<PAGE>


                                                                      EXHIBIT 13

                          SOUTH STREET FINANCIAL CORP.
                            ALBEMARLE, NORTH CAROLINA

                               2002 ANNUAL REPORT

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
TABLE OF CONTENTS

<TABLE>
<S>                                                                             <C>
SELECTED CONSOLIDATED FINANCIAL DATA .............................................1-2

REPORT TO STOCKHOLDERS .............................................................3

MANAGEMENT'S DISCUSSION AND ANALYSIS ............................................4-11

INDEPENDENT AUDITORS' REPORT ......................................................12

CONSOLIDATED FINANCIAL STATEMENTS

  Statements of financial condition at December 31, 2002 and 2001 .................13

  Statements of income for the years ended
   December 31, 2002 and 2001 .....................................................14

  Statements of stockholders' equity for the years ended
   December 31, 2002 and 2001 .....................................................15

  Statements of cash flows for the years ended
   December 31, 2002 and 2001 ..................................................13-17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .....................................18-44

CORPORATE INFORMATION ..........................................................45-46
</TABLE>

This Annual Report to Stockholders contains certain forward-looking statements
consisting of estimates with respect to the financial condition, results of
operations and other business of South Street Financial Corp. that are subject
to various factors which could cause actual results to differ materially from
those estimates. Factors that could influence the estimates include changes in
the national, regional and local market conditions, a slowing economy, layoffs,
legislative and regulatory conditions, and an adverse interest rate environment.

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                   At of for the Years Ended December 31,
                                          ------------------------------------------------------
                                                2002               2001                2000
                                          ---------------     ---------------    ---------------
                                               (In Thousands, Except Per Share Amounts)
<S>                                       <C>                 <C>                <C>
FINANCIAL CONDITION DATA:
   Total assets                           $       224,806     $       212,368    $       198,343
   Investment securities /(1)/                     44,565              31,510             37,784
   Loans receivable, net /(2)/                    172,184             173,132            152,514
   Deposits                                       175,669             167,590            155,035
   Borrowings                                      21,000              17,000             16,000
   Stockholders' equity                            24,895              23,889             23,809
   Book value per share                              8.08                7.68               7.50

OPERATING DATA:
   Interest income                        $        13,885     $        14,600    $        13,791
   Interest expense                                 6,969               8,980              8,181
                                          ---------------     ---------------    ---------------
   Net interest income                              6,916               5,620              5,610
   Provision for loan losses                          100                   -                  -
                                          ---------------     ---------------    ---------------
   Net interest income after provision
    for loan losses                                 6,816               5,620              5,610
                                          ---------------     ---------------    ---------------
   Non-interest income                                516                 450                196
                                          ---------------     ---------------    ---------------

   Non-interest expense:
     Compensation and employee                      3,341               3,111              3,337
     Other                                          1,480               1,461              1,319
                                          ---------------     ---------------    ---------------
   Total non-interest expense                       4,821               4,572              4,656
                                          ---------------     ---------------    ---------------

   Income before income taxes                       2,511               1,498              1,150
   Income tax expense                                 849                 525                409
   Minority interest                                    -                   -                 10
                                          ---------------     ---------------    ---------------
   Net income                             $         1,662     $           973    $           731
                                          ===============     ===============    ===============
</TABLE>

                                        1

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                       At of for the Years Ended December 31,
                                                      ----------------------------------------
                                                         2002          2001          2000
                                                      ----------   -----------   -------------
                                                      (In Thousands, Except Per Share Amounts)
<S>                                                   <C>          <C>           <C>
SELECTED OTHER DATA:
   Basic earnings per share                           $     0.58   $      0.35   $       0.24
   Diluted earnings per share                               0.58          0.35           0.24
   Dividends per share                                      0.40          0.40           0.40
   Dividend payout ratio /(6)/                             68.97%       114.29%        166.67%
   Return on average assets                                 0.77%         0.47%          0.39%
   Return on average equity                                 6.85%         4.22%          2.94%
   Average equity to average assets                        11.22%        11.24%         13.12%
   Stockholders' equity to end-of-period assets            11.07%        11.25%         12.00%
   Interest rate spread for period /(3)/                    2.95%         2.34%          2.39%
   Average interest-earning assets to
    average interest-bearing liabilities                  110.78%       110.92%        115.11%
   Net interest margin /(4)/                                3.31%         2.83%          3.07%
   Non-performing assets to total assets
    at period end /(5)/                                     0.58%         0.36%          0.23%
   Non-performing loans to total loans
     at period end                                          0.75%         0.43%          0.28%
   Allowance for loan losses to non-
     performing loans at period end                        40.42%        57.16%         97.72%
   Net interest income, after provision for
     loan losses to non-interest expense                  141.38%       122.92%        120.49%
   Non-interest expense to average assets                   2.23%         2.23%          2.46%
     Deposit accounts                                     11,041        12,366         12,498
     Loan accounts                                         3,252         3,348          3,232
   Number of full service banking offices                      2             2              2
</TABLE>

/(1)/ Includes interest-bearing deposits, federal funds sold, Federal Home Loan
      Bank stock, and investment securities.

/(2)/ Loans receivable, net, represents gross loans less net deferred loan fees
      and allowance for loan losses.

/(3)/ The interest rate spread represents the difference between the
      weighted-average yield on interest-earning assets and the weighted-average
      cost of interest-bearing liabilities.

/(4)/ The net interest margin represents net interest income as a percent of
      average interest-earning assets.

/(5)/ Nonperforming assets include mortgage loans and consumer loans 90 days or
      more delinquent and real estate acquired in the settlement of loans.

/(6)/ The dividend payout ratio represents dividends per share as a percent of
      basic earnings per share.

                                        2

<PAGE>

                   SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
                             REPORT TO STOCKHOLDERS

Dear Stockholders:

                                        3

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion and analysis is intended to assist readers in
understanding the results of operations in 2002 and 2001 and changes in
financial position at December 31, 2002. This discussion and analysis is
intended to complement and should be read in conjunction with the audited
consolidated financial statements of the Company and related notes appearing
elsewhere in this annual report to stockholders.

DESCRIPTION OF BUSINESS

South Street Financial Corp. (the Company) was incorporated under laws of the
State of North Carolina for the purpose of becoming the bank holding company of
Home Savings Bank of Albemarle, Inc., SSB (the Bank, Home Savings or Home) in
connection with the Bank's conversion from a state chartered mutual savings bank
to a state chartered stock savings bank (the Conversion), pursuant to its Plan
of Conversion. A subscription and community offering of the Company's shares
closed on October 2, 1996, at which time the Company acquired all of the shares
of the Bank and commenced operations.

In accordance with the Plan of Conversion, the Company issued 4,496,500 shares
of common stock at the price of $10 per share which resulted in proceeds of
$43,645,000, net of conversion costs. The Company transferred $19,558,000 of the
net proceeds to Home Savings for the purchase of all of the capital stock of the
Bank.

The Company has no operations and conducts no business of its own other than
owning Home Savings, investing its portion of the net proceeds received in the
conversion, and lending funds to the Employee Stock Ownership Plan (the ESOP)
which was formed in connection with the Conversion. The principal business of
the Bank is accepting deposits from the general public and using those deposits
and other sources of funds to make loans secured by real estate and other forms
of collateral located in the Bank's primary market area of Stanly County, North
Carolina.

Home Savings' results of operations depend primarily on its net interest income,
which is the difference between interest income from interest-earning assets and
interest expense on interest-bearing liabilities. The Bank's operations are also
affected by noninterest income, such as miscellaneous income from loans,
customer deposit account service charges, and other sources of revenue. The
Bank's principal operating expenses, aside from interest expense, consist of
compensation and associated benefits, federal deposit insurance premiums,
occupancy costs, and other general and administrative expenses.

During 1998, the Bank formed a wholly owned subsidiary, South Street Development
Corporation (SSDC) with a $1.8 million cash investment. SSDC then invested
$10,000 for a 50% interest in Park Ridge Associates, LLC (Park Ridge). The other
50% interest in Park Ridge was owned by an outside individual until 2000, when
SSDC purchased the remaining interest and Park Ridge became a 100% subsidiary of
SSDC. In June 1998, Park Ridge acquired 25.6 acres of prime real estate located
within the city limits of Albemarle, North Carolina. The joint venture was
created to acquire and develop the property into a premier residential
subdivision. As of December 2002, the project was 100% completed and 14 of the
30 lots to be sold had been committed to buyers.

                                        4

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion and analysis contains the consolidated financial
results for the Company, Home Savings, SSDC and Park Ridge for the years ended
December 31, 2002 and 2001. Because the Company has no operations and conducts
no business other than as described above and SSDC and Park Ridge assets are
primarily real estate held for investment and their operations have not
significantly impacted the consolidated financial statements for the years ended
December 31, 2002 and 2001, the discussion contained in this Management's
Discussion and Analysis concerns primarily the business of the Bank. However,
for ease of reading and because the financial statements are presented on a
consolidated basis, the Company and the Bank and its subsidiaries are
collectively referred to herein as the Company unless otherwise noted.

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2002 AND 2001

During 2002, the Company's total assets increased by $12.4 million, or 5.9%,
from $212.4 million at December 31, 2001 to $224.8 million at December 31, 2002.
This increase in our total assets resulted primarily from growth in our liquid
assets, consisting of cash and cash equivalents and investment securities. These
liquid assets increased from $33.6 million at December 31, 2001 to $46.9 million
at the end of 2002, an increase of $13.3 million. This increase in our liquid
assets was offset by a decrease in our loans receivable during 2002 of $852,000.
This decrease in our net loans resulted principally from a decrease during the
year in our real estate loans. The funding for this increase in our assets came
from increases in deposits from our customers and from borrowings. Deposit
increased by $8.1 million during 2002 to $175.7 million at December 31, 2002
compared with $167.6 million at the beginning of the year, with all of the
increase occurring in demand accounts which cost the Company significantly less
than do certificates of deposit. Borrowings, consisting solely of advances from
the Federal Home Loan Bank, increased $4.0 million during 2002 to $21.0 million
at the end of the year.

Stockholders' equity increased by $1.0 million during 2002. This net increase
was the result of several factors. Items which increased stockholders' equity
were: net income of $1.7 million, principal payments received on the note
receivable from the ESOP of $519,000, amortization of the return of capital
dividends paid on unvested ESOP shares of $361,000, and unrealized gains on
available for sale investment securities of $90,000. These increases were offset
by the following items which decreased stockholders' equity: the purchase and
retirement of 32,000 shares of the Company's common stock for $225,000, the
payment of quarterly cash dividends totaling $1.1 million, or $.40 per share,
and the ESOP contribution of $323,000.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001

NET INCOME

The Company earned net income of $1.7 million or $.58 per share for 2002, as
compared with net income of $973,000 or $.35 per share in 2001. This improvement
of $689,000 or $.23 per share in net operating results is principally
attributable to the increase in our net interest income during 2002, which is
analyzed further in the discussion that follows.

                                        5

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS

NET INTEREST INCOME

Like most financial institutions, the primary component of earnings for the Bank
is net interest income. Net interest income is the difference between interest
income, principally from loan and investment securities, and interest expense,
principally on customer deposits and borrowings. Changes in net interest income
result from changes in volume, spread and margin. For this purpose, volume
refers to the average dollar level of interest-earning assets and
interest-bearing liabilities, spread refers to the difference between the
average yield on interest-earning assets and the average cost of
interest-bearing liabilities, and margin refers to net interest income divided
by average interest-earning assets. Margin is influenced by the level and
relative mix of interest-earning assets and interest-bearing liabilities, as
well as by levels of noninterest-bearing liabilities and capital.

Net interest income increased to $6.9 million for the year ended December 31,
2002, compared to the $5.6 million earned in 2001, an increase of $1.3 million.
During 2002 our level of average interest earning assets increased from $198.5
million in 2001 to $208.8 million, but the average rate we earned on those
assets dropped 71 basis points from 7.36% in 2001 to 6.65% in 2002. This
decrease in the average rate we earned on our investments more than offset the
effect of the increase in our average interest earning assets during the year
and resulted in the decrease in our interest income of $715,000. This decrease
in our interest income, however, was negated by the decrease in our interest
expense during 2002. While our average interest-bearing liabilities increased
from $178.9 million in 2001 to $188.5 million in 2002, it is important to note
though that much of this increase occurred in our interest-bearing demand
deposits, which have rates significantly less than our other types of
interest-bearing liabilities. The average rate we paid for our interest-bearing
liabilities during the year dropped 132 basis points during 2002 from 5.02% in
2001 to 3.70%, resulting in a decrease of $2.0 million in our total interest
expense in 2002, and enabling the Company to experience the aforementioned
increase in net interest income during the year.

The following table analyzes the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate); (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume); and (iii) mixed changes (changes in volume multiplied by
changes in rate), with any rate/volume variances allocated based on their
absolute values.

