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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB



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ANNUAL REPORT UNDER SECTION 13 OR
15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the fiscal year ended: December 31, 2003



Commission file number: 0-21083



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SOUTH STREET FINANCIAL CORP.

(Name of Small Business Issuer in its Charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|North Carolina                                                 |  | 56-1973261                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|155 West South Street Albemarle, North Carolina                |  | 28001                               
|(Address of principal executive office)                        |  | (Zip Code)                          



Issuers
telephone number, including area code: (704) 982-9184



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Securities Registered Under Section 12(b) of the Act: None



Securities Registered Under Section 12(g) of the Act:



Common Stock, no par value

(Title of class)



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Check whether the issuer: (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ̈



Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will 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 issuers revenues for its most recent fiscal year. $12,285,000, based on the sum of total interest income and total non-interest income for fiscal year 2003.



State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to
the price at which the common equity was sold, or the average bid and asked prices of a specified date within the past 60 days. $32,307,805 based on the closing price of such common stock on March 22, 2004, which was $10.49 per share.



State the number of shares outstanding of each of the
registrants classes of common equity, as of the latest practicable date. 3,079,867 shares of common stock, outstanding at March 22, 2004.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the Annual Report to stockholders of South Street Financial Corp. for the year ended December 31, 2003 (2003 Annual Report), are
incorporated by reference into Part I, Part II and Part III.



Portions of the Proxy Statement for the 2004 Annual Meeting of Stockholders of South Street Financial Corp. to be held on May 17, 2004, are incorporated by reference into Part III.



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This report contains certain forward-looking statements with respect to the financial condition, results of operations
and business of the Bank. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Bank and on the information available to management at the time that these disclosures were
prepared. These statements can be identified by the use of words like expect, anticipate, estimate and believe, variations of these words and other similar expressions. Readers should not place undue
reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not
limited to, (1) competition in the Banks markets, (2) changes in the interest rate environment, (3) general national, regional or local economic conditions may be less favorable than expected, resulting in, among other things, a deterioration
in credit quality and the possible impairment of collectibility of loans, (4) legislative or regulatory changes, including changes in accounting standards, (5) significant changes in the federal and state legal and regulatory environment and tax
laws, (6) the impact of changes in monetary and fiscal policies, laws, rules and regulations and (7) other risks and factors identified in the Banks other filings with the Federal Deposit Insurance Corporation. The Bank undertakes no
obligation to update any forward-looking statements.



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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 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 real estate located within the city
limits of Albemarle, North Carolina, for the purpose of developing the property into a residential subdivision. During 2000, the Bank purchased all of the developers interest in the property.



As of December 31, 2003, sixteen 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.



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At December 31, 2003, the Company had total assets of $219.9 million, net loans of $143.3 million,
deposits of $181.1 million, investment securities of $20.2 million and stockholders equity of $25.6 million.



At December 31, 2003, the Company and the Bank had a total of 41 employees, all of whom are full-time.



Subsidiaries



The Company has no subsidiaries other than the Bank. The Bank has a wholly owned subsidiary, South Street Development Corp.
(SSDC), which was formed in 1998 with a $1.8 million cash investment. SSDC is currently the 100% owner of a premier residential subdivision. In June 1998, SSDC and Park Ridge Associates, L.L.C. (Park Ridge) acquired 25.6
acres of prime real estate located within the city limits of Albemarle, North Carolina. Park Ridge acquired the real estate to develop it into a residential subdivision. During 2000, the Bank purchased all of Park Ridges interest in the
property. Park Ridge is currently a wholly owned subsidiary of SSDC.



The upscale subdivision consists of 30 building lots of which 3 have been retained by the sellers and 13 have been sold to buyers. The project has now been completed. The Bank has recognized $315,247 in net gains on the sale of real
estate since the inception of the project. 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.



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, 2003, there
were at least 7 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, 2003, the Bank had a deposit market share of approximately
25% in Stanly County, which was the highest in the 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 58,900. Its economy is diversified among manufacturing, trade and services. Major area employers include Collins and Aikman Corporation, Michelin Aircraft Tire Company, Oakwood Homes, Stanly County and Stanly Memorial
Hospital. Within the past five years, several large manufacturing companies have closed operations in Stanly County, resulting in a significant loss of jobs.



