<PAGE>

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

                                   ---------

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 2000
                                             -----------------

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


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

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

               155 West South Street
             Albemarle, North Carolina                      28001
            ---------------------------                    -------
      (Address of principal executive office)            (Zip Code)

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

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

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

                           Common Stock, no par value
                           --------------------------
                                (Title of class)

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

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

State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing.
$20,199,375 common stock, no par value, based on the closing price of such
common stock on March 20, 2001.

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. 3,137,767 shares of common
stock, no par value, outstanding at March 20, 2001.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report to stockholders of South Street Financial Corp.
for the year ended December 31, 2000 ("2000 Annual Report"), are incorporated by
reference into Part I, Part II and Part IV.

Portions of the Proxy Statement for the 2001 Annual Meeting of Shareholders of
South Street Financial Corp. to be held on May 21, 2001, are incorporated by
reference into Part III.

--------------------------------------------------------------------------------
<PAGE>

                                     PART I


ITEM 1.          BUSINESS

General

         Prior to October 2, 1996, Home Savings Bank of Albemarle, Inc., S.S.B.
(the "Bank") operated as a mutual North Carolina-chartered savings bank. On
October 2, 1996, the Bank converted from a North Carolina-chartered mutual
savings bank to a North Carolina-chartered stock savings bank (the
"Conversion"). In connection with the Conversion, all of the issued and
outstanding capital stock of the Bank was acquired by South Street Financial
Corp., a North Carolina corporation (the "Company") which was organized to
become the holding company for the Bank. At that time, the Company had an
initial public offering of its common stock, no par value (the "Common Stock").

         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's office is located at 155
West South Street, Albemarle, North Carolina. The Company's activities consist
of investing the proceeds of its initial public offering which were retained at
the holding company level, 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.

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

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

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



                                        2
<PAGE>

         In December 1998, the Bank joined the HONOR network (which merged into
the STAR network in 1999) and the CIRRUS network for ATMs and Point of Sale
("POS") terminals, which allows the Bank's cardholders to enjoy the convenience
and accessability of approximately 324,000 ATMs and over 400,000 POS terminals
worldwide.

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

         On December 28, 1999, the Company changed its fiscal year end from
September 30 to December 31.

         At December 31, 2000, the Company had total assets of $198.3 million,
net loans of $152.5 million, deposits of $155.0 million, investment securities
of $37.8 million and stockholders' equity of $23.8 million. The Company
repurchased 476,385 shares of common stock in 2000 resulting in a decrease in
stockholders' equity of $3.1 million.

         At December 31, 2000, the Company and the Bank had a total of 41
employees, all of whom are full-time. Employees are not represented by any union
or collective bargaining group, and the Bank considers its employee relations to
be good.

         The Company has no operations and conducts no business of its own other
than owning the Bank, investing its portion of the net proceeds received in the
Conversion and lending funds to the ESOP. Accordingly, the discussion of the
business which follows in the Form 10-K concerns the business conducted by the
Bank, unless otherwise indicated.

Market Area

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

         The Bank's loans and deposits are primarily generated from the areas
where its offices are located. It does not solicit deposits and loans outside
its primary market area and does not use brokers to obtain deposits.
Approximately 82% of the Bank's deposits are at the Albemarle office. Stanly
County is largely rural with a population of 54,000. Its economy is diversified
among manufacturing, trade and services. Major area employers include Wiscassett
Mills Company, Collins and Aikman Corporation, Michelin Aircraft Tire Company,
Oakwood Homes and Alcoa Aluminum Company. Within the past five years several
large manufacturing companies have closed operations in Stanly County, resulting
in the loss of approximately 2,000 jobs. Over the past five years the local
economy has weakened as a result of layoffs and plant closings by local
employers. The North Carolina Department of Commerce has declared Stanly a
"distressed county" entitling it to use state grants and tax credits to lure
industry to the area. Population and household growth, and median and per capita
income levels for Stanly County are generally lower than comparable levels for
North Carolina and the nation, while unemployment levels are generally higher.
Management regards the Stanly County market area as a low growth area in which
there is significant competition among financial services providers for market
share. Management believes that opportunities for future earnings growth in the
Bank's primary market area are limited in light of these factors.



                                        3
<PAGE>

Lending Activities

         General. The Bank's primary source of revenue is interest and fee
income from its lending activities, consisting primarily of mortgage loans for
the purchase or refinancing of one-to-four family residential real property
located in its primary market area. The Bank also makes loans secured by
improved nonresidential real estate, construction loans, loans secured by
undeveloped real estate and savings account loans. Approximately 98% of the
Bank's loan portfolio is secured by real estate. As of December 31, 2000, all of
the loans in the Bank's real estate loan portfolio were secured by properties in
North Carolina. On December 31, 2000, the Bank's largest single outstanding loan
had a balance of approximately $2,855,000. This loan was performing in
accordance with its original terms. In addition to interest earned on loans, the
Bank receives fees in connection with loan originations, loan servicing, loan
modifications, late payments, loan assumptions and other miscellaneous services.