<TABLE>
<CAPTION>
                                              Year Ended                                   Year Ended
                                      December 31, 2002 vs. 2001                   December 31, 2001 vs. 2000
                               ----------------------------------------    ----------------------------------------
                                      Increase (Decrease) Due To                            Increase
                               ----------------------------------------    ----------------------------------------
                                 Volume          Rate          Total         Volume          Rate          Total
                               -----------    ----------    -----------    -----------   -----------    -----------
                                                              (Dollars in thousands)
  <S>                          <C>            <C>           <C>            <C>           <C>            <C>
  Interest income:
    Interest-bearing deposits  $        53    $     (271)   $      (218)   $       264   $      (175)   $       89
    Investments                       (286)         (245)          (531)          (522)          (81)          (603)
    Loans receivable, net            1,094        (1,060)            34          1,453           (71)         1,382
                               -----------    ----------    -----------    -----------   -----------    -----------
      Total interest income            861        (1,576)          (715)         1,195          (327)           868
                               -----------    ----------    -----------    -----------   -----------    -----------
  Interest expense:
    Deposits:
      Passbook savings                 138          (158)           (20)            62           (48)            14
      NOW and money market              27           (17)            10             56           (73)           (17)
      Certificates of deposit          (27)       (1,568)        (1,595)           516            70            586
    Borrowings                          76          (482)          (406)           310          (129)           181
                               -----------    ----------    -----------    -----------   -----------    -----------
      Total interest expense           214        (2,225)        (2,011)           944          (180)           764
                               -----------    ----------    -----------    -----------   -----------    -----------
  Net interest income
   increase (decrease)         $       647    $      649    $     1,296    $       251   $      (147)   $       104
                               ===========    ==========    ===========    ===========   ===========    ===========
</TABLE>

                                        6

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS

The following table provides additional information concerning the Company's
yields on interest-earning assets and cost of funds on interest-bearing
liabilities for the years ended December 31, 2002 and 2001, respectively.

<TABLE>
<CAPTION>
                                      Year Ended December 31, 2002     Year Ended December 31, 2001    Year Ended December 31, 2000
                                     -------------------------------  -------------------------------  -----------------------------
                                      Average               Average     Average               Average   Average              Average
                                      Balance    Interest     Rate      Balance    Interest     Rate    Balance    Interest   Rate
                                     ---------  ----------  --------  ----------  ----------  -------  ----------  ---------  ------
                                                                       (Dollars in thousands)
<S>                                  <C>        <C>            <C>    <C>         <C>           <C>    <C>         <C>         <C>
Interest earning assets:
 Interest-bearing deposits /(1)/     $  13,185  $      206     1.56%  $   11,574  $      410    3.54%  $    5,780  $     321   5.55%
 Investments /(2)/                      19,453         946     4.86%      25,207       1,491    5.92%      33,834      2,094   6.19%
 Loans receivable, net /(5)/           176,184      12,733     7.23%     161,682      12,699    7.85%     143,320     11,376   7.94%
                                     ---------  ----------  --------  ----------  ----------  -------  ----------  ---------  ------

 Total interest-earning assets         208,822      13,885     6.65%     198,463      14,600    7.36%     182,934     13,791   7.54%
                                                ----------  --------              ----------  -------              ---------  ------
Non interest-earning assets              7,405                             6,497                            6,418
                                     ---------                        ----------                       ----------
  Total assets                       $ 216,227                        $  204,960                       $  189,352
                                     =========                        ==========                       ==========

Interest-bearing liabilities:
 Deposits:
  Passbook savings                   $  27,621         546     1.98%  $   21,598         566    2.62%  $   19,333        552   2.86%
  NOW and money market                  18,450         199     1.08%      16,043         189    1.18%      12,140        206   1.70%
  Certificates of deposit              124,068       5,637     4.54%     124,582       7,232    5.81%     115,600      6,611   5.72%
 Borrowings                             18,364         587     3.20%      16,699         993    5.95%      11,850        812   6.85%
                                     ---------  ----------  --------  ----------  ----------  -------  ----------  ---------  ------

 Total interest-bearing liabilities    188,503       6,969     3.70%     178,922       8,980    5.02%     158,923      8,181   5.15%
                                                ----------  --------              ----------  -------              ---------  ------
Non-interest-bearing liabilities         3,454                             3,003                            5,594
Stockholders' equity                    24,270                            23,035                           24,835
                                     ---------                        ----------                       ----------
  Total liabilities and
   stockholders' equity              $ 216,227                        $  204,960                       $  189,352
                                     =========                        ==========                       ==========
Net interest income and
 interest rate spread /(3)/                     $    6,916     2.95%              $    5,620    2.34%              $   5,610   2.39%
                                                ==========  ========              ==========  =======              =========  ======
Net yield on average
 interest-earning assets /(4)/                                 3.31%                            2.83%                          3.07%
                                                            ========                          ======                          ======
Ratio of average
 interest-earning assets
 to average interest-bearing
 liabilities                            110.78%                           110.92%                          115.11%
                                     =========                        ==========                       ==========
</TABLE>

/(1)/ Includes interest-bearing deposits and federal funds sold.

/(2)/ Includes investment securities and FHLB common stock.

/(3)/ Interest rate spread represents the difference between the average yield
      on interest-earning assets and the average cost of interest-bearing
      liabilities.

/(4)/ Net yield on interest-earning assets represents net interest income
      divided by average interest-earning assets.

/(5)/ Loans placed on nonperforming status have been included in the computation
      of average balances.

PROVISION FOR LOAN LOSSES AND ASSET QUALITY

The provision for loan losses was $100,000 during 2002 while there was no
provision for loan losses made in 2001. Loan charge-offs in 2002 and 2001 of
$4,000 and $2,000, respectively, were nominal. While no provision was considered
necessary during 2001, during 2002, due to the increase in our non-performing
assets discussed below, the provision of $100,000 was considered necessary to
maintain the allowance for loan losses at an adequate level. The allowance for
loan losses is maintained at a level deemed adequate to absorb probable losses
inherent in the loan portfolio and results from management's consideration of
such factors as the financial condition of the borrower, past and expected loss
experience, and other factors management feels deserve recognition in
establishing an appropriate reserve. Although management attempts to maintain
the allowance at a level deemed adequate, future additions to the allowance may
be necessary based upon changes in market conditions. In addition, various
regulatory agencies periodically review our allowance for loan losses. These
agencies may require us to make adjustments based upon their judgments about
information available to them at the time of their examination.

                                        7

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS

The level of our non-performing assets, defined as loans past due 90 days or
more, increased from $747,000 at December 31, 2001 to $1.3 million at December
31, 2002. Real estate acquired in the settlement of loans amounted to $0 and
$18,000 at December 31, 2002 and 2001, respectively. The Bank has adopted
policies that it believes provide for prudent and adequate levels of loan loss
allowances. At December 31, 2002, the allowance for loan losses amounted to
$523,000, which management believes is adequate to absorb losses inherent in its
loan portfolio.

NONINTEREST INCOME

Non-interest income increased slightly during the year from $450,000 during 2001
to $516,000 in 2002, an increase of $66,000. Our non-interest income is
comprised primarily of service charges on deposit accounts, insurance
commissions and various sources of miscellaneous operating income.

NONINTEREST EXPENSE

Our non-interest expenses increased from $4.6 million in 2001 to $4.8 million in
2002, an increase of $249,000. The primary factor responsible for this increase
was an increase in compensation and benefits expense of $230,000 in 2002
compared to 2001. This increase resulted from an increase in the expenses
associated with the Bank's ESOP. There were no other significant increases in
any of the other categories comprising our non-interest expenses.

INCOME TAXES

The provision for income taxes, as a percentage of income before income taxes,
was 33.8% and 35.0% for the years ended December 31, 2002 and 2001,
respectively.

CAPITAL RESOURCES AND LIQUIDITY

The Company paid regular quarterly cash dividends of $.40 per share in the
aggregate during 2002 and 2001. Although the Company anticipates that it will
continue to declare cash dividends on a regular basis, the Board of Directors
will continue to review its policy on the payment of dividends on an ongoing
basis, and such payments will be subject to future earnings, cash flows, capital
needs and regulatory restrictions.

The objective of Home's liquidity management is to ensure the availability of
sufficient cash flows to meet all of its financial commitments. Liquidity
management addresses Home's ability to meet deposit withdrawals either on demand
or at contractual maturity, to repay borrowings, if any, as they mature and to
originate new loans and make investments as opportunities arise.

Significant liquidity sources for Home are cash provided by new savings
deposits, operating activities, sale or maturity of investment and the ability
to raise equity capital. Cash flows from investing activities typically are
dependent on the level of loan demand and the amount of new savings deposits
that the Bank is able to generate. During the year ended December 31, 2002, cash
inflow was provided by proceeds from maturities, calls and principal repayments
on securities of $12.1 million, cash provided by operating activities of
$727,000 million and an increase in deposits and borrowings of 12.1 million.
Significant cash outflows during 2002 included purchases and retirement of
common stock for $225,000, purchases of securities available for sale of $5.5
million, and dividend payments of $1.1 million.

                                        8

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS

Levels of deposit accounts are impacted primarily by overall market rates and
the pricing policies that Home sets to attract or maintain its deposits, which
are affected by Home's demand for loans and its other liquidity needs.
Approximately 64% of Home's certificates of deposit outstanding at December 31,
2002 are scheduled to mature within the next year. Management believes that
substantially all of these deposits will be renewed and intends to price such
deposits at competitive rates in order to ensure that these deposits are
renewed. Home does not hold brokered deposits or significant levels of public
deposits which are less likely to renew if a higher rate of interest can be
obtained elsewhere. Liquidity levels and Home's operations would be
significantly hindered should a sizable portion of these deposits not be
renewed.

Cash provided by operating and financing activities has historically been used
by the Company to make new loans to its customers. Excess cash will be used in
the future to make new loans as demand warrants and to maintain the Company's
liquid investment portfolios by offsetting maturities, which are timed to
provide needed cash flows to meet anticipated short term liquidity requirements.

As a state chartered savings bank, Home must meet certain liquidity requirements
which are established by the Administrator of the North Carolina Savings
Institutions Division. Home's liquidity ratio at December 31, 2002, as computed
under such regulations, was in excess of such requirements. Given its excess
liquidity and its ability to borrow from the FHLB of Atlanta, Home believes that
it will have sufficient funds available to meet anticipated future loan
commitments, unexpected deposit withdrawals, or other cash requirements.

ASSET/LIABILITY MANAGEMENT

Home's asset/liability management, or interest rate risk management, is focused
primarily on evaluating and managing Home's net interest income given various
risk criteria. Factors beyond Home's control, such as the effects of changes in
market interest rates and competition, may also have an impact on the management
of interest rate risk.

In the absence of other factors, Home's overall yield on interest-earning assets
will increase as will its cost of funds on its interest-bearing liabilities when
market rates increase over an extended period of time. Inversely, Home's yields
and cost of funds will decrease when market rates decline. Home is able to
manage these swings to some extent by attempting to control the maturity or rate
adjustments of its interest-earning assets and interest-bearing liabilities over
given periods of time. Home's gap is typically described as the difference
between the amounts of such assets and liabilities which reprice within a period
of time. In a declining interest rate environment, a negative gap, or a
situation where Home's interest-bearing liabilities subject to repricing exceed
the level of interest-earning assets which will mature or reprice, will have a
favorable impact on Home's net interest income. At December 31, 2002, Home had a
one-year sensitivity gap of negative 39.20%. Conversely, an increase in general
market rates over a sustained period of time will tend to affect Home's net
interest income adversely.

In order to minimize the potential effects of adverse material and prolonged
increases or decreases in market interest rates on the Bank's operations,
management has implemented an asset/liability program designed to stabilize the
Bank's interest rate gap. The program emphasizes the investment of excess cash
in short or intermediate term interest-earning assets, the solicitation of
transaction deposit accounts which are less sensitive to changes in interest
rates and can be repriced rapidly, and to a lesser extent, the origination of
adjustable rate mortgage loans.

In addition to shortening the average repricing period of its assets, Home has
sought to lengthen the average maturity of its liabilities by adopting a tiered
pricing program for its certificates of deposit, which provides higher rates of
interest on its longer term certificates in order to encourage depositors to
invest in certificates with longer maturities.

                                        9

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS

Although Home's asset/liability management program has generally helped to
decrease the exposure of its earnings to interest rate increases, Home continues
to have a negative gap position which will be adversely impacted during
prolonged periods of rising interest rates and positively affected during
prolonged periods of interest rate declines. The Bank's interest-earning assets
less interest-bearing liabilities maturing or repricing within five years as a
percentage of total interest-earning assets was a negative 57.65%.