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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.



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 some of the basic statutes and regulations that apply to the Company and Bank, but it is not a complete discussion of all the laws that affect the Companys and Banks
business.



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 BHCA, the Company is subject to certain regulations of the Federal Reserve. Under the BHCA, 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 that the Federal Reserve determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The BHCA 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 BHCA 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 BHCA 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 stockholder 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



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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 BHCA 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 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.



Gramm-Leach-Bliley Act



The federal Gramm-Leach-Bliley Act enacted in 1999 (the GLB Act) dramatically changed various federal laws
governing the banking, securities and insurance industries. The GLB Act has expanded opportunities for banks and bank holding companies to provide services and engage in other revenue-generating activities that previously were prohibited to them.
However, this expanded authority also may present us with new challenges as our larger competitors are able to expand their services and products into areas that are not feasible for smaller, community oriented financial institutions. The GLB Act
likely will have a significant economic impact on the banking industry and on competitive conditions in the financial services industry generally.



USA Patriot Act of 2001



The USA Patriot Act of 2001 was enacted in response to the terrorist attacks that occurred in New York, Pennsylvania and Washington, D.C. on September 11,
2001. The Act is intended to strengthen the ability of U.S. law enforcement and the intelligence community to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Act on financial institutions of all kinds is
significant and wide ranging. The Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including standards for verifying customer identification at account opening, and rules to promote
cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.



Sarbanes-Oxley Act of 2002



On July 30, 2002, the Sarbanes-Oxley Act of 2002 was signed into law and became some of the most sweeping federal legislation addressing accounting,
corporate governance and disclosure issues. The impact of the Sarbanes-Oxley Act is wide-ranging as it applies to all public companies and imposes significant new requirements for public company governance and disclosure requirements. Some of the
provisions of the Sarbanes-Oxley Act became effective immediately while others will be implemented over the coming months.



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In general, the Sarbanes-Oxley Act mandates important new corporate governance and financial reporting
requirements intended to enhance the accuracy and transparency of public companies reported financial results. It establishes new responsibilities for corporate chief executive officers, chief financial officers and audit committees in the
financial reporting process and creates a new regulatory body to oversee auditors of public companies. It backs these requirements with new SEC enforcement tools, increases criminal penalties for federal mail, wire and securities fraud, and creates
new criminal penalties for document and record destruction in connection with federal investigations. It also increases the opportunity for more private litigation by lengthening the statute of limitations for securities fraud claims and providing
new federal corporate whistleblower protection.



The economic
and operational effects of this new legislation on public companies, including us, will be significant in terms of the time, resources and costs associated with complying with the new law. Because the Sarbanes-Oxley Act, for the most part, applies
equally to larger and smaller public companies, we will be presented with additional challenges as a smaller, community-oriented financial institution seeking to compete with larger financial institutions in our market.



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 under
which 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 SEC 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.



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Supervision and Regulation of the Bank



General. The Bank is an insured North Carolina-chartered savings bank
that is a member of the FHLB 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.



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 FHLB; (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 Stockholders), Regulation W (Transactions Between Member Banks and Affiliates), 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. The Company and Bank are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places
limits on the amount of:



| |  | a banks loans or extensions of credit to, or investment in, its affiliates;
| | - | ----------------------------------------------------------------------------



| |  | assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve Board;
| | - | ------------------------------------------------------------------------------------------------------------------------



| |  | the amount of loans or extensions of credit by a bank to third parties which are collateralized by the securities or obligations of the banks affiliates; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a banks guarantee, acceptance or letter of credit issued on behalf of one of its affiliates.
| | - | ---------------------------------------------------------------------------------------------



The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a banks capital
and surplus and, as to all affiliates combined, to 20% of a banks capital and surplus. In



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addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified
collateral requirements. The Company must also comply with other provisions designed to avoid the taking of low-quality assets from an affiliate.



The Company is also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibits a bank from engaging in the
above transactions with its affiliates unless the transactions are on terms substantially the same, or at least as favorable to the bank or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.



Federal law also places restrictions on our ability to extend
credit to our executive officers, directors, principal stockholders and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with unrelated third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features.



