annual Report, which section is
incorporated herein by reference. See "Item 1. DESCRIPTION OF
BUSINESS--Supervision and Regulation of the Bank--Restrictions on Dividends and
Other Capital Distributions" above for regulatory restrictions that limit the
ability of the Bank to pay dividends to the Company.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATION

         The table below sets forth certain performance ratios for the Company
for the periods indicated.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                                               Year Ended                    Year Ended
                                                               December 31                  September 30
--------------------------------------------------------------------------------------------------------------------
                                                      2001        2000        1999        1998        1997
                                                     ------      ------      ------      ------      ------
--------------------------------------------------------------------------------------------------------------------

<S>                                                  <C>         <C>         <C>         <C>         <C>
Return on Average Assets (Net income divided
   by average total assets)                            0.47%       0.39%       0.15%       0.35%       1.24%

--------------------------------------------------------------------------------------------------------------------
Return on Average Equity (Net income divided
   by average shareholders' equity                     4.22%       2.94%       0.96%       1.89%       4.70%

--------------------------------------------------------------------------------------------------------------------
Average Equity to Average Assets Ratio
   (Average shareholders' equity divided by
   average total assets)                              11.24%      13.12%      16.12%      18.43%      26.40%

--------------------------------------------------------------------------------------------------------------------
Interest Rate Spread for the Period                    2.39%       2.39%       2.48%       1.97%       2.02%

--------------------------------------------------------------------------------------------------------------------
Average Interest-Earning Assets to Average
   Interest-Bearing Liabilities                      110.92%     115.11%     118.68%     123.10%     136.08%

--------------------------------------------------------------------------------------------------------------------
Net Interest Margin                                    2.88%       3.07%       3.24%       2.98%       3.46%

--------------------------------------------------------------------------------------------------------------------
Loan Loss Allowance to Nonperforming Assets
   at Period End                                      55.82%      93.87%     222.23%     135.76%      81.25%

--------------------------------------------------------------------------------------------------------------------
</TABLE>

         See also the information set forth under Item 1 above and the
information set forth under the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operation" on pages 3 through 10
in the Company's 2001 Annual Report which section is incorporated herein by
reference.


                                       13
<PAGE>

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The consolidated financial statements of the Company and supplementary
data set forth on pages 12 through 17 of the Company's 2001 Annual Report are
incorporated herein by reference.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

         As of February 21, 2001, Dixon Odom PLLC was engaged as the Bank's new
independent auditor. Prior to that time, McGladrey & Pullen, LLP ("M&P") served
as the Bank's independent auditor. The decision to change independent auditors
was made by the Company's Audit Committee after soliciting bids on the Company's
auditing work from accounting firms and was approved by the Board of Directors.
M&P's report on the Bank's financial statements for the fiscal years ended
September 30, 1998, September 30, 1999, and December 31, 2000 did not contain an
adverse opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or procedure which, if not resolved to the satisfaction
of the auditor, would have caused it to make reference to the subject of such
disagreement in connection with its reports. During its three most recent fiscal
years, the Bank has not consulted Dixon Odom PLLC with regard to either (i)
application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
the Bank's financial statements, or (ii) any matter that was either the subject
of a disagreement or reportable event.

         The Board of Directors of the Bank has selected Dixon Odom PLLC as
independent certified public accountants to audit the financial statements of
the Bank for the fiscal year ending December 31, 2002. Such selection is being
submitted to the Company's stockholders for ratification.

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(A) OF THE EXCHANGE ACT

         The information required by this Item regarding directors, executive
officers, promoters and control persons of the Company is set forth under the
sections of the Proxy Statement captioned "Proposal 1 - Election of Directors -
General" of the Proxy Statement and "Proposal 1 - Election of Directors -
Executive Officers," which sections are incorporated herein by reference.

         The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 is set forth under the Proxy
Statement section captioned "Section 16(a) Beneficial Ownership Reporting
Compliance," which is incorporated herein by reference.

ITEM 10. EXECUTIVE COMPENSATION

         The information required by this Item is set forth under the Proxy
Statement sections captioned "Proposal 1 - Election of Directors - Directors'
Compensation" and " - Executive Compensation," which sections are incorporated
herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by this Item is incorporated by reference from
the Proxy Statement section captioned "Security Ownership of Certain Beneficial
Owners."

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         There have been no reportable transactions during the two most recent
fiscal years nor are any reportable transactions proposed as of the date of this
Form 10-KSB. See also the Proxy Statement section captioned "Proposal


                                       14
<PAGE>

1 - Election of Directors - Certain Indebtedness and Transactions of
Management," which section is incorporated herein by reference.

                                     PART IV

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

13(a)    Consolidated Financial Statements (contained in the Bank's 2001 Annual
         Report attached hereto as Exhibit (13) and incorporated herein by
         reference)

         (a)      Independent Auditor's Report

         (b)      Statements of Financial Condition as of December 31, 2001,
                  2000 and 1999

         (c)      Statements of Income and Comprehensive Income for the Years
                  Ended December 31, 2001, 2000, September 30, 1999, and three
                  months ended December 31, 1999

         (d)      Statements of Stockholders' Equity for the Years Ended
                  December 31, 2001, 2000, and September 30, 1999, and three
                  months ended December 31, 1999

         (e)      Statements of Cash Flows for the Years Ended December 31,
                  2001, 2000, and September 30, 1999, and three months ended
                  December 31, 1999

         (f)      Notes to Consolidated Financial Statements

13(b)    Exhibits

         Exhibit (3)(i)             Certificate of Incorporation, incorporated
                                    herein by reference to Exhibit (3)(i) to the
                                    Registration Statement on Form S-1,
                                    Registration No. 333-04509, dated May 24,
                                    1996, and amended on July 25, 1996