The following table sets forth the amount of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2002, which are
projected to reprice or mature in each of the future time periods shown. The
computations were made without using assumptions for loan prepayments or deposit
decline. Except as stated below, the amounts of assets and liabilities shown
which reprice or mature within a given period were determined in accordance with
contractual terms of the assets or liabilities. In making the computations, all
adjustable rate loans were considered to be due at the end of the next upcoming
adjustment period. Fixed rate loans are reflected at their contractual
maturities with consideration given to scheduled payments. Marketable equity
securities and savings accounts with no stated maturities are subject to
immediate repricing and availability and have been classified in the earliest
category. FHLB of Atlanta stock must be maintained at certain regulatory levels
and is classified in the more than ten category. The interest rate sensitivity
of Home's assets and liabilities illustrated in the following table would vary
substantially if different assumptions were used or if actual experience differs
from that indicated by such assumptions.

<TABLE>
<CAPTION>
                                                                     At December 31, 2002
                                                -------------------------------------------------------
                                                                More Than
                                                   1 Year       1 Year to     More Than
                                                  or Less        5 Years       5 Years         Total
                                                ------------   -----------    -----------    ----------
                                                                   (Dollars in thousands)
<S>                                             <C>            <C>            <C>            <C>
INTEREST-EARNING ASSETS:
   Interest-bearing deposits                    $     24,831   $         -    $         -    $   24,831
   Federal funds sold                                  3,070             -              -         3,070
   Securities held to maturity                             -           100          3,144         3,244
   Securities available for sale                           -         4,590          7,321        11,911
   Federal Home Loan Bank stock, at cost                   -             -          1,509         1,509
   Loans, net                                         27,825        11,120        133,239       172,184
                                                ------------   -----------    -----------    ----------
       Total interest-earning assets            $     55,726   $    15,810    $   145,213    $  216,749
                                                ============   ===========    ===========    ==========

INTEREST-BEARING LIABILITIES:
   Passbook savings                             $     30,075   $         -    $         -    $  30,075
   NOW accounts                                       11,816             -              -       11,816
   Money market                                        7,840             -              -        7,840
   Certificates of deposit                            79,960        45,811              -      125,771
   Borrowings                                         11,000        10,000              -       21,000
                                                ------------   -----------    -----------    ----------
                                                $    140,691   $    55,811    $         -    $  196,502
                                                ============   ===========    ===========    ==========

INTEREST SENSITIVITY GAP                        $    (84,965)  $   (40,001)   $   145,213    $   20,247

CUMULATIVE INTEREST
   SENSITIVITY GAP                              $    (84,965)  $  (124,966)   $    20,247    $   20,247

CUMULATIVE INTEREST SENSITIVITY
 GAP AS A PERCENTAGE OF TOTAL
 INTEREST-EARNING ASSETS                              (39.20)%      (57.65)%         9.34%         9.34%

CUMULATIVE RATIO OF
 INTEREST-SENSITIVE ASSETS TO
 INTEREST-SENSITIVE LIABILITIES                         39.61%       36.40%        110.30%       110.30%
</TABLE>

                                       10

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS

CRITICAL ACCOUNTING POLICY

The Bank's most significant critical accounting policy is the determination of
its allowance for loan losses. A critical accounting policy is one that is both
very important to the portrayal of the Bank's financial condition and results,
and requires management's most difficult, subjective or complex judgments. What
makes these judgments difficult, subjective and/or complex is the need to make
estimates about the effects of matters that are inherently uncertain.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

In the normal course of business there are various outstanding contractual
obligations of the Bank that will require future cash outflows. In addition,
there are commitments and contingent liabilities, such as commitments to extend
credit that may or may not require future cash outflows. The following table
reflects contractual obligations of the Bank outstanding as of December 31,
2002.

<TABLE>
<CAPTION>
                                                                     Payments Due by Period
                                          -------------------------------------------------------------------------
                                                           On Demand
                                                           or Within                                       After
    Contractual Obligations                   Total        or 1 Year      2-3 Years       4-5 Years       5 Years
---------------------------------------   ------------   ------------   ------------   -------------   ------------
                                                                         (In thousands)
<S>                                       <C>            <C>            <C>            <C>             <C>
Short-term borrowings                     $     11,000   $     11,000   $          -   $           -   $          -
Long-term borrowings                            10,000              -         10,000               -              -
Deposits                                       175,669        129,858         26,369          19,442              -
                                          ------------   ------------   ------------   -------------   ------------

   Total contractual cash obligations     $    196,669   $    140,858   $     36,369   $      19,442   $          -
                                          ============   ============   ============   =============   ============
</TABLE>

The following table reflects other commitments of the Bank outstanding as of
December 31, 2002.

<TABLE>
<CAPTION>
                                                           Amount of Commitment Expiration Per Period
                                          -------------------------------------------------------------------------
                                              Total
                                             Amounts        Within                                         After
       Other Commitments                    Committed       1 Year        2-3 Years       4-5 Years       5 Years
---------------------------------------   ------------   ------------   ------------   -------------   ------------
                                                                         (In thousands)
<S>                                       <C>            <C>            <C>            <C>             <C>
Undisbursed portion of home
 equity lines                             $      7,700   $        259   $        144   $         516   $      6,781
Other commitments and credit lines               1,400          1,129              6               -            265
Undisbursed portion of construction loans        2,568          2,568              -               -              -
                                          ------------   ------------   ------------   -------------   ------------

   Total other commitments                $     11,668   $      3,956   $        150   $         516   $      7,046
                                          ============   ============   ============   =============   ============
</TABLE>

                                       11

<PAGE>

[LETTERHEAD OF DIXON ODOM PLLC]

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors
South Street Financial Corp.
Albemarle, North Carolina

We have audited the accompanying consolidated statements of financial condition
of South Street Financial Corp. and subsidiary as of December 31, 2002 and 2001
and the related consolidated statements of income, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of South Street
Financial Corp. and subsidiary as of December 31, 2002 and 2001 and the results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.

/s/ Dixon Odam PLLC

Charlotte, North Carolina
February 28, 2003

                                       12

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2002 AND 2001

<TABLE>
<CAPTION>
                                                                            2002               2001
                                                                     ----------------    ---------------
                                                                            (Dollars in thousands)
<S>                                                                  <C>                 <C>
ASSETS

Cash and cash equivalents:
   Non-interest-bearing deposits                                     $          3,821    $         3,486
   Interest-bearing deposits                                                   24,831              5,865
   Federal funds sold                                                           3,070              2,628
Securities held to maturity, fair value December 31, 2002,
 $3,060; December 31, 2001, $4,468                                              3,244              4,697
Securities available for sale                                                  11,911             16,972
Federal Home Loan Bank stock                                                    1,509              1,348

Loans receivable                                                              172,707            173,559
Allowance for loan losses                                                        (523)              (427)
                                                                     ----------------    ---------------
       Net loans                                                              172,184            173,132
                                                                     ----------------    ---------------

Real estate held for investment                                                 1,030              1,026
Property and equipment, net                                                     1,278              1,427
Other assets                                                                    1,928              1,787
                                                                     ----------------    ---------------

       Total assets                                                  $        224,806    $       212,368
                                                                     ================    ===============

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
   Deposits                                                          $        175,669    $       167,590
   Borrowings                                                                  21,000             17,000
   Accrued expenses and other liabilities                                       3,242              3,889
                                                                     ----------------    ---------------
       Total liabilities                                                      199,911            188,479
                                                                     ----------------    ---------------
Stockholders' Equity:
   Preferred stock, no par value; authorized
    5,000,000 shares; none issued                                                   -                  -
   Common stock, no par value, authorized
    20,000,000 shares; issued 3,111,867 and
    3,079,867 shares at December 31, 2002
    and 2001, respectively                                                      7,748              8,296
   Unearned compensation                                                       (1,076)            (1,437)
   Unearned ESOP                                                               (1,920)            (2,439)
   Retained earnings, substantially restricted                                 20,018             19,434
   Accumulated other comprehensive income                                         125                 35
                                                                     ----------------    ---------------

       Total stockholders' equity                                              24,895             23,889
                                                                     ----------------    ---------------

       Total liabilities and stockholders' equity                    $        224,806    $       212,368
                                                                     ================    ===============
</TABLE>

See Notes to Consolidated Financial Statements.

                                       13

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002 AND 2001

<TABLE>
<CAPTION>
                                                                                 2002                2001
                                                                           ---------------    ----------------
                                                                                    (Dollars in thousands)
<S>                                                                        <C>                <C>
INTEREST INCOME
   Loans, including fees                                                   $        12,733    $         12,699
   Investment securities                                                               862               1,393
   Other interest and dividends                                                        290                 508
                                                                           ---------------    ----------------
                                               TOTAL INTEREST INCOME                13,885              14,600
                                                                           ---------------    ----------------
INTEREST EXPENSE
   Deposits                                                                          6,382               7,987
   Borrowings                                                                          587                 993
                                                                           ---------------    ----------------
                                              TOTAL INTEREST EXPENSE                 6,969               8,980
                                                                           ---------------    ----------------
                                                 NET INTEREST INCOME                 6,916               5,620
PROVISION FOR LOAN LOSSES                                                              100                   -
                                                                           ---------------    ----------------
                 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                 6,816               5,620
                                                                           ---------------    ----------------
NON-INTEREST INCOME
   Service charges on deposit accounts                                                 259                 243
   Other                                                                               257                 207
                                                                           ---------------    ----------------
                                      TOTAL NON-INTEREST INCOME, NET                   516                 450
                                                                           ---------------    ----------------
NON-INTEREST EXPENSES
   Compensation and benefits                                                         3,341               3,111
   Net occupancy and equipment                                                         359                 343
   Data processing                                                                     310                 272
   Other                                                                               811                 846
                                                                           ---------------    ----------------
                                         TOTAL NON-INTEREST EXPENSES                 4,821               4,572
                                                                           ---------------    ----------------
                                          INCOME BEFORE INCOME TAXES                 2,511               1,498
INCOME TAXES                                                                           849                 525
                                                                           ---------------    ----------------
                                                          NET INCOME       $         1,662    $            973
                                                                           ===============    ================
                       BASIC AND DILUTED NET INCOME PER COMMON SHARE       $          0.58    $           0.35
                                                                           ===============    =1===============
</TABLE>

See Notes to Consolidated Financial Statements.

                                       14

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002 AND 2001

<TABLE>
<CAPTION>
                                                                      Accumulated                          Retained
                                                Shares of               Other                              Earnings      Total
                                                 Common      Common  Comprehensive  Unearned    Unearned Substantially Stockholders'
                                                  Stock      Stock   Income (Loss)    ESOP   Compensation  Restricted    Equity
                                                ---------   --------  ----------    --------   ---------   ---------   -----------
                                                                           (Dollars in thousands)
<S>                                             <C>         <C>         <C>         <C>         <C>         <C>         <C>
Balance At December 31, 2000                    3,176,267   $  9,051    $   (163)   $ (2,993)   $ (1,665)   $ 19,579    $ 23,809
   Principal payment on note receivable
    from the ESOP                                       -          -           -         554           -           -         554
   ESOP contribution                                    -       (293)          -           -           -           -        (293)
   Purchases and retirement of common stock       (64,400)      (462)          -           -           -           -        (462)
   Cash dividends ($.40 per share)                      -          -           -           -           -      (1,118)     (1,118)
   Net change in unrealized gain on
    securities available for sale,
    net of taxes of $123,000                            -          -         198           -           -           -         198
   Amortization of return of capital dividend           -          -           -           -         228           -         228
   Net income                                           -          -           -           -           -         973         973
                                                ---------   --------    --------    --------    --------    --------    --------
Balance At December 31, 2001                    3,111,867      8,296          35      (2,439)     (1,437)     19,434      23,889
   Principal payment on note receivable
    from ESOP                                           -          -           -         519           -           -         519
   ESOP contribution                                    -       (323)          -           -           -           -        (323)
   Purchases and retirement of common stock       (32,000)      (225)          -           -           -           -        (225)
   Cash dividends ($.40 per share)                      -          -           -           -           -      (1,078)     (1,078)
   Net change in unrealized gain on
    securities available for sale,
    net of taxes of $54,000                             -          -          90           -           -           -          90
   Amortization of return of capital dividend           -          -           -           -         361           -         361
   Net income                                           -          -           -           -           -       1,662       1,662
                                                ---------   --------    --------    --------    --------    --------    --------
Balance At December 31, 2002                    3,079,867   $  7,748    $    125    $ (1,920)   $ (1,076)   $ 20,018    $ 24,895
                                                =========   ========    ========    ========    ========    ========    ========
</TABLE>

See Notes to Consolidated Financial Statements.