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.



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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, 2003.



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, 2003, 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 18.49% and 18.07%, respectively, which were well above the FDICs
minimum risk-based capital guidelines.



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, 2003, the Banks Leverage Capital Ratio was 10.45%, 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.



10



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As of December 31, 2003, the largest aggregate amount of loans that the Bank had to any one borrower was
$3,751,959. 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 enacted 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, 2003, 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 FHLB system provides a central
credit facility for member institutions. As a member of the FHLB of Atlanta, the Bank is required to own capital stock in the FHLB 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 FHLB of Atlanta. On December 31, 2003, the Bank was in compliance with this
requirement, with an investment in FHLB of Atlanta of $1,492,000.



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, 2003, 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, 2003,
the Banks liquidity ratio, calculated in accordance with North Carolina regulations, was approximately 25.27%.



11



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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 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, 2003, the Bank had the requisite
capital levels to qualify as well capitalized.



Interstate Banking. The BHCA, 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.



12



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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 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.



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 and other Bank-owned property as of December 31, 2003.



The Bank owns both the Albemarle and Locust offices. The Bank also owns two vacant lots, which are adjacent to its Albemarle
office, in addition to a lot in Oakboro, but has no plans for these lots at the present time. The Bank has purchased an office building adjacent to its Albemarle office, which is



13



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currently being leased to tenants. There are no immediate plans for the office building, but it may be utilized for
future Bank expansion. The Bank has purchased 1.84 acres on NC Hwy 740-Northeast Connector within the city limits of Albemarle. The property is a potential site for a new Bank branch. Finally, the Bank has purchased three lots at 110 and 112 N.
Central Avenue in Locust, North Carolina.



|                                                                             |  |                            |          
|---------------------------------------------------------------------------- |  | -------------------------- | ---------
|Address                                                                      |  | Net Book Value Of Property
|                                                                             | 
|Albemarle:                                                                   |  |                            |          
|155 West South Street Albemarle, North Carolina 28001                        |  | $                          | 633,438  
|                                                                             | 
|Two (2) Vacant Lots South Second Street Albemarle, North Carolina 28001      |  | $                          | 26,378   
|                                                                             | 
|115 & 117 West South Street Albemarle, North Carolina 28001                  |  | $                          | 554,903  
|                                                                             | 
|1.84 acres on NC Hwy 740 Northeast Connector Albemarle, North Carolina 28001 |  | $                          | 375,293  
|                                                                             | 
|Locust:                                                                      |  |                            |          
|406 West Main Street Locust, North Carolina 28097                            |  | $                          | 164,969  
|                                                                             | 
|110 & 112 N. Central Avenue Locust, North Carolina 28097                     |  | $                          | 308,275  
|                                                                             | 
|Oakboro:                                                                     |  |                            |          
|Highway 205 Oakboro, North Carolina 28129                                    |  | $                          | 273,483  
|                                                                             | 
|Totals                                                                       |  | $                          | 2,336,739



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, 2003 was $206,655. 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, 2003, the Bank had recorded
$689,979 for real estate acquired in settlement of loans.



ITEM 3. LEGAL
PROCEEDINGS



In the opinion of management, neither the
Company nor the Bank is involved in any 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 fourth quarter of the fiscal year ended
December 31, 2003.



14



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PART II



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



Market Information/Holders/Dividends. See the information under the section captioned Common Stock
Information on page 46 in the Companys 2003 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.