         Exhibit (3)(ii)            Bylaws, incorporated herein by reference to
                                    Exhibit (3)(ii) to the Registration
                                    Statement on Form S-1, Registration No.
                                    333-04509, dated May 24, 1996, and amended
                                    on July 25, 1996

         Exhibit (4)                Specimen Stock Certificate, incorporated
                                    herein by reference to Exhibit (4) to the
                                    Registration Statement on Form S-1,
                                    Registration No. 333-04509, dated May 24,
                                    1996, and amended on July 25, 1996

         Exhibit (10)(i)            Employment Agreement between Carl M. Hill
                                    and Home Savings Bank of Albemarle, Inc.,
                                    S.S.B., incorporated herein by reference to
                                    the Form 10-K dated September 30, 1996

         Exhibit (10)(ii)           Employment Agreement between R. Ronald
                                    Swanner and Home Savings Bank of Albemarle,
                                    Inc., S.S.B., incorporated herein by
                                    reference to the Form 10-K dated September
                                    30, 1996

         Exhibit (10)(iii)          1985 Retirement Payment Agreements with Carl
                                    M. Hill, R. Ronald Swanner, Caldwell A.
                                    Holbrook, Jr. and Joel A. Huneycutt,
                                    incorporated herein by reference to the Form
                                    10-K dated September 30, 1996

         Exhibit (10)(v)            1995 Retirement Payment Agreements with Carl
                                    M. Hill, R. Ronald Swanner, Caldwell A.
                                    Holbrook, Jr., Joel A. Huneycutt, Douglas


                                       15
<PAGE>

                                    Dwight Stokes and Greg E. Underwood,
                                    incorporated herein by reference to the Form
                                    10-K dated September 30, 1996

         Exhibit (10)(vi)           Directors Retirement Plan Agreements with
                                    Carl M. Hill, R. Ronald Swanner, Caldwell A.
                                    Holbrook, Jr., Joel A. Huneycutt, Douglas
                                    Dwight Stokes and Greg E. Underwood,
                                    incorporated herein by reference to the Form
                                    10-K dated September 30, 1996

         Exhibit (10)(vii)          1985 Supplemental Income Agreements with
                                    Carl M. Hill and R. Ronald Swanner,
                                    incorporated herein by reference to the Form
                                    10-K dated September 30, 1996

         Exhibit (10)(viii)         1995 Supplemental Income Agreements with
                                    Carl M. Hill and R. Ronald Swanner,
                                    incorporated herein by reference to the Form
                                    10-K dated September 30, 1996

         Exhibit (10)(ix)           South Street Financial Corp. Stock Option
                                    Plan, incorporated herein by reference to
                                    the Form 10-K dated September 30, 1997

         Exhibit (10)(x)            Home Savings Bank of Albemarle, Inc., SSB
                                    Management Recognition Plan and Trust
                                    Agreement, incorporated herein by reference
                                    to the Form 10-K dated September 30, 1997

         Exhibit (11)               Statement Regarding Computation of Per
                                    Share Earnings

         Exhibit (13)               Portions of the 2001 Annual Report to
                                    Stockholders (excluding page 2, the Report
                                    to Stockholders)

         Exhibit (13)(b)            No reports on Form 8-K were filed during the
                                    last quarter of the period covered by this
                                    report.

         Exhibit (16)               Report on change in certifying accountant,
                                    incorporated herein by reference to the Form
                                    8-Ks dated February 23, 2001 and March 6,
                                    2001.

         Exhibit (21)               See "Item 1. Description of Business" for
                                    discussion of subsidiaries

         Exhibit (23)(i)            Consent of Independent Certified Public
                                    Accountants

         Exhibit (23)(ii)           Consent of former Independent Certified
                                    Public Accountants

         Exhibit (99)               Independent Auditor's Report by McGladrey &
                                    Pullen, LLP


                                       16
<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                       SOUTH STREET FINANCIAL CORP.



Date:  March 19, 2002                  By:  /s/ Carl M.  Hill
                                          -------------------------------------
                                          Carl M.  Hill
                                          President and Chief Executive Officer

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

<TABLE>
<CAPTION>
Signature                                                    Title                                             Date
---------                                                    -----                                             ----
<S>                                                  <C>                                                   <C>



/s/ Carl M. Hill                                     President, Chief Executive                            March 18, 2002
----------------------------------------             Officer and Director
Carl M.  Hill



/s/ R. Ronald Swanner                                Executive Vice President,                             March 18, 2002
----------------------------------------             Secretary and Director
R.  Ronald Swanner



/s/ Christopher F. Cranford                          Controller and Treasurer                              March 18, 2002
----------------------------------------
Christopher F. Cranford



/s/ Caldwell A. Holbrook,                            Director                                              March 18, 2002
----------------------------------------
Caldwell A. Holbrook, Jr.



/s/ Joel A. Huneycutt                                Director                                              March 18, 2002
----------------------------------------
Joel A. Huneycutt



/s/ Douglas Dwight Stokes                            Director                                              March 18, 2002
----------------------------------------
Douglas Dwight Stokes



/s/ Greg E. Underwood                                Director                                              March 18, 2002
----------------------------------------
Greg E. Underwood
</TABLE>


                                       17
<PAGE>

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit No.                                    Description
-----------                                    -----------
<S>                        <C>
Exhibit (11)               Statement Regarding Computation of Per Share Earnings

Exhibit (13)               2001 Annual Report (excluding page 2, the Report to Stockholders)

Exhibit (23)(i)            Consent of Independent Certified Public Accountants

Exhibit (23)(ii)           Consent of McGladrey & Pullen, LLP

Exhibit (99)               Independent Auditor's Report by McGladrey & Pullen, LLP
</TABLE>


                                       18