                                       15

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001

<TABLE>
<CAPTION>
                                                                        2002           2001
                                                                    ------------   ------------
                                                                       (Dollars in thousands)
<S>                                                                 <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                       $      1,662   $        973
   Adjustments to reconcile net income to net cash
    provided by operating activities:
       Net accretion of premiums and discounts on securities                  85             72
       Amortization of deferred loan fees                                   (481)          (544)
       Provision for depreciation                                            165            159
       Provision for loan losses                                             100              -
       Deferred income taxes                                                (147)           (78)
       Gain on sale of real estate held for investment                         -            (20)
       ESOP contribution                                                    (323)          (293)
       Amortization of unearned compensation                                 361            228
       (Increase) decrease in other assets                                  (141)           503
       Increase (decrease) in accrued expenses
          and other liabilities                                             (550)           349
                                                                    ------------   ------------
   Net cash provided by operating activities                                 731          1,349
                                                                    ------------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of securities available for sale                             (5,541)        (2,004)
   Proceeds from maturities, calls and principal
    repayments of securities available for sale                           10,723         10,631
   Proceeds from maturities, calls and principal
    repayments of securities held to maturity                              1,391          1,996
   Loan originations and principal payments on loans, net                  1,329        (20,074)
   Purchase of property and equipment                                        (16)           (82)
   Investment in real estate held for investment                              (4)           (70)
   Purchase of real estate held for investment                                 -           (327)
   Proceeds from sale of real estate held for investment                       -            675
   Purchase of FHLB stock                                                   (161)          (119)
                                                                    ------------   ------------
     Net cash provided (used) by investing activities                      7,721         (9,374)
                                                                    ------------   ------------
</TABLE>

                                       16

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001 (Continued)

<TABLE>
<CAPTION>
                                                                 2002                 2001
                                                           -----------------    ----------------
                                                                  (Dollars in thousands)
<S>                                                        <C>                  <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
   Net increase in deposits                                $           8,079    $         12,555
   Payment of dividends                                               (1,082)             (1,126)
   Purchases and retirement of common stock                             (225)               (462)
   Proceeds from borrowings                                           10,000              20,000
   Repayments on borrowings                                           (6,000)            (19,000)
   Principal payment received on ESOP note                               519                 554
                                                           -----------------    ----------------
     Net cash provided by financing activities                        11,291              12,521
                                                           -----------------    ----------------
     Net increase in cash and cash equivalents                        19,743               4,496
Cash and cash equivalents:
   Beginning                                                          11,979               7,483
                                                           -----------------    ----------------
   Ending                                                  $          31,722    $         11,979
                                                           =================    =================

Supplemental Disclosures of Cash Flow Information:
   Cash payments for:
     Interest                                              $           6,955    $          8,972
     Income taxes                                                        907                 337
Supplemental Disclosures of Noncash Transactions:
   Change in unrealized gains on
    available for sale securities, net                                    90                 198
   Change in dividends accrued                                             4                   8
</TABLE>

See Notes to Consolidated Financial Statements.

                                       17

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION
South Street Financial Corp., a North Carolina corporation, (the Company) is 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 serves as a holding company for Home Savings Bank of
Albemarle, Inc., SSB. (Home Savings or the Bank). The Company's activities
consist of managing its investment portfolio, holding the indebtedness
outstanding from the Home Savings Bank of Albemarle, Inc., SSB Employee Stock
Ownership Plan (the ESOP) and owning the Bank. The Company's principal sources
of income are earnings on its investments and interest payments received from
the ESOP with respect to the ESOP loan. In addition, the Company will receive
any dividends which are declared and paid by the Bank on its capital stock.

NATURE OF BUSINESS
Home Savings is primarily engaged in the business of obtaining savings deposits
and originating single-family residential loans within its primary lending area
of Stanly County, North Carolina. The Bank's underwriting polices require such
loans to be made with a loan-to-value ratio of at least 80% based upon appraised
values unless private mortgage insurance is obtained. These loans are secured by
the underlying properties. The Bank's primary regulators are the Federal Deposit
Insurance Company (FDIC) and the Administrator of the North Carolina Savings
Institutions Division (the NC Administrator). The Bank's deposits are insured by
the Savings Association Insurance Fund (SAIF) of the FDIC.

During 1998, the Bank formed a wholly owned subsidiary, South Street Development
Corporation (SSDC) with a $1.8 million cash investment. SSDC then invested
$10,000 for a 50% interest in Park Ridge Associates, LLC (Park Ridge). The other
50% interest in Park Ridge was purchased by SSDC in 2000.

The following is a description of the significant accounting policies used in
the preparation of the accompanying consolidated financial statements:

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of South Street
Financial Corp. and its wholly owned subsidiary, Home Savings Bank of Albemarle,
SSB., the Bank's wholly owned subsidiary, South Street Development Corporation,
and SSDC's wholly owned subsidiary, Park Ridge Associates, LLC. All significant
intercompany transactions and balances have been eliminated in consolidation.

USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses.

                                       18

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (Continued)

CASH AND CASH EQUIVALENTS
For the purpose of presentation in the statement of cash flows, cash and cash
equivalents are defined as those amounts included in the balance sheet captions
"Non-interest-bearing deposits," "Interest-bearing deposits," and "Federal funds
sold."

INVESTMENT SECURITIES
The Company has investments in debt and equity securities which consist
primarily of obligations of the U.S. Government and federal agencies,
mortgage-backed securities and common stock. Management classifies all
securities as trading, available for sale, or held to maturity on the date of
purchase and the appropriateness of such classification is reassessed at each
statement of financial condition date. Since the Company does not buy investment
securities in anticipation of short-term fluctuations in market prices, none of
the investment securities are classified as trading in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 115. All securities have been
classified as either available for sale or held to maturity. Declines in the
fair value of individual securities classified as either available for sale or
held to maturity below their amortized cost that are determined to be other than
temporary result in write-downs of the individual securities to their fair value
with the resulting write-downs included in current earnings as realized losses.

SECURITIES AVAILABLE FOR SALE
Securities classified as available for sale are those securities that the
Company intends to hold for an indefinite period of time but not necessarily to
maturity. Any decision to sell a security classified as available for sale would
be based on various factors, including significant movements in interest rates,
changes in the maturity mix of the Company's assets and liabilities, liquidity
needs, regulatory capital consideration, and other similar factors. Securities
available for sale are carried at fair value. Premiums and discounts are
amortized using the interest method over the securities' contractual lives.
Unrealized gains or losses are reported as increases or decreases in other
comprehensive income, net of the related deferred tax effect. Realized gains or
losses, determined on the basis of the cost of specific securities sold, are
included in income.

SECURITIES HELD TO MATURITY
Securities classified as held to maturity are those securities the Company has
both the intent and ability to hold to maturity regardless of changes in market
conditions, liquidity needs or changes in general economic conditions. These
securities are carried at cost adjusted for amortization of premium and
accretion of discount, computed by the interest method over their contractual
lives. Based on the Company's financial position and liquidity, management
believes the Company has the ability to hold these securities to maturity.

INVESTMENT IN FEDERAL HOME LOAN BANK STOCK
The Bank, as a member of the Federal Home Loan Bank system (FHLB), is required
to maintain an investment in capital stock of the FHLB in an amount equal to the
greater of 1% of its outstanding home loans or 5% of advances from the FHLB. No
ready market exists for the FHLB stock, and it has no quoted market value. For
presentation purposes, such stock is assumed to have a market value which is
equal to cost.

                                       19

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (Continued)

LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances, less the allowance for
loan losses, the undisbursed portion of construction loans, and net deferred
loan origination fees. The Bank's loan portfolio consists principally of
mortgage loans collateralized by first trust deeds on single family residences,
other residential property, commercial property and land.

ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). The allowance is an amount that management
believes will be adequate to absorb probable losses inherent in the loan
portfolio. Management's periodic evaluation of the adequacy of the allowance is
based on the Bank's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to pay, the
estimated value of any underlying collateral, and current economic conditions.
The loan portfolio is further analyzed by each loan type and delinquency status
to determine the risk category for each loan that is used in calculating the
allowance for loan losses. Loans delinquent greater than 90 days are evaluated
individually for loss exposure, while other loans are evaluated aggregately by
type. Allocated and unallocated portions are determined in the same manner.
While management uses the best information to make evaluations, future
adjustments may be necessary if economic or other conditions differ
substantially from the assumptions used.

IMPAIRED LOANS
The Bank assesses loans delinquent greater than 90 days for impairment. SFAS No.
114 requires that the Bank establish specific loan loss allowances on impaired
loans if it is doubtful that all principal and interest due, according to the
loan terms, will be collected. An allowance on an impaired loan is required if
the present value of the future cash flows discounted using the loan's effective
interest rate is less than the carrying value of the loan. An impaired loan can
also be valued based upon its fair value in the market place or on the basis of
its underlying collateral if the loan is collateral dependent. If foreclosure is
imminent, and the loan is collateral dependent, the loan must be valued based
upon the fair value of the underlying collateral.

INTEREST INCOME
The Bank recognizes interest income on loans using the interest method over the
contractual life of the loan. The Bank continues to accrue interest on loans,
including loans delinquent 90 days or more, when the collection of interest is
not in doubt. At the time a loan becomes nonperforming, the loan is placed on
nonaccrual status by establishing an allowance for uncollected interest.
Interest income is subsequently recognized only to the extent cash payments are
received. If and when management determines that the collectibility of principal
and interest is no longer in doubt, the loan is returned to performing status
and the reserve for uncollected interest is reversed.

LOAN ORIGINATION FEES AND RELATED COSTS
Loan fees and certain direct loan origination costs are deferred, and the net
fee or cost is recognized as an adjustment to interest income using the interest
method over the contractual life of the loans, adjusted for actual prepayments.

                                       20

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (Continued)

REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
Real estate acquired in settlement of loans is initially recorded at estimated
fair value at the date of foreclosure, establishing a new cost basis. Based on
periodic evaluations by management, the carrying values are reduced where they
exceed fair value minus estimated costs to sell. Costs relating to the
development and improvement of the property are capitalized, while holding costs
of the property are charged to expense in the period incurred.

REAL ESTATE HELD FOR INVESTMENT
Real estate held for investment is stated at the lower of cost or market value.

PROPERTY AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated on the straight-line method over the estimated useful
lives of the assets. Estimated useful lives are up to 50 years for buildings, 5
to 10 years for furniture, fixtures and equipment and 3 years for computers and
related equipment. Repairs and maintenance costs are charged to operations as
incurred and additions and improvements to premises and equipment are
capitalized. Upon sale or retirement, the cost and related accumulated
depreciation are removed from the accounts and any gains or losses are reflected
in current operations.

STOCK COMPENSATION PLANS
SFAS No. 123, Accounting for Stock-Based Compensation, encourages all entities
to adopt a fair value based method of accounting for employee stock compensation
plans, whereby compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period, which is usually
the vesting period. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, whereby compensation cost is the excess, if any,
of the quoted market price of the stock at the grant date (or other measurement
date) over the amount an employee must pay to acquire the stock. Stock options
issued under the Bank's stock option plans have no intrinsic value at the grant
date and, under Opinion No. 25, no compensation cost is recognized for them. The
Company has elected to continue with the accounting methodology in Opinion No.
25 and, as a result, has provided pro forma disclosures of net income and
earnings per share and other disclosures as if the fair value based method of
accounting had been applied. All granted options were fully vested by December
31, 2001.

                                       21

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (Continued)

STOCK COMPENSATION PLANS (Continued)

<TABLE>
<CAPTION>
                                                                                   2002                2001
                                                                              --------------     ---------------
                                                                                    (Amounts in thousands,
                                                                                    except per share data)
<S>                                                                           <C>                <C>
Net income:
  As reported                                                                 $        1,662     $           973
    Deduct:   Total stock-based employee compensation expense
              determined under fair value method for all awards,
              net of related tax effects                                                   -                (236)
                                                                              --------------     ---------------
  Pro forma                                                                   $        1,662     $           737
                                                                              ==============     ===============

Basic net income per share:
  As reported                                                                 $         0.58     $          0.35
  Pro forma                                                                             0.58                0.26

Diluted net income per share:
  As reported                                                                 $         0.58     $          0.35
  Pro forma                                                                             0.58                0.26
</TABLE>

OTHER BENEFIT PLANS
The Bank provides a noncontributory pension plan covering substantially all of
the Bank's employees who are eligible as to age and length of service. The
Bank's funding policy is to make the maximum annual contribution that is
deductible for income tax purposes.

The Bank has deferred compensation, supplemental income and retirement plan
agreements for the benefit of certain officers of the Company and members of the
Board of Directors. The plans are funded in part through life insurance policies
held by the Bank, and the liabilities are being accrued over the terms indicated
in the plan agreements. The Bank also has an ESOP which covers substantially all
of its employees. Contributions to the plan are based upon the amortization
requirements of the ESOP's debt to the Company, subject to compensation
limitations, and are expensed in accordance with the AICPA's Statement of
Position 93-6, Employers' Accounting for Employee Stock Ownership Plans.