|                                                                                                      |  |                        |   |  |        |   |  |        |  
|----------------------------------------------------------------------------------------------------- |  | ---------------------- | - |  | ------ | - |  | ------ | -
|                                                                                                      |  | Year Ended December 31 |  
|                                                                                                      |  | 2003                   |   |  | 2002   |   |  | 2001   |  
|Return on Average Assets (Net income divided By average total assets)                                 |  | 0.56                   | % |  | 0.48   | % |  | 0.47   | %
|                                                                                                      |  |                        |  
|Return on Average Equity (Net income divided By average stockholders equity                          |  | 4.92                   | % |  | 4.31   | % |  | 4.22   | %
|                                                                                                      |  |                        |  
|Average Equity to Average Assets Ratio (Average stockholders equity divided by average total assets) |  | 11.43                  | % |  | 11.22  | % |  | 11.24  | %
|                                                                                                      |  |                        |  
|Interest Rate Spread for the Period                                                                   |  | 2.84                   | % |  | 2.95   | % |  | 2.34   | %
|                                                                                                      |  |                        |  
|Average Interest-Earning Assets to Average Interest-Bearing Liabilities                               |  | 107.95                 | % |  | 110.78 | % |  | 110.92 | %
|                                                                                                      |  |                        |  
|Net Interest Margin                                                                                   |  | 3.04                   | % |  | 3.31   | % |  | 2.83   | %
|                                                                                                      |  |                        |  
|Loan Loss Allowance to Nonperforming Assets at Period End                                             |  | 78.08                  | % |  | 40.42  | % |  | 57.16  | %



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 4 through 11 in the Companys 2003
Annual Report, which section is incorporated herein by reference. Certain amounts in the 2002 financial statements have been reclassified to conform to the 2003 presentation. While the reclassification changed certain percentages in the 2002 column
as compared to previous reports, the reclassifications had no effect on net income or stockholders equity as previously reported.



Risks Associated with the Bank and the Company



Concentration of Operations. The Banks operations are concentrated in Stanly County, North Carolina. As a result of this geographic
concentration, the Banks results may correlate to the economic conditions in these areas. A deterioration in economic conditions in any of this market area, particularly in the industries on which this area depends, may adversely affect the
quality of the Banks loan portfolio and the demand for the Banks products and services, and accordingly, its results of operations.



15



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Risks Associated with Loans. A significant source of risk for the Bank arises from the possibility
that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loans. The Bank has underwriting and credit monitoring procedures and credit policies, including the
establishment and review of the allowance for loan losses, that management believes are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying the Banks loan portfolio. Such
policies and procedures, however, may not prevent unexpected losses that could adversely affect results of operations.



Competition with Larger Financial Institutions. The banking and financial services business in the Banks market area continues to be a
competitive field and is becoming more competitive as a result of:



| |  | Changes in regulations;
| | - | -----------------------



| |  | Changes in technology and product delivery systems; and
| | - | -------------------------------------------------------



| |  | The accelerating pace of consolidation among financial services providers.
| | - | --------------------------------------------------------------------------



It may be difficult to compete effectively in the Banks market, and results of operations could be adversely affected by the nature or pace of
change in competition. The Bank competes for loans, deposits and customers with various bank and nonbank financial services providers, many of which are much larger in total assets and capitalization, have greater access to capital markets and offer
a broader array of financial services.



Trading Volume.
The trading volume in the Companys common stock on the Nasdaq National Market System (Nasdaq) has been comparable to other similarly sized banks and companies trading on the Nasdaq. Nevertheless, this trading is relatively low when
compared with more seasoned companies listed on the Nasdaq, the New York Stock Exchange, or other consolidated reporting systems or stock exchanges. The market in the Banks common stock may be limited in scope relative to other companies. The
Company cannot guarantee that a more active and liquid trading market for the Companys common stock will develop in the future.



Technological Advances. The banking industry is undergoing technological changes with frequent introductions of new technology-driven products and
services. In addition to improving customer services, the effective use of technology increases efficiency and enables financial institutions to reduce costs. The Banks future success will depend, in part, on its ability to address the needs
of its customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in the Banks operations. Many of our competitors have substantially greater
resources than the Company and the Bank have to invest in technological improvements.



Government Regulations. Current and future legislation and the policies established by federal and state regulatory authorities will affect the Banks operations. The Bank is subject to supervision and
periodic examination by the FDIC and the Commissioner. Banking regulations, designed primarily for the protection of depositors, may limit the Banks growth and the return to our stockholders by restricting certain of the Banks
activities, such as:



| |  | The payment of dividends to the Banks stockholders;
| | - | ----------------------------------------------------



| |  | Possible mergers with or acquisitions of or by other institutions;
| | - | ------------------------------------------------------------------



| |  | Investment policies;
| | - | --------------------



| |  | Loans and interest rates on loans;
| | - | ----------------------------------



| |  | Interest rates paid on deposits;
| | - | --------------------------------



| |  | Expansion of branch offices; and/or
| | - | -----------------------------------



| |  | The possibility to provide or expand securities or trust services.
| | - | ------------------------------------------------------------------



16



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The Bank cannot predict what changes, if any, will be made to existing federal and state legislation and
regulations or the effect that any changes may have on future business and earnings prospects. The cost of compliance with regulatory requirements may adversely affect the Banks ability to operate profitably. The enactment of the
Sarbanes-Oxley Act, and the related rules and regulations enacted by the SEC, have resulted in a significant increase in audit and legal fees.



ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



The consolidated financial statements and notes to the financial statements of the Company set forth on pages 13 through 44 of the Companys 2003
Annual Report are incorporated herein by reference.



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



Not applicable.



ITEM 8A. CONTROLS AND
PROCEDURES



The Companys management, under the
supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively), has concluded based on its evaluation as of the end
of the period covered by this Report, that the Companys disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the
Company in such reports is accumulated and communicated to the Company s management, including the Chief Executive Officer and the Chief Financial Officer of the Company, as appropriate to allow timely decisions regarding required disclosure.



There have been no significant changes in internal control
over financial reporting during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



PART III



ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE ISSUER



(a) Directors and Executive Officers - 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 and Proposal 1- Election of Directors - Executive Officers, which
sections are incorporated herein by reference.



(b) Section
16(a) Compliance - 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.



(c) Audit Committee Financial Expert - The Board of Directors of the Bank has determined that Greg E. Underwood, Chairman of the Audit Committee, qualifies as an audit committee financial expert and is
independent as defined under applicable SEC and NASD rules and regulations.



(d) Code of Ethics - The Company has adopted a Code of Business Conduct and Ethics that is applicable to all of its directors, officers and employees, including its principal executive and senior financial
officers, as required by Section 406 of the Sarbanes-Oxley Act of 2002 and applicable SEC rules. A copy of the Companys Code of Business Conduct and Ethics adopted by the Companys Board of Directors is attached as Exhibit 14.



17



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In the event that the Company makes any amendment to, or grants any waivers of, a provision of its Code
of Business Conduct and Ethics that applies to the principal executive or financial officer that requires disclosure under applicable SEC rules, the Company intends to disclose such amendment or waiver by filing a Form 8-K with the SEC.



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 AND RELATED
STOCKHOLDER MATTERS



The information required by this Item
is incorporated by reference from the Proxy Statement sections captioned Security Ownership of Certain Beneficial Owners and Employee Stock Ownership Plan.



Equity Compensation Plan Information.The following table presents the number of shares of the Companys common
stock to be issued upon the exercise of outstanding options for both the Directors and the Employees Stock Option Plans, and the weighted-average price of the outstanding options and the number of options remaining that may be issued
under the Companys stock option plans.



|                                                           |  |                                                                                           |  |                                                                             |    |                                                                                                                                          |  
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | -- | ---------------------------------------------------------------------------------------------------------------------------------------- | -
|Plan category                                              |  | Number of securities to beissued upon exercise ofoutstanding options, warrants and rights |  | Weighted-average exercise price of outstanding options, warrants and rights |    | Number of securities remaining availablefor future issuanceunder equity compensation plans
(excluding securitiesreflected in column (a))
|                                                           |  | (a)                                                                                       |  | (b)                                                                         |    | (c)                                                                                                                                     
|Equity compensation plans approved by security holders     |  | 449,650                                                                                   |  | $                                                                           | 12 |                                                                                                                                          | 0
|                                                           |  |                                                                                           | 
|Equity compensation plans not approved by security holders |  | 0                                                                                         |  | $                                                                           | 0  |                                                                                                                                          | 0
|                                                           |  |                                                                                           | 
|Total                                                      |  | 449,650                                                                                   |  | $                                                                           | 12 |                                                                                                                                          | 0



ITEM 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS



The information required by this
Item is set forth under the Proxy Statement section captioned Proposal 1 - Election of Directors - Certain Indebtedness and Transactions of Management, which section is incorporated herein by reference.