         Loan Portfolio Composition. The Bank's net loan portfolio totaled
approximately $152.5 million at December 31, 2000 representing 76.9% of the
Company's total assets at such date. At December 31, 2000, 76.3% of the Bank's
net loan portfolio was composed of one-to-four family residential mortgage
loans. Home equity loans, all of which have adjustable rates, represented 2.8%
of the Bank's net loan portfolio, and nonresidential real estate loans
represented 16.2% of the Bank's net loan portfolio on such date.

         The Bank no longer originates adjustable rate mortgage loans, excluding
home equity loans, but continues to hold a small number of adjustable rate loans
in its portfolio. As of December 31, 2000, fewer than 1% of the loans in the
Bank's loan portfolio, excluding home equity loans, had adjustable interest
rates.

         In December 1998, the Bank started a new consumer and commercial loan
department and began offering a full range of consumer and commercial products
and services. See "- Consumer Loans" below for a further discussion of the new
department, products and services.

         Origination of Loans. Historically, the Bank has not originated its
one-to-four family residential mortgage or other loans with the intention that
they will be sold in the secondary market. Accordingly, the Bank originates
fixed rate one-to-four family residential real estate loans which satisfy the
Bank's underwriting requirements and are tailored to its local community, but do
not necessarily satisfy various technical FHLMC and FNMA underwriting
requirements and purchase requirements not related to documentation.

         Although the Bank believes that many of its nonconforming loans are
saleable in the secondary market, some of such nonconforming loans could be sold
only after the Bank incurred certain costs and/or discounted the purchase price.
As a result, the Bank's loan portfolio is less liquid than would be the case if
it was composed entirely of loans originated in conformity with secondary market
requirements. In addition, certain types of nonconforming loans are generally
thought to have greater risks of default and nonperformance. However, such loans
generally produce a higher yield than would be produced by conforming loans, and
the Bank has historically found that its origination of such loans has not
resulted in a high level of nonperforming assets. These nonconforming loans
satisfy a need in the Bank's local community, and the Bank intends to continue
to originate nonconforming loans.

         Substantially all of the one-to-four family residential mortgage loans
originated by the Bank have a fixed rate of interest because there is very
little demand for adjustable rate loans in the Bank's market area. As a result,
the Bank offers 30-year fixed rate residential real estate loans but prices its
loans to encourage shorter terms of 10 to 15 years.

         The table below sets forth the Bank's loan origination, purchase
activity and loan portfolio repayment experience during the periods indicated.



                                        4
<PAGE>

<TABLE>
<CAPTION>

                                                                   Year Ended:
                                                       --------------------------------------
                                                December 31,      September 30,      September 30,
                                                   2000               1999               1998
                                                  ------             ------             -----
                                                                  (In Thousands)
<S> <C>
Loans receivable, net,
   beginning of period                           $ 133,785          $ 110,550          $ 111,990
                                                  --------           --------           --------
Loan originations:
   Residential 1-4 family                           12,402             26,604             16,309
   Nonresidential real estate                         ---                 513              1,303
   Residential construction                          8,877             11,949              2,963
   Line of credit                                    6,048              1,247              1,641
   Commercial                                        8,941              5,739                ---
   Consumer                                          4,891              1,213                343
                                                  --------           --------           --------
     Total loan originations                        41,159             47,265             22,559
Principal repayments                               (24,632)           (27,948)           (27,123)
Other changes, net(1)                                2,202             (4,374)             3,124
                                                  --------           --------           --------
Increase (decrease) in loans receivable             18,729             14,943            ( 1,440)
                                                  --------           --------           --------
Loans receivable, net, end of period             $ 152,514          $ 125,493          $ 110,550
                                                  ========           ========           ========
</TABLE>

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

(1)      Includes changes in deferred loan fees, allowance for loan losses and
         undisbursed portion of construction loans.

         Residential Real Estate Lending. The Bank's primary lending activity,
which it intends to continue to emphasize, is the origination of fixed-rate
mortgage loans to enable borrowers to purchase or refinance one-to-four family
residential real property. Consistent with the Bank's emphasis on being a
community-oriented financial institution, it is and has been the Bank's strategy
to focus its lending efforts in Stanly County, North Carolina and in contiguous
counties. On December 31, 2000, approximately 75.7% of the Bank's total net real
estate loan portfolio consisted of one-to-four family residential real estate
loans. These include both loans secured by detached single- family residences
and condominiums and loans secured by housing containing not more than four
separate dwelling units. Of such loans, 0.8% had adjustable interest rates.