Additionally, the Company has also implemented a management recognition plan by
acquiring in trust 179,860 shares of stock for issuance to certain directors,
officers and employees.

INCOME TAXES
Deferred taxes are provided on an asset and liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.

                                       22

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (Continued)

EARNINGS PER SHARE
SFAS No. 128 requires the presentation of earnings per share by all entities
that have common stock or potential common stock, such as options, warrants and
convertible securities, outstanding that trade in a public market. Those
entities that have only common stock outstanding are required to present basic
earnings per-share amounts. Basic per-share amounts are computed by dividing net
income (the numerator) by the weighted-average number of common shares
outstanding (the denominator). All other entities are required to present basic
and diluted per-share amounts. Diluted per-share amounts assume the conversion,
exercise or issuance of all potential common stock instruments unless the effect
is to reduce the loss or increase the income per common share from continuing
operations. For both computations, the weighted average number of shares of
common stock purchased by the Company's employee stock ownership and management
recognition plans, which have not been allocated to participant accounts, are
not assumed to be outstanding. The weighted average number of shares of common
stock not allocated to participant accounts under the employee stock ownership
plan was 249,119 and 308,774 in 2002 and 2001, respectively, while there were no
unallocated shares under the management recognition plan in 2002 or 2001. The
Company had no dilutive potential common shares outstanding during 2002 and
2001. The weighted average number of shares outstanding at December 31, 2002 and
2001 was 2,847,117 and 2,820,050, respectively.

COMPREHENSIVE INCOME
The Company reports as comprehensive income all changes in stockholders' equity
during the year from sources other than stockholders. Other comprehensive income
refers to all components (revenues, expenses, gains, and losses) of
comprehensive income that are excluded from net income. The Company's only
component of other comprehensive income is unrealized gains and losses on
investment securities available for sale.

OFF-STATEMENT OF FINANCIAL CONDITION RISK
The Bank is a party to financial instruments with off-statement of financial
condition risk such as commitments to extend credit and lines of credit.
Management assesses the risk related to these instruments for potential losses
on an ongoing basis.

FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values required under SFAS No. 107, Disclosures About Fair
Value of Financial Instruments, have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is required to develop the estimates of fair value.
Accordingly, the estimates presented for the fair value of the Company's
financial instruments are not necessarily indicative of the amounts the Company
could realize in a current market exchange. The use of different market
assumptions or estimation methodologies may have a material effect on the
estimated fair market value amounts.

The fair value estimates presented are based on pertinent information available
to management as of the dates presented. Although management is not aware of any
factors that would significantly affect the estimated fair value amounts, such
amounts have not been comprehensively revalued for purposes of these
consolidated financial statements since these dates and, therefore, current
estimates of fair value may differ significantly from the amounts presented in
these financial statements.

                                       23

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (Continued)

RECLASSIFICATIONS
Certain amounts in the 2001 financial statements have been reclassified to
conform to the 2002 presentation. The reclassifications had no effect on net
income or stockholders' equity as previously reported.

RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure.
SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 is effective for
financial statements for fiscal years ending after December 15, 2002. The
Company continues to account for its stock-based compensation in accordance with
Accounting Principles Board ("APB") Opinion No. 25 and has adopted the
disclosure provisions of SFAS No. 148 effective for the years presented herein.

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires a liability to be
recognized at the time a company issues a guarantee for the fair value of the
obligations assumed under certain guarantee agreements. Additional disclosures
about guarantee agreements are also required in the interim and annual financial
statements. The disclosure provisions of FIN 45 are effective for the Company on
December 31, 2002. The provisions for initial recognition and measurement of
guarantee agreements are effective on a prospective basis for guarantees that
are issued or modified after December 31, 2002. The Company is in the process of
assessing the impact of FIN 45 on its consolidated financial statements.

NOTE 2. SECURITIES

Amortized cost and fair values of securities are summarized as follows:

<TABLE>
<CAPTION>
                                                                               2002
                                               -------------------------------------------------------------------
                                                                      Gross            Gross          Estimated
                                                 Amortized         Unrealized      Unrealized          Market
                                                   Cost               Gains           Losses            Value
                                               --------------    -------------     -------------   ---------------
                                                                     (Dollars in thousands)
<S>                                            <C>               <C>               <C>             <C>
Securities available for sale:
   U.S. Government and federal
    agencies obligations                       $        6,036    $          80     $          (3)  $         6,113
   Mortgage-backed securities                           5,074              187               (63)            5,198
   Other equity securities                                600                -                 -               600
                                               --------------    -------------     -------------   ---------------
                                               $       11,710    $         267     $         (66)  $        11,911
                                               ==============    =============     =============   ===============
Securities held to maturity:
   Mortgage-backed securities
     and related securities                    $        3,244    $          80     $        (264)  $         3,060
                                               ==============    =============     =============   ===============
</TABLE>

                                       24

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. SECURITIES (Continued)

<TABLE>
<CAPTION>
                                                                               2001
                                               -------------------------------------------------------------------
                                                                      Gross            Gross          Estimated
                                                 Amortized         Unrealized      Unrealized          Market
                                                   Cost               Gains           Losses            Value
                                               --------------    -------------     -------------   ---------------
                                                                     (Dollars in thousands)
<S>                                            <C>               <C>               <C>             <C>
Securities available for sale:
   U.S. Government and federal
    agencies obligations                       $        9,003    $         140     $           -   $         9,143
   Mortgage-backed securities                           7,312               11               (94)            7,229
   Other equity securities                                600                -                 -               600
                                               --------------    -------------     -------------   ---------------
                                               $       16,915    $         151     $         (94)  $        16,972
                                               ==============    =============     =============   ===============
Securities held to maturity:
   Mortgage-backed securities
    and related securities                     $        4,697    $          73     $        (302)  $         4,468
                                               ==============    =============     =============   ===============
</TABLE>

The amortized cost and fair values of securities as of December 31, 2002 by
contractual maturity are shown below. Actual maturities may differ from
contractual maturities for mortgage-backed securities because the mortgages
underlying the securities may be called or repaid without any penalties.

                                                 Amortized            Fair
                                                   Cost               Value
                                               -------------     -------------
                                                    (Dollars in thousands)
Securities available for sale:
   Due after one but within five years         $       4,510     $       4,590
   Due after five but within ten years                 1,526             1,523
   Due after ten years                                 5,074             5,198
   Other equity securities                               600               600
                                               -------------     -------------
                                               $      11,710     $      11,911
                                               =============     =============

Securities held to maturity:
   Due after one but within five years         $         100     $         103
   Due after five but within ten years                   246               267
   Due after ten years                                 2,898             2,690
                                               -------------     -------------
                                               $       3,244     $       3,060
                                               =============     =============

There were no sales of securities in 2002 or 2001.

The Bank had pledged securities with an amortized cost of $14.6 million and $3.5
million at December 31, 2002 and 2001, respectively, as collateral for public
deposits and treasury and tax loan accounts.

                                       25

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. SECURITIES (Continued)

The following table sets forth certain information regarding the carrying value
and contractual maturities of the Company's investment portfolio at December 31,
2002:

<TABLE>
<CAPTION>
                                                                       Carrying Value
                                          --------------------------------------------------------------------------
                                                             After 1         After 5
                                                          Year Through    Years Through       After
                                             1 Year          5 Years        10 Years        10 Years        Total
                                          -------------  --------------  --------------  ------------  -------------
                                                                   (Dollars in thousands)
<S>                                       <C>            <C>             <C>             <C>           <C>
Securities available for sale:
  U.S. Government and federal
   agencies obligations                   $           -  $        4,590  $        1,523  $          -  $       6,113
  Mortgage-backed securities                          -               -               -         5,198          5,198
  Other securities                                    -               -               -           600            600
Securities held to maturity:
  Mortgage-backed securities
   and related securities                             -             100             246         2,898          3,244
                                          -------------  --------------  --------------  ------------  -------------
                                          $           -  $        4,690  $        1,769  $      8,696  $      15,155
                                          =============  ==============  ==============  ============  =============
</TABLE>

The following table sets forth the weighted average yield by maturity of the
Company's investment portfolio at December 31, 2002:

<TABLE>
<CAPTION>
                                                                   Weighted Average Yields
                                          --------------------------------------------------------------------------
                                                             After 1         After 5
                                                          Year Through    Years Through       After
                                             1 Year          5 Years        10 Years        10 Years        Total
                                          -------------  --------------  --------------  ------------  -------------
<S>                                                   <C>         <C>             <C>          <C>            <C>
Securities available for sale: /(1)/
  U.S. Government and federal
   agencies obligations                               -           3.77%           6.10%           -           4.36%
  Mortgage-backed securities                          -              -               -         6.09%          6.09%
  Other equity securities                             -              -               -         1.04%          1.04%
Securities held to maturity:
  Mortgage-backed securities
   and related securities                             -           7.69%           8.70%        7.38%          7.49%
</TABLE>

/(1)/ Average yields based on amortized cost.

                                       26

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. LOANS RECEIVABLE

Loans receivable are summarized below:

<TABLE>
<CAPTION>
                                                    December 31, 2002                   December 31, 2001
                                            ----------------------------------  -----------------------------------
                                                                      % of                                % of
                                                  Amount              Total            Amount             Total
                                            ----------------     -------------  ----------------     --------------
                                                                     (Dollars in thousands)
<S>                                         <C>                        <C>      <C>                         <C>
Real estate loans:
   Residential 1-4 family                   $        134,095            76.30%  $        127,920             72.66%
   Home equity                                        10,534             5.99%             6,293              3.57%
   Residential multi-family                              934             0.53%               979              0.56%
   Nonresidential real estate                         14,210             8.09%            15,951              9.06%
   Residential construction                            4,972             2.83%             5,529              3.14%
   Land                                                3,453             1.96%             7,888              4.48%
   Line of credit                                      2,419             1.38%             6,293              3.57%
                                            ----------------     ------------   ----------------     -------------
     Total real estate loans                         170,617            97.08%           170,853             97.04%
                                            ----------------     ------------   ----------------     -------------

Commercial/consumer loans:
   Commercial                                          3,088             1.76%             3,182              1.81%
   Share and other                                     1,959             1.11%             1,926              1.09%
   Credit reserve                                         87             0.05%                99              0.06%
                                            ----------------     ------------   ----------------     -------------
   Total commercial/consumer loans                     5,134             2.92%             5,207              2.96%
                                            ----------------     ------------   ----------------     -------------

   Subtotal                                          175,751           100.00%           176,060            100.00%
                                                                 ============                        =============
Allowance for loan losses                               (523)                               (427)
Net deferred loan fees                                  (475)                               (501)
Loans in process                                      (2,569)                             (2,000)
                                            ----------------                    ----------------

   Total                                    $        172,184                    $        173,132
                                            ================                    ================
</TABLE>

The following table sets forth the time to contractual maturity of the Bank's
loan portfolio at December 31, 2002. Demand loans, loans having no stated
maturity and overdrafts are reported as due in one year or less. The table does
not include prepayments. Amounts in the table are net of loans in process,
unamortized loan fees, and the allowance for loan losses.

<TABLE>
<CAPTION>
                                                          At December 31, 2002
                                      -----------------------------------------------------------
                                                         More than       Greater
                                          1 Year        1 Year to          Than
                                          or Less         5 Years         5 Years        Total
                                      --------------  --------------  ------------  -------------
                                                         (Dollars in thousands)
<S>                                   <C>             <C>             <C>           <C>
Residential 1-4 family                $        5,650  $        6,462  $    121,808  $     133,920
All other loans                                4,628           9,069        25,565         39,262
Net deferred loan fees                          (475)              -             -           (475)
Allowance for loan losses                       (523)              -             -           (523)
                                      --------------  --------------  ------------  -------------
        Totals                        $        9,280  $       15,531  $    147,373  $     172,184
                                      ==============  ==============  ============  =============
</TABLE>

                                       27

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. LOANS RECEIVABLE (Continued)

The following table sets forth the dollar amount at December 31, 2002 of all
loans maturing or repricing on or after December 31, 2003 which have fixed or
adjustable interest rates.