18



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ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K



13(a)      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 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)(ii)   |  | 1995 Retirement Payment 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)(iii)  |  | 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)(iv)   |  | 1985 Supplemental Income Agreement with R. Ronald Swanner, incorporated herein by reference to the Form 10-K dated September 30, 1996                                                                                                           
|                   | 
|Exhibit (10)(v)    |  | 1995 Supplemental Income Agreement with R. Ronald Swanner, incorporated herein by reference to the Form 10-K dated September 30, 1996                                                                                                           
|                   | 
|Exhibit (10)(vi)   |  | South Street Financial Corp. Stock Option Plan, incorporated herein by reference to the Form 10-K dated September 30, 1997                                                                                                                      
|                   | 
|Exhibit (10)(vii)  |  | 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 (10)(viii) |  | 2003 Supplemental Executive Retirement Plan Agreements with R. Ronald Swanner, Christopher F. Cranford, David L. Smith and Cris D. Turner, dated June 27, 2003                                                                                  

|
|





19



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|                  |  |                                                                                                                                                                                                                                            
|----------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                  | 
|Exhibit (10)(ix)  |  | 2003 Executive Life Insurance Endorsement Method Split Dollar Plan Agreements with R. Ronald Swanner, Christopher F. Cranford, David L. Smith and Cris D. Turner, dated June 27,
2003                                                      
|                  | 
|Exhibit (10)(x)   |  | 2003 Director Supplemental Retirement Plan Agreements with Caldwell A. Holbrook, Jr., Joel A. Huneycutt, Douglas Dwight Stokes, R. Ronald Swanner and Greg E. Underwood, dated June 27,
2003                                               
|                  | 
|Exhibit (10)(xi)  |  | 2003 Director Deferral Plan Agreements with Caldwell A. Holbrook, Jr., Joel A. Huneycutt, J. Banks Garrison, Jr., Douglas Dwight Stokes, R. Ronald Swanner and Greg E. Underwood, dated June
27, 2003                                      
|                  | 
|Exhibit (10)(xii) |  | 2003 Director Life Insurance Endorsement Method Split Dollar Plan Agreements with Caldwell A. Holbrook, Jr., Joel A. Huneycutt, J. Banks Garrison, Jr., Douglas Dwight Stokes, R. Ronald
Swanner and Greg E. Underwood, dated June 27, 2003
|                  | 
|Exhibit (11)      |  | Statement Regarding Computation of Per Share Earnings                                                                                                                                                                                      
|                  | 
|Exhibit (13)      |  | South Street Financial Corp. 2003 Annual Report to Stockholders (excluding page 3, the Letter to Stockholders)                                                                                                                             
|                  | 
|Exhibit (14)      |  | Code of Business Conduct and Ethics, dated February 18, 2004                                                                                                                                                                               
|                  | 
|Exhibit (21)      |  | See Item 1. DESCRIPTION OF BUSINESSGeneral and Subsidiaries for discussion of subsidiaries                                                                                                                                           
|                  | 
|Exhibit (23)      |  | Consent of Independent Certified Public Accountants                                                                                                                                                                                        
|                  | 
|Exhibit (31.1)    |  | Certification of R. Ronald Swanner                                                                                                                                                                                                         
|                  | 
|Exhibit (31.2)    |  | Certification of Christopher F. Cranford                                                                                                                                                                                                   
|                  | 
|Exhibit (32)      |  | Certification pursuant to 18 U.S.C. Section 1350                                                                                                                                                                                           



13(b)     Reports on Form 8-K           None were filed during the quarter ended December 31, 2003



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.



The information required by this Item is set forth under the Proxy Statement section captioned Proposal 2  Ratification of
Appointment of Independent Auditor, which section is incorporated herein by reference.