         The Bank also originates fixed-rate mortgage loans secured by owner
occupied property having terms generally ranging from 10 to 30 years in amounts
of up to 95% of the lesser of the value or purchase price. Private mortgage
insurance is always required if the loan amount exceeds 80% of the value of the
property. In addition, the Bank makes fixed-rate loans secured by non-owner
occupied residential real estate generally having terms of 15 to 20 years in
amounts of up to 80% of the value of the property. Substantially all of the
fixed-rate loans in the Bank's mortgage loan portfolio have due on sale
provisions allowing the Bank to declare the unpaid balance due and payable in
full upon the sale or transfer of an interest in the property securing the loan.



                                        5
<PAGE>

         While one-to-four family residential loans are normally originated for
10 to 30 year terms, such loans customarily remain outstanding for substantially
shorter periods because borrowers often prepay their loans in full upon sale of
the property pledged as security or upon refinancing the original loan. Thus,
average loan maturity is a function of, among other factors, the level of
purchase and sale activity in the real estate market, prevailing interest rates,
and the interest rates payable on outstanding loans. The thrift and mortgage
banking industries have generally used 12-year and 7-year average loan lives in
calculations calling for prepayment assumptions for 30-year residential loans
and 15-year residential loans, respectively. Management believes that the Bank's
recent loan prepayment experience has been shorter than these assumed average
loan lives due to recent periods of low interest rates and resulting high levels
of refinancing.

         The Bank requires title insurance for its one-to-four family
residential loans. The Bank also requires that fire and extended coverage
casualty insurance (and, if appropriate, flood insurance) be maintained in an
amount at least equal to the loan amount or replacement cost of the improvements
on the property securing the loans, whichever is greater.

         Residential Multifamily. At December 31, 2000, the Bank had
approximately $566,000 in outstanding loans secured by multifamily residential
real estate, comprising approximately 0.37% of its net loan portfolio as of that
date. Substantially all of the Bank's loans secured by multifamily residential
real estate have fixed rates. Such loans are typically made to a maximum of 80%
of the lesser of the purchase price or appraised value of the property for a
maximum term of 20 years. All such loans are personally guaranteed by
individuals.

         Nonresidential Real Estate Lending. On December 31, 2000, the Bank had
$24.7 million in outstanding loans secured by nonresidential real estate,
including undeveloped land, comprising approximately 16.2% of its net loan
portfolio as of that date. This portfolio has increased significantly due to the
Bank's additional efforts in the commercial real estate area. Most of these
loans are secured by office, retail, other commercial real estate, as well as
church properties. Loans secured by undeveloped land generally do not exceed 65%
of the appraised value of the real estate securing the loans; loans secured by
commercial real estate generally do not exceed 80% of the appraised value of the
real estate securing the loans. Loans secured by commercial real estate and
undeveloped land generally are larger than one-to-four family residential loans
and involve a greater degree of risk. Payments on these loans depend to a large
degree on results of operations and management of the properties and may be
affected to a greater extent by adverse conditions in the real estate market or
the economy in general. As of December 31, 2000, the largest nonresidential real
estate loan in the Bank's loan portfolio totaled $809,000. This loan was
performing in accordance with the original loan contract.

         Home Equity Lines of Credit. At December 31, 2000, the Bank had
approximately $4.3 million in home equity line of credit loans, representing
approximately 2.8% of its net loan portfolio. These loans are often originated
at the time of the closing of a one-to-four family residential real estate loan
secured by the same property. The Bank's home equity lines of credit have
adjustable interest rates tied to prime interest rates plus a margin. The home
equity lines of credit require monthly payments until the loan is paid in full.
Home equity lines of credit are generally secured by subordinate liens against
residential real property. The Bank requires that fire and extended coverage
casualty insurance (and, if appropriate, flood insurance) be maintained in an
amount at least sufficient to cover its loan. Home equity loans are generally
limited so that the amount of such loans, along with any senior indebtedness,
does not exceed 80% of the value of the real estate security. Because home
equity loans involve revolving lines of credit which can be drawn over a period
of time, the Bank faces risks associated with changes in the borrower's
financial condition. Because home equity loans have adjustable interest rates
with no rate caps (other than usury limitations), increased delinquencies could
occur if interest rate increases occur and borrowers are unable to satisfy
higher payment requirements. The Bank intends to continue to emphasize its home
equity program. The presence of home equity loans in the Bank's portfolio allows
the institution to manage the interest sensitivity of its assets and liabilities
because home equity lines of credit have adjustable rates which are subject to
change monthly and without any significant rate caps.