                                                            Adjustable
                                        Fixed Rates            Rates
                                     ---------------    -----------------
                                           (Dollars in thousands)

Residential 1-4 family               $       126,690    $           1,580
All other loans                               16,955               17,680
                                     ---------------    -----------------
                                     $       143,645    $          19,260
                                     ===============    =================

The following is an analysis of the allowance for loan losses:

                                                   Year Ended December 31,
                                                  2002                2001
                                             ---------------    ---------------
                                                     (Dollars in thousands)

Balance, beginning of year                   $           427     $          429
Provision for loan losses                                100                  -
Charge-offs:
   Residential 1-4 family                                  -                  -
   Consumer                                                4                  2
Recoveries:
   Residential 1-4 family                                  -                  -
                                             ---------------     --------------
Balance, end of year                         $           523     $          427
                                             ===============     ==============
Net charge-offs as a percent
 of average loans                                      .002%               .001%
Allowance at period end as a
 percent of nonperforming loans                       40.42%              57.16%
Allowance at period end as a percent
 of nonperforming assets                              40.42%              55.82%
Allowance at period end as a
 percent of total gross loans                          0.30%               0.24%

                                       28

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. LOANS RECEIVABLE (Continued)

The allocation of the allowance for loan losses applicable to each category of
loans is as follows:

<TABLE>
<CAPTION>
                                              December 31, 2002                             December 31, 2001
                                --------------------------------------------- --------------------------------------
                                                 Percent of                                  Percent of
                                                  Allowance      Percent of                  Allowance   Percent of
                                 Amount of        to Total        Loans to     Amount of      to Total    Loans to
                                 Allowance       Allowance      Total Loans    Allowance      Allowance  Total Loans
                                ------------    -----------     ----------    -----------    ----------  -----------
                                                                 (Dollars in thousands)
<S>                             <C>                  <C>            <C>       <C>               <C>         <C>
Real estate loans:
  Residential 1-4 family        $        185          35.37%         76.30%   $       179        41.92%      72.66%
  Home equity                             15           2.87%          5.99%            10         2.34%       3.57%
  Residential multi-family                 2           0.38%          0.53%             1         0.23%       0.56%
  Nonresidential real estate               3           0.57%          8.09%             2         0.47%       9.06%
  Residential construction                 -              -%          2.83%             -            -%       3.14%
  Land                                     5           0.96%          1.96%             5         1.17%       4.48%
  Line of credit                           -              -%          1.38%             -            -%       3.57%
                                ------------    -----------     ----------    -----------    ---------   ---------
    Total real estate loans              210          40.15%         97.08%           197        46.13%      97.04%
                                ------------    -----------     ----------    -----------    ---------   ---------

Commercial/consumer loans:
  Commercial loans                       100          19.12%          1.76%            40         9.37%       1.81%
  Share and other                         10           1.91%          1.11%             3         0.70%       1.09%
  Credit reserve                          12           2.29%          0.05%             1         0.23%       0.06%
                                ------------    -----------     ----------    -----------    ---------   ---------

    Total commercial/
      consumer loans                     122          23.32%          2.92%            44        10.30%       2.96%
                                ------------    -----------     ----------    -----------    ---------   ---------

Unallocated                              191          36.53%                          186        43.57%
                                ------------    -----------                   -----------    ---------

  Total                         $        523         100.00%        100.00%   $       427       100.00%     100.00%
                                ============    ===========     ==========    ===========    =========   =========
</TABLE>

SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by
SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures, requires that the Bank establish a specific
allowance on impaired loans and disclosure of the Bank's method of accounting
for interest income on impaired loans. The Bank assesses loans delinquent more
than 90 days past due for impairment. Such loans are on nonaccrual status and
amounted to approximately $1,294,000 and $747,000 and had related allowance for
loan losses of $81,000 and $48,000 at December 31, 2002 and 2001, respectively.
These loans had an average outstanding balance of $1,021,000 and $594,000 for
the years ended December 31, 2002 and 2001, respectively. The amount of interest
recognized on impaired loans during the portion of the year that they were
impaired was not material in 2002 or 2001.

                                       29

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. LOANS RECEIVABLE (Continued)

The following table sets forth information with respect to nonperforming assets
identified by the Bank, including nonaccrual loans.

<TABLE>
<CAPTION>
                                                             Year Ended December 31,
                                                   -------------------------------------------
                                                          2002                      2001
                                                   ----------------          -----------------
                                                              (Dollars in thousands)
<S>                                                <C>                       <C>
Nonaccrual loans                                   $          1,294          $             747
Foreclosed real estate                                            -                         18
                                                   ----------------          -----------------
Total non-performing assets                        $          1,294          $             765
                                                   ================          =================
Non-performing loans to total gross loans                      0.74%                      0.43%
                                                   ================          =================
Non-performing assets to total assets                          0.58%                      0.36%
                                                   ================          =================
Total assets                                       $        224,806          $         212,368
                                                   ================          =================
Total gross loans                                  $        175,751          $         176,060
                                                   ================          =================
</TABLE>

Officers and directors of the Company were indebted to the Bank for loans made
in the ordinary course of business. The following is an analysis of the loans to
officers and directors:

<TABLE>
<CAPTION>
                                                             Year Ended December 31,
                                                   -------------------------------------------
                                                         2002                       2001
                                                   ----------------          -----------------
                                                              (Dollars in thousands)
<S>                                                <C>                       <C>
Balance, beginning                                 $          4,163          $           3,217
   Originations                                               2,610                      1,992
   Payments received                                         (4,394)                    (1,046)
                                                   ----------------          -----------------
Balance, ending                                    $          2,379          $           4,163
                                                   ================          =================
</TABLE>

NOTE 4. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                            Year Ended December 31,
                                                   -------------------------------------------
                                                         2002                      2001
                                                   ----------------          -----------------
                                                              (Dollars in thousands)
<S>                                                <C>                       <C>
Land                                               $            411          $             411
Buildings and improvements                                    1,499                      1,498
Furniture and equipment                                       1,005                        990
                                                   ----------------          -----------------
                                                              2,915                      2,899
Less accumulated depreciation                                 1,637                      1,472
                                                   ----------------          -----------------
                                                   $          1,278          $           1,427
                                                   ================          =================
</TABLE>

                                       30

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5. EMPLOYEE PENSION PLAN

The Bank has a defined benefit plan covering substantially all employees. The
benefits are based on years of service and the employee's expected compensation
during five consecutive plan years within the last ten plan years that produce
the highest average. Total pension expense was $210,000 and $146,000 for the
years ended December 31, 2002 and 2001, respectively, and is included in
compensation and benefits in the accompanying statements of income.

The most recent actuarial valuation of the plan was completed as of and for the
plan year ended September 30, 2002. Management believes that there have been no
significant changes in the assumptions or plan activity through December 31,
2002 that would cause a material change in the balances presented below. The
following table sets forth the Plan's funded status:

<TABLE>
<CAPTION>
                                                           Year Ended September 30,
                                                 -------------------------------------------
                                                       2002                       2001
                                                 ----------------          -----------------
                                                            (Dollars in thousands)
<S>                                              <C>                       <C>
Change in benefit obligation:
   Benefit obligation, beginning                 $          1,974          $           1,690
   Service cost                                                94                         87
   Interest cost                                              147                        135
   Actuarial (gain) loss                                       (9)                       132
   Benefits paid                                             (517)                       (70)
                                                 ----------------          -----------------
   Benefit obligation, ending                               1,689                      1,974
                                                 ----------------          -----------------

Change in plan assets:
   Fair value of plan assets, beginning                     1,219                      1,004
   Actual return on plan assets                                81                         73
   Employer contribution                                      235                        212
   Benefits paid                                             (517)                       (70)
                                                 ----------------          -----------------
   Fair value of plan assets, ending                        1,018                      1,219
                                                 ----------------          -----------------

Funded status                                                (671)                      (755)
   Unrecognized net actuarial loss                            508                        525
   Unrecognized prior service cost                            236                        269
                                                 ----------------          -----------------
   Prepaid benefit cost                          $             73          $              39
                                                 ================          =================
</TABLE>

The components of net periodic benefit cost are as follows:

<TABLE>
<CAPTION>
                                                            Year Ended September 30,
                                                 -------------------------------------------
                                                       2002                      2001
                                                 ----------------            ---------------
                                                             (Dollars in thousands)
<S>                                              <C>                         <C>
Service cost                                     $             94            $             87
Interest cost                                                 147                         135
Expected return on plan assets                                (93)                        (83)
Amortization of prior service cost                             34                          34
Recognized net actuarial loss                                  21                          22
                                                 ----------------            ----------------
     Net periodic benefit cost                   $            203            $            195
                                                 ================            ================
</TABLE>

                                       31

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5. EMPLOYEE PENSION PLAN (Continued)

Weighted-average assumptions used to develop the net periodic pension cost are
as follows:

<TABLE>
<CAPTION>
                                                         Year Ended September 30,
                                               -------------------------------------------
                                                      2002                      2001
                                               ----------------          -----------------
<S>                                                        <C>                        <C>
Discount rate                                              7.5%                       7.5%
Expected rate of return on plan assets                     7.5%                       8.0%
Rate of compensation increase                              3.0%                       5.0%
</TABLE>

NOTE 6. DEPOSITS

Deposits are summarized as follows:

<TABLE>
<CAPTION>
                                           December 31, 2002                          December 31, 2001
                              -----------------------------------------  ------------------------------------------
                                                Average         % of                        Average        % of
                                 Amount          Rate         Deposits       Amount          Rate        Deposits
                              ------------    ----------    -----------  --------------  -----------    -----------
                                                              (Dollars in thousands)
<S>                           <C>                  <C>          <C>      <C>                   <C>          <C>
Demand accounts:
  Passbook savings            $     30,075         1.98%         17.12%  $       24,660        2.63%         14.71%
  NOW accounts                      11,816         0.37%          6.73%           8,459        0.63%          5.05%
  Money market                       7,840         2.15%          4.46%           5,966        2.49%          3.56%
  Noninterest-bearing
   accounts                            164            -%          0.09%           2,540           -%          1.52%
                              ------------    ----------    -----------  --------------  -----------    -----------
      Total demand deposits         49,895         1.62%         28.40%          41,625        2.14%         24.84%
Certificates of deposit            125,771         4.56%         71.60%         125,964        5.81%         75.16%
Accrued interest payable                 3            -%             -%               1           -%             -%
                              ------------    ----------    -----------  --------------  -----------    -----------
      Total deposits          $    175,669         3.76%        100.00%  $      167,590        4.90%        100.00%
                              ============    ==========    ===========  ==============  ===========    ===========
</TABLE>

At December 31, 2002, the scheduled maturities of certificates of deposit are as
follows:

Year Ending December 31,                          Amount
------------------------                  --------------------
                                               (Dollars
                                             in thousands)
          2003                            $           79,960
          2004                                        17,514
          2005                                         8,855
          2006                                        18,871
          2007                                           571
                                          ------------------
                                          $          125,771
                                          ==================

                                       32

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6. DEPOSITS (Continued)

The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $32,263,000 and $27,161,000 at
December 31, 2002 and 2001, respectively.

The aggregate amount of certificates of deposit by maturity with a minimum
denomination of $100,000 is as follows:

                                                       December 31, 2002
                                                       ------------------
                                                            (Dollars
                                                          in thousands)
Maturity period:
   Within 3 months or less                             $            7,934
   Over 3 months through 6 months                                   7,367
   Over 6 months through 12 months                                  3,314
   Over 12 months                                                  13,648
                                                       ------------------
                                                       $           32,263
                                                       ==================

Interest expense on deposits is summarized as follows:

                                               Year Ended December 31,
                                 -------------------------------------------
                                        2002                      2001
                                 ----------------          -----------------
                                            (Dollars in thousands)

Passbook savings                $             546           $            566
NOW and money market                          199                        189
Certificates of deposit                     5,637                      7,232
                                -----------------           ----------------
                                $           6,382           $          7,987
                                =================           ================

Eligible savings accounts are insured to $100,000 by the SAIF which is
administered by the FDIC.

NOTE 7. BORROWINGS

Borrowings consisting of advances from the Federal Home Loan Bank of Atlanta
were as follows at December 31, 2002 and 2001:

<TABLE>
<CAPTION>
                                                                         Amount
                                                         -------------------------------------
     Maturity                        Call Feature                2002                2001                 Rate
   ----------------------            ------------        -----------------     ---------------      --------------
   <S>                                 <C>               <C>                  <C>                      <C>
   Due on August 26, 2002              None              $               -    $      6,000,000         3.82% Fixed
   Due on March 21, 2003               None                      5,000,000           5,000,000         3.22% Fixed
   Due on June 23, 2003                None                      6,000,000           6,000,000         3.16% Fixed
   Due on February 27, 2004            None                     10,000,000                   -         2.45% Fixed
                                                         -----------------    ----------------

   Total FHLB borrowings                                 $      21,000,000    $     17,000,000
                                                         =================    ================

   Total weighted average rate                                        2.84%               3.41%
                                                         =================    ================
   Maximum amount
    outstanding during year                              $      21,000,000    $     21,000,000
                                                         =================    ================
</TABLE>

                                       33

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7. BORROWINGS (Continued)

Pursuant to a collateral agreement with the FHLB, advances are collateralized by
all the Company's FHLB stock and qualifying first mortgage loans. The balance of
qualifying first mortgage loans as of December 31, 2002 was approximately $103
million. This agreement with the FHLB provides for a line of credit up to 15% of
the Bank's assets.