20



---

SIGNATURES



In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.



|                     |  |                              |  |                                      
|-------------------- |  | ---------------------------- |  | -------------------------------------
|                     |  | SOUTH STREET FINANCIAL CORP.
|                     |  |                             
|Date: March 24, 2004 |  | By:                          |  | /s/ R. Ronald Swanner                
|                     |  |                              |  | R. Ronald Swanner                    
|                     |  |                              |  | President and Chief Executive Officer



Pursuant to the
requirements of Section 13 or 15(d) 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:



|                                                   |  |                                                             |  |               
|-------------------------------------------------- |  | ----------------------------------------------------------- |  | --------------
|Signature                                          |  | Title                                                       |  | Date          
|                                                   |  |                                                            
|/s/ R. Ronald SwannerR. Ronald Swanner             |  | President, Chief Executive Officer and Director             |  | March 24, 2004
|                                                   |  |                                                            
|/s/ Christopher F. CranfordChristopher F. Cranford |  | Treasurer and Chief Financial Officer                       |  | March 24, 2004
|                                                   |  |                                                            
|/s/ David L. SmithDavid L. Smith                   |  | Executive Vice President of Bank; Secretary of Company      |  | March 24, 2004
|                                                   |  |                                                            
|/s/ Cris D. TurnerCris D. Turner                   |  | Executive Vice President of Bank; Vice President of Company |  | March 24, 2004
|                                                   |  |                                                            
|/s/ Caldwell A. Holbrook,Caldwell A. Holbrook, Jr. |  | Director                                                    |  | March 24, 2004
|                                                   |  |                                                            
|/s/ Joel A. HuneycuttJoel A. Huneycutt             |  | Director                                                    |  | March 24, 2004
|                                                   |  |                                                            
|/s/ Douglas Dwight StokesDouglas Dwight Stokes     |  | Director                                                    |  | March 24, 2004
|                                                   |  |                                                            
|/s/ Greg E. UnderwoodGreg E. Underwood             |  | Director                                                    |  | March 24, 2004
|                                                   |  |                                                            
|/s/ J. Banks GarrisonJ. Banks Garrison             |  | Director                                                    |  | March 24, 2004



21



---

INDEX TO EXHIBITS



|                   |  |                                                                                                                                                                                                                                            
|------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No.        |  | Description                                                                                                                                                                                                                                
|                   | 
|Exhibit (10)(viii) |  | 2003 Supplemental Executive Retirement Plan Agreements with R. Ronald Swanner, Christopher F. Cranford, David L. Smith and Cris D. Turner, dated June 27, 2003                                                                             
|                   | 
|Exhibit (10)(ix)   |  | 2003 Executive Life Insurance Endorsement Method Split Dollar Plan Agreements with R. Ronald Swanner, Christopher F. Cranford, David L. Smith and Cris D. Turner, dated June 27,
2003                                                      
|                   | 
|Exhibit (10)(x)    |  | 2003 Director Supplemental Retirement Plan Agreements with Caldwell A. Holbrook, Jr., Joel A. Huneycutt, Douglas Dwight Stokes, R. Ronald Swanner and Greg E. Underwood, dated June 27,
2003                                               
|                   | 
|Exhibit (10)(xi)   |  | 2003 Director Deferral Plan Agreements with Caldwell A. Holbrook, Jr., Joel A. Huneycutt, J. Banks Garrison, Jr., Douglas Dwight Stokes, R. Ronald Swanner and Greg E. Underwood, dated June
27, 2003                                      
|                   | 
|Exhibit (10)(xii)  |  | 2003 Director Life Insurance Endorsement Method Split Dollar Plan Agreements with Caldwell A. Holbrook, Jr., Joel A. Huneycutt, J. Banks Garrison, Jr., Douglas Dwight Stokes, R. Ronald
Swanner and Greg E. Underwood, dated June 27, 2003
|                   | 
|Exhibit (11)       |  | Statement Regarding Computation of Per Share Earnings                                                                                                                                                                                      
|                   | 
|Exhibit (13)       |  | 2003 Annual Report (excluding page 3, the Letter to Stockholders)                                                                                                                                                                          
|                   | 
|Exhibit (14)       |  | Code of Business Conduct and Ethics, dated February 18, 2004                                                                                                                                                                               
|                   | 
|Exhibit (23)       |  | Consent of Independent Certified Public Accountants                                                                                                                                                                                        
|                   | 
|Exhibit (31.1)     |  | Certification of R. Ronald Swanner                                                                                                                                                                                                         
|                   | 
|Exhibit (31.2)     |  | Certification of Christopher F. Cranford                                                                                                                                                                                                   
|                   | 
|Exhibit (32)       |  | Certification pursuant to 18 U.S.C. Section 1350                                                                                                                                                                                           



22