NOTE 8. DEFERRED COMPENSATION AGREEMENTS

The Bank has entered into unfunded deferred compensation agreements providing
retirement and death benefits for seven directors and supplemental income
agreements for two executive officers. Vested benefits under these agreements
are payable in monthly installments over 10 and 15 year periods. The present
value of the liability for the benefits is being accrued over the service life
per the underlying agreements, which amounted to $2,323,000 and $2,263,000 at
December 31, 2002 and 2001, respectively. The total expense for the deferred
compensation agreements and supplemental income agreements amounted to $133,000
and $125,000 for the years ended December 31, 2002 and 2001, respectively.

NOTE 9. MANAGEMENT RECOGNITION PLAN AND STOCK OPTION PLAN

The Company's stockholders approved the Company's Stock Option Plan and the
Bank's Management Recognition Plan and Trust (the MRP) on October 15, 1997. The
Stock Option Plan reserves for issuance up to 449,650 stock options to certain
officers, directors, and employees either in the form of incentive stock options
or non-incentive stock options. The exercise price of the stock options may not
be less than the fair value of the Company's common stock at date of grant. All
options granted have an exercise price of $12.00 per share. The options granted
to employees, which vest at the rate of 25% annually beginning at the date of
grant, were all granted in 1998 and expire in 2008. Options granted to
non-employee directors vested immediately on the date of grant. All options were
fully vested as of December 31, 2001.

A summary of the Bank's option plans as of and for the years ended December 31,
2002 and 2001 is as follows:

<TABLE>
<CAPTION>
                                                     Outstanding Options                   Exercisable Options
                                             -----------------------------------  ---------------------------------
                                    Shares                          Weighted                           Weighted
                                   Available                         Average                            Average
                                  for Future        Number          Exercise          Number           Exercise
                                    Grants        Outstanding         Price         Outstanding          Price
                               --------------   -------------   ----------------  ---------------  ----------------
<S>                                         <C>        <C>      <C>                       <C>      <C>
At December 31, 2000                        -          449,650  $          12.00          382,070  $          12.00
    Options granted/vesting                 -                -                 -           67,580             12.00
    Options exercised                       -                -                 -                -                 -
    Options forfeited                       -                -                 -                -                 -
                               --------------   --------------  ----------------  ---------------  ----------------

At December 31, 2001                        -          449,650             12.00          449,650             12.00
    Options granted/vesting                 -                -                 -                -                 -
    Options exercised                       -                -                 -                -                 -
    Options forfeited                       -                -                 -                -                 -
                               --------------   --------------  ----------------  ---------------  ----------------

At December 31, 2002                        -          449,650  $          12.00          449,650  $          12.00
                               ==============   ==============  ================  ===============  ================
</TABLE>

                                       34

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9. MANAGEMENT RECOGNITION PLAN AND STOCK OPTION PLAN (Continued)

In determining the fair value of the option grant as prescribed in SFAS No. 123,
the Black-Scholes option pricing model was used with the following assumptions:
a risk-free interest rate of 5.00%, expected lives of 10 years, expected
volatility of 29.55% and expected dividends of $0.40 per year.

The MRP reserved for issuance 179,860 shares of common stock to certain
officers, directors and employees. The Company issued shares to fund the MRP on
October 15, 1997. The restricted common stock under the MRP was fully vested in
2000.

NOTE 10. INCOME TAX MATTERS

Under the Internal Revenue Code, the Bank is allowed a special bad debt
deduction related to additions to tax bad debt reserves established for the
purposes of absorbing losses. Through 1996, the provisions of the Code permitted
the Bank to deduct from taxable income an allowance for bad debts based on 8% of
taxable income before such deduction or actual loss experience. Legislation
passed in 1996 eliminated the percentage of taxable income method as an option
for computing bad debt deductions in all future years. The Bank is still
permitted to take deductions for bad debts, but is required to compute such
deductions using an experience method.

The Bank must also recapture over a six year period its tax bad debt reserves
which accumulated from 1987 through 1996 and amount to approximately $1,023,000.
The tax associated with the recaptured reserve is approximately $350,000. The
recapture was scheduled to begin with the Bank's 1997 year but was delayed two
years because the Bank originated a required minimum level of mortgage loans
over this period. Deferred income taxes have been previously established for the
taxes associated with the recaptured reserves, and the ultimate payment of the
taxes will not result in a charge to earnings. During the years ended December
31, 2002 and 2001, the Bank annually recaptured $171,000 of this reserve.

Deferred taxes have been provided for certain increases in the Bank's tax bad
debt reserves subsequent to 1987 which are in excess of recorded book loan loss
allowances. At December 31, 2002, retained earnings contain certain historical
additions to bad debt reserves for income tax purposes of approximately
$2,870,000, the balance at September 30, 1988, for which no deferred taxes have
been provided because the Bank does not intend to use these reserves for
purposes other than to absorb loan losses. If amounts which qualified as bad
debt deductions are used for purposes other than to absorb losses or adjustments
arising from the carryback of net operating losses, income taxes may be imposed
at the then existing rates. The unrecorded deferred income tax liability on the
above amount was approximately $1,125,000 as of December 31, 2002.

The tax effects of temporary differences that gave rise to significant portions
of the net deferred tax asset (classified as other assets in the statements of
financial condition) are as follows:

                                       35

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. INCOME TAX MATTERS (Continued)

Deferred income taxes consist of the following:

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                                       -------------------------------------------
                                                              2002                      2001
                                                       ----------------          -----------------
                                                                  (Dollars in thousands)
<S>                                                    <C>                       <C>
Deferred tax assets:
   Deferred compensation and supplemental income       $            890          $             856
   Allowance for loan losses                                        202                        165
   Other                                                             70                         67
                                                       ----------------          -----------------
     Total deferred tax assets                                    1,162                      1,088
                                                       ----------------          -----------------
Deferred tax liabilities:
   Unrealized gain on securities available for sale                  76                         23
   Net deferred loan fees and costs                                 213                        199
   Federal Home Loan Bank dividends                                 227                        228
   Tax reserve for bad debts                                        116                        182
   Property and equipment                                            56                         76
                                                       ----------------          -----------------
     Total deferred tax liabilities                                 688                        708
                                                       ----------------          -----------------
     Net deferred tax assets                           $            474          $             380
                                                       ================          =================
</TABLE>

Allocation of income tax expense between current and deferred portions is as
follows:

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                       --------------------------------------------
                                                             2002                         2001
                                                       -----------------          -----------------
                                                                   (Dollars in thousands)
<S>                                                    <C>                         <C>
Current tax expense                                    $             996           $            603
Deferred tax benefit                                                (147)                       (78)
                                                       -----------------           ----------------
                                                       $             849           $            525
                                                       =================           ================
</TABLE>

The difference between the provision for income taxes and the amounts computed
by applying the statutory federal income tax rate of 34% to income before income
taxes is summarized below:

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                       ------------------------------------------
                                                              2002                      2001
                                                       ----------------          ----------------
                                                                  (Dollars in thousands)
<S>                                                    <C>                       <C>
Expense computed at statutory rate of 34%              $             854         $            509
Effect of state income taxes                                         114                       68
U.S. Government interest                                             (23)                     (40)
Other, net                                                           (96)                     (12)
                                                       -----------------         -----------------
                                                       $             849         $            525
                                                       =================         ================
</TABLE>

                                       36

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. STOCKHOLDERS' EQUITY

On October 2, 1996, South Street Financial Corp. completed and closed its stock
offering. Gross proceeds from the sale of 4,496,500 shares amounted to
$44,965,000, which includes $4,528,000 in proceeds from shares purchased by the
ESOP, and reduced by conversion costs of $1,320,000. The Company transferred
$19,558,000 of the net proceeds to Home Savings for the purchase of all of the
common stock of the Bank and retained the remaining net proceeds.

Concurrent with the Conversion, the Bank established a liquidation account in an
amount equal to its net worth as reflected in its latest statement of financial
condition contained in the definitive prospectus used in connection with the
Company's initial public offering. The liquidation account will be maintained
for the benefit of eligible deposit account holders and supplemental eligible
deposit account holders who continue to maintain their deposit accounts in the
Bank after the Conversion. Only in the event of a complete liquidation will
eligible deposit account holders and supplemental eligible deposit account
holders be entitled to receive a liquidation distribution from the liquidation
account in the amount of the then current adjusted sub-account balance for
deposit accounts then held before any liquidation distribution may be made with
respect to common stockholders. Dividends paid by the Bank subsequent to the
Conversion cannot be paid from this liquidation account.

Subject to applicable law, the Board of Directors of the Company or Home Savings
may each provide for the payment of dividends. Future declarations of cash
dividends, if any, by the Company may depend upon dividend payments by the Bank
to the Company. Subject to regulations promulgated by the NC Administrator, the
Bank will not be permitted to pay dividends on its common stock if its
stockholders' equity would be reduced below the amount required for the
liquidation account or its capital requirement.

During the years ended December 31, 2002 and 2001, the Bank paid $1,242,647 and
$1,257,028, respectively, in dividends to the Company.

The Company paid cash dividends totaling $.40 per share during each of the years
ended December 31, 2002 and 2001, respectively.

The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative regulatory accounting practices. The Company's and the
Bank's capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors. Prompt corrective action provisions are not applicable to bank holding
companies.

                                       37

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. STOCKHOLDERS' EQUITY (Continued)

The FDIC requires the Company and the Bank to have a minimum leverage ratio of
Tier I Capital (principally consisting of retained earnings and any future
common stockholders' equity, less any intangible assets) to all assets of at
least 3%, provided that it receives the highest rating during the examination
process. For institutions that receive less than the highest rating, the Tier I
capital requirement is 1% to 2% above the stated minimum. The FDIC also requires
the Company and the Bank to have a ratio of total capital to risk-weighted
assets of 8%, of which at least 4% must be in the form of Tier I capital. As of
December 31, 2002, the most recent notification from the FDIC categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action. There are no conditions or events since that notification that
management believes have changed the Bank's category. The Company and the Bank
complied with all of the capital requirements at December 31, 2002 and 2001, as
presented in the following table.

<TABLE>
<CAPTION>
                                                                                            Minimum To Be Well
                                                                    Minimum                 Capitalized Under
                                                                    Capital                  Prompt Corrective
                                      Actual                      Requirement                Action Provisions
                           ----------------------------   ---------------------------  ----------------------------
                              Amount           Ratio        Amount          Ratio          Amount          Ratio
                           -------------  -------------   ------------  -------------  -------------   ------------
                                                            (Dollars in Thousands)
<S>                        <C>                   <C>     <C>                     <C>   <C>                    <C>
DECEMBER 31, 2002:
Total Capital to Risk
   Weighted Assets:
     Consolidated          $      25,293         20.31%  $       9,964           8.0%  $         N/A           N/A
     Bank                         22,957         18.43%          9,964           8.0%         12,455          10.0%
Tier 1 Capital to Risk
   Weighted Assets:
     Consolidated                 24,770         19.89%          4,982           4.0%            N/A           N/A
     Bank                         22,434         18.01%          4,982           4.0%          7,473           6.0%
Tier 1 Capital to
   Average Assets:
     Consolidated          $      24,770         11.17%  $       6,653           3.0%  $         N/A           N/A
     Bank                         22,434         10.12%          6,653           3.0%         11,088           5.0%
DECEMBER 31, 2001:
Total Capital to Risk
   Weighted Assets:
     Consolidated          $      24,281         20.07%  $       9,678           8.0%  $         N/A           N/A
     Bank                         22,367         18.49%          9,678           8.0%         20,992          10.0%
Tier 1 Capital to Risk
   Weighted Assets:
     Consolidated                 23,854         19.72%          4,839           4.0%            N/A           N/A
     Bank                         21,940         18.14%          4,839           4.0%         12,595           6.0%
Tier 1 Capital to
   Average Assets:
     Consolidated          $      23,854         11.36%  $       6,298           3.0%  $         N/A           N/A
     Bank                         21,940         10.45%          6,298           3.0%         10,495           5.0%
</TABLE>

                                       38

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12. EMPLOYEE STOCK OWNERSHIP PLAN

The Bank has established an ESOP to benefit all qualified employees. The ESOP
purchased 359,720 shares of common stock in the open market subsequent to the
Conversion with proceeds received from a loan from the Company. The ESOP
purchased 168,448 additional shares with proceeds received from the return of
capital dividend paid by the Company in 1998.

The Company's note receivable is to be repaid based upon 15 annual installments
of principal and interest on September 30 of each year through September 30,
2011. Interest is based upon prime which will be adjusted and paid annually. The
note may be prepaid without penalty. The unallocated shares of stock held by the
ESOP are pledged as collateral for the debt. The ESOP is funded by contributions
made by the Bank in amounts sufficient to retire the debt. At December 31, 2002,
the outstanding balance of the note receivable is $1,920,000, and is presented
as a reduction of stockholders' equity.

Shares are released as the debt is repaid and dividends from the common stock
held by the ESOP are allocated among participants on the basis of compensation
in the year of allocation. Benefits become 100% vested after five years of
credited service. Forfeitures of nonvested benefits will be reallocated among
remaining participating employees in the same proportion as contributions.

Dividends on unallocated shares may be used by the ESOP to repay the debt to the
Company and are not reported as dividends but as additional compensation expense
in the financial statements. Dividends on allocated or committed to be allocated
shares may also be used to repay the debt to the Company and are reported as
dividends in the financial statements. Special return of capital dividends paid
on 331,742 unallocated ESOP shares totaled $1,990,000 on September 30, 1998 and
are being amortized as compensation expense in subsequent periods as ESOP shares
are released to the participants. During the years ended December 31, 2002 and
2001, $361,000 and $228,000, respectively, was amortized as compensation
expense.

Net expenses of $323,000 and $293,000 have been recorded during the years ended
December 31, 2002 and 2001, respectively, in connection with the ESOP. The
expenses represent the difference between the fair value of the shares which
have been released or committed to be released to participants and the cost of
these shares to the ESOP. The Bank has debited this amount to paid-in capital in
accordance with the provisions of AICPA Statement of Position 93-6.

At December 31, 2002, 284,640 shares held by the ESOP have been released or
committed to be released to the plan's participants for purposes of computing
earnings per share.

The ESOP has a put option which requires the Company to repurchase its common
stock from participants in the ESOP who are eligible to receive benefits under
the terms of the plan and elect to receive cash in exchange for their common
stock. The potential commitment for the put option at December 31, 2002, based
on a fair value of the ESOP shares released or committed to be released is
$1,519,000. The fair value of the unallocated shares is $1,746,000 at December
31, 2002. This commitment will fluctuate based on the fair value of the shares.

                                       39

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13. OFF BALANCE-SHEET RISK

The Company is a party to financial instruments with off-balance sheet credit
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit.
Those instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheet. The contract
or notional amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments. The Company uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of conditions established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company, upon extension of credit is based on
management's credit evaluation of the borrower. Collateral obtained varies but
may include real estate, stocks, bonds, and certificates of deposit.

A summary of the contract amounts of the Company's exposure to off-balance sheet
credit risk as of December 31, 2002 is as follows:

        Financial instruments whose contract amounts represent credit risk:
          Commitments to extend credit                     $   738,000
          Undisbursed lines of credit                        9,100,000
          Undisbursed portion of construction loans          2,569,000

The Bank entered into an employment agreement with one executive officer to
provide for his continued employment. The agreement provides for an initial term
of three years and can be extended an additional year annually.

In the normal course of its operations, the Company from time to time is party
to various legal proceedings. Based upon information currently available, and
after consultation with its legal counsel, management believes that such legal
proceedings, in the aggregate, will not have a material adverse effect on the
Company's business, financial position or results of operations.

                                       40

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instruments for which fair value disclosures are required include cash
and due from banks, interest-bearing deposits, federal funds sold, investment
securities, loans, Federal Home Loan bank stock, deposit accounts and advances
from the Federal Home Loan Bank. Fair value estimates are made at a specific
moment in time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no active market readily
exists for a portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and, therefore, cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:

CASH AND DUE FROM BANKS, INTEREST-BEARING DEPOSITS AND FEDERAL FUNDS SOLD

        The carrying amounts for cash and due from banks, interest-bearing
        deposits and federal funds sold approximate fair value because of the
        short maturities of those instruments.

INVESTMENT SECURITIES

        Fair values for investment securities held to maturity and available for
        sale are based on quoted market prices, where available. If quoted
        market prices are not available, fair values are based on quoted market
        prices of comparable instruments.

LOANS

        For certain homogenous categories of loans, such as residential
        mortgages, fair value is estimated using the quoted market prices for
        securities backed by similar loans, adjusted for differences in loan
        characteristics. The fair value of other types of loans is estimated by
        discounting the future cash flows using the current rates at which
        similar loans would be made to borrowers with similar credit ratings and
        for the same remaining maturities.

FEDERAL HOME LOAN BANK STOCK

        The carrying value of Federal Home Loan Bank stock approximates fair
        value based on the redemption provisions of the Federal Home Loan Bank.

                                       41

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

DEPOSITS

        The fair value of demand deposits is the amount payable on demand at the
        reporting date. The fair value of time deposits is estimated by
        discounting expected future cash flows using the rates currently offered
        for instruments of similar remaining maturities.

BORROWINGS

        The fair value of advances from the Federal Home Loan Bank is based upon
        the discounted value of expected future cash flows when using current
        rates at which borrowings of similar maturity could be obtained.

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

        With regard to financial instruments with off-balance sheet risk
        discussed in Note 13, it is not practicable to estimate the fair value
        of future financing commitments. The large majority of commitments to
        extend credit and standby letters of credit are at variable rates and/or
        have relatively short terms to maturity. Therefore, the fair value for
        these financial instruments is considered to be immaterial.

The carrying amounts and estimated fair values of the Company's financial
instruments, none of which are held for trading purposes, are as follows at
December 31, 2002 and 2001:

<TABLE>
<CAPTION>
                                                           2002                                  2001
                                             ---------------------------------   ----------------------------------
                                                Carrying          Estimated          Carrying          Estimated
                                                 amount          fair value           amount          fair value
                                             --------------   ----------------   ---------------    ---------------
                                                                     (Dollars in thousands)
<S>                                          <C>              <C>                <C>                <C>
Financial assets:
   Cash and due from banks                   $        3,821   $          3,821   $         3,486    $         3,486
   Interest-bearing deposits and
    federal funds sold                               27,901             27,901             8,493              8,493
   Held to maturity investments                       3,244              3,060             4,697              4,468
   Available for sale investment                     11,911             11,911            16,972             16,972
   Loans, net                                       172,184            173,505           173,132            173,485
   Federal Home Loan Bank stock                       1,509              1,509             1,348              1,348

Financial liabilities:
   Deposits                                         175,669            176,535           167,590            167,556
   Borrowings                                        21,000             21,000            17,000             17,000
</TABLE>

                                       42

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15. PARENT COMPANY FINANCIAL DATA

                            CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                 ----------------------------------
                                                                      2002               2001
                                                                 --------------     ---------------
                                                                     (Dollars in thousands)
<S>                                                              <C>                <C>
Assets:
   Cash                                                          $            1     $             2
   Federal funds sold                                                     2,388               1,925
   Securities available for sale                                            300                 300
   Accrued interest receivable                                               41                  51
   Other assets                                                              23                  28
   Investment in Home Savings Bank                                       22,559              21,975
                                                                 --------------     ---------------
                                                                 $       25,312     $        24,281
                                                                 ==============     ===============
Liabilities and Stockholders' Equity:
   Liabilities:
      Other liabilities                                          $          417     $           392
                                                                 --------------     ---------------
   Stockholders' Equity:
      Common stock                                                        7,748               8,296
      Accumulated other comprehensive income                                125                  35
      Unearned ESOP                                                      (1,920)             (2,439)
      Unearned compensation                                              (1,076)             (1,437)
      Retained earnings                                                  20,018              19,434
                                                                 --------------     ---------------
                                                                         24,895              23,889
                                                                 --------------     ---------------
                                                                 $       25,312     $        24,281
                                                                  ==============     ===============
</TABLE>

                         CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                 ----------------------------------
                                                                      2002               2001
                                                                 --------------     ---------------
                                                                       (Dollars in thousands)
<S>                                                              <C>                <C>
Interest income                                                  $          226     $           296
Interest expense                                                              -                   -
Equity in earnings of Home Savings Bank                                   1,534                 799
Other expense                                                               (17)                (13)
Income tax expense                                                          (81)               (109)
                                                                 --------------     ---------------
      Net income                                                 $        1,662     $           973
                                                                 ==============     ===============
</TABLE>

                                       43

<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15. PARENT COMPANY FINANCIAL DATA (Continued)

                       CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                      ----------------------------------
                                                                           2002               2001
                                                                      --------------     ---------------
                                                                            (Dollars in thousands)
<S>                                                                   <C>                <C>
Cash Flows from Operating Activities:
   Net income                                                         $        1,662     $           973
   Adjustments to reconcile net income to net cash provided
    by operating activities:
        Change in assets and liabilities:
            Equity in earnings of Home Savings                                (1,534)               (799)
            Decrease in accrued interest
             receivable and other assets                                          15                  18
            Decrease in other liabilities                                       (136)                (71)
                                                                      --------------     ---------------

        Net cash provided by operating activities                                  7                 121
                                                                      --------------     ---------------
Cash Flows from Investing Activities:
   Upstream dividend from Home Savings Bank                                    1,243               1,257
                                                                      --------------     ---------------

        Net cash provided by investing activities                              1,243               1,257
                                                                      --------------     ---------------
Cash Flows from Financing Activities:
   Retirement of stock purchased                                                (225)               (462)
   Payment of dividends                                                       (1,082)             (1,126)
   Principal payment received on note receivable from ESOP                       519                 554
                                                                      --------------     ---------------

        Net cash used by financing activities                                   (788)             (1,034)
                                                                      --------------     ---------------
        Net increase in cash and cash equivalents                                462                 344
Cash and cash equivalents:
   Beginning                                                                   1,927               1,583
                                                                      --------------     ---------------

   Ending                                                             $        2,389     $         1,927
                                                                      ==============     ===============
Supplemental Disclosures of Cash Flow Information:
      Cash paid for income taxes                                      $           54     $            43

Supplemental Disclosures of Noncash
   Investing and Financing:
      Change in unrealized gain on
       securities available for sale, net                                         90                 198
      Change in dividends accrued                                                  4                   8
</TABLE>

                                       44

<PAGE>

                   SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
                              CORPORATE INFORMATION

                             OFFICERS OF THE COMPANY

R. Ronald Swanner                                Cris D. Turner
President, CEO and Chairman of Board             Vice-President

David L. Smith                                   Christopher F. Cranford
Secretary                                        CFO and Treasurer

                    DIRECTORS OF THE HOLDING COMPANY AND BANK

R. Ronald Swanner                                Douglas D. Stokes
President, CEO and Chairman of Board             Owner and President
 of Home Savings Bank                            Stokes Construction Company

Joel A. Huneycutt                                Caldwell A. Holbrook, Jr.
President,                                       Owner of Gus Holbrook
Locust Lumber Company                             General Contractor

Greg E. Underwood                                J. Banks Garrison, Jr.
Certified Public Accountant                      Vice President of South Central
Private Practice                                  Oil Company

STOCK TRANSFER AGENT             INDEPENDENT AUDITORS    SPECIAL LEGAL COUNSEL
Registrar and Transfer Company     Dixon Odom PLLC         Brooks, Pierce,
  10 Commerce Drive             6525 Morrison Boulevard,       McLendon,
  Cranford, NJ 07016             Suite 516 Charlotte,    Humphrey & Leonard, LLP
                                     NC  28211-3563       2000 Renaissance Plaza
                                                           230 North Elm Street
                                                           Greensboro, NC 27420

                                CORPORATE OFFICE
                              155 West South Street
                                  P.O. Box 489
                            Albemarle, NC 28002-0489

FORM 10-KSB

A copy of Form 10-KSB as filed with the Securities and Exchange Commission will
be furnished without charge to the Company's stockholders upon written request
to South Street Financial Corp., 155 West South Street, P.O. Box 489, Albemarle,
NC 28002.

ANNUAL MEETING

The 2003 annual meeting of stockholders of South Street Financial Corp. will be
held at 4 p.m. on May 19, 2003 at the Company's corporate office at 155 West
South Street, Albemarle, NC.

                                       45

<PAGE>

                   SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
                            COMMON STOCK INFORMATION

The Company's common stock is listed on the NASDAQ National Market under the
symbol SSFC and began trading on October 3, 1996. At December 31, 2002, there
were approximately 618 shareholders of record, not including the number of
persons or entities where stock is held in nominee or street name through
various brokerage firms or banks. The following table reflects the stock trading
and dividend payment frequency of the Company.

<TABLE>
<CAPTION>
                                        Dividends                        Stock Price
                              -----------------------------     -----------------------------
                                         Regular                    High              Low
                              -----------------------------     ------------    -------------
<S>                                  <C>                        <C>             <C>
2002:
First Quarter                        $       0.10               $    7.50       $      6.35
Second Quarter                               0.10                    8.00              6.58
Third Quarter                                0.10                    8.20              6.80
Fourth Quarter                               0.10                    7.68              6.92

2001:
First Quarter                        $       0.10               $    6.500      $      6.380
Second Quarter                               0.10                    7.790             6.260
Third Quarter                                0.10                    8.000             6.010
Fourth Quarter                               0.10                    7.000             6.650
</TABLE>

                                       46