                                        6
<PAGE>

         Construction Lending. The Bank makes construction loans primarily for
the construction of single- family dwellings. The aggregate outstanding balance
of such loans on December 31, 2000 was approximately $7.9 million, representing
approximately 5.2% of the Bank's net loan portfolio. Most of these loans were
made to persons who are constructing properties for the purpose of occupying
them. Loans made to individual property owners are "construction-permanent"
loans which generally provide for the payment of interest only during a
construction period, after which the loans convert to a permanent loan at fixed
rates having terms similar to other one-to-four family residential loans.
Construction loans to persons who intend to occupy the finished premises
generally have a maximum loan-to-value ratio of 90%.

         Construction loans are generally considered to involve a higher degree
of risk than long-term financing secured by real estate which is already
occupied. A lender's risk of loss on a construction loan is dependent largely
upon the accuracy of the initial estimate of the property's value at the
completion of construction and the estimated cost (including interest) of
construction. If the estimate of construction costs proves to be inaccurate, the
lender may be required to advance funds beyond the amount originally committed
in order to permit completion of construction. If the estimate of anticipated
value proves to be inaccurate, the lender may have security which has value
insufficient to assure full repayment.

         Consumer Loans. In addition to the loans described above, the Bank
provides overdraft lines of credit in amounts of up to $2,000. Payments are
required in amounts of 5% of the outstanding balance or $10, whichever is
greater. In addition, the Bank offers loans secured by savings accounts,
automobile loans and other secured and unsecured consumer loans. As of December
31, 2000, the Bank had approximately $3.7 million in consumer loans outstanding,
representing approximately 2.4% of its net loan portfolio.

         In December 1998, the Bank started a new consumer and commercial loan
department and began offering a full range of consumer and commercial products
and services. To oversee the new department, the Bank hired a commercial banker
with over 21 years of experience in the local market. The Bank hired another
loan officer in August 1999 to assist in the growth of this line of service.
Management of the Bank believes that introducing consumer and commercial lending
to the Bank's existing line of products and services will enhance the Bank's net
interest margin while reducing the Bank's overall exposure to interest rate
risk. Management also feels that the addition of these products will help the
Bank grow while creating stronger ties to its existing customer base. As of
December 31, 2000, commercial loans, which are classified as nonresidential real
estate loans, totaled approximately $17.0 million, representing approximately
11.1% of the Bank's net loan portfolio.

         Loan Solicitation, Processing and Underwriting. Loan originations are
derived from a number of sources such as referrals from real estate brokers,
present depositors and borrowers, builders, attorneys, walk-in customers and in
some instances, other lenders.

         During its loan approval process, the Bank assesses the applicant's
ability to make principal and interest payments on the loan and the value of the
property securing the loan. The Bank obtains detailed written loan applications
to determine the borrower's ability to repay and verifies responses on the loan
application through the use of credit reports, financial statements, and other
confirmations. Under current practice, the loan officer of the Bank analyzes the
loan application and the property involved, and an appraiser inspects and
appraises the property. The Bank requires independent fee appraisals on all
loans originated primarily on the basis of real estate collateral. The Bank also
obtains information concerning the income, financial condition, employment and
the credit history of the applicant.

         Mortgage loans of up to $500,000 are approved by the Bank's loan
committee which is composed of its President, Executive Vice President and one
other member of the Board of Directors. All loans in excess of $500,000 must be
approved by the entire Board of Directors.



                                        7
<PAGE>

         Normally, upon approval of a residential mortgage loan application, the
Bank gives a commitment to the applicant that it will make the approved loan at
a stipulated rate any time within a 30-day period. The loan is typically funded
at such rate of interest and on other terms which are based on market conditions
existing as of the date of the commitment. As of December 31, 2000, the Bank had
$7.3 million in such unfunded mortgage loan commitments. In addition, on such
date the Bank had $4.4 million in unfunded commitments for unused lines of
credit and letters of credit.

         Interest Rates, Terms, Points and Fees. Interest rates and fees charged
on the Bank's loans are affected primarily by the market demand for loans,
competition, the supply of money available for lending purposes and the Bank's
cost of funds. These factors are affected by, among other things, general
economic conditions and the policies of the federal government, including the
Federal Reserve, tax policies and governmental budgetary matters.

         In addition to earning interest on loans, the Bank receives fees in
connection with originating loans. Fees for loan servicing, loan modifications,
late payments, loan assumptions and other miscellaneous services in connection
with loans are also charged by the Bank.

         Nonperforming Assets and Asset Classification. When a borrower fails to
make a required payment on a loan and does not cure the delinquency promptly,
the loan is classified as delinquent. Delinquencies on all loans are reviewed
monthly by the Board of Directors. The normal procedure followed by the Bank
once a loan is classified as delinquent is to make contact with the borrower at
prescribed intervals in an effort to bring the loan to a current status, and
late charges are assessed as allowed by law. In most cases, delinquencies are
cured promptly. If a delinquency is not cured, the Bank normally, subject to any
required prior notice to the borrower, commences foreclosure proceedings. If the
loan is not reinstated within the time permitted for reinstatement, or the
property is not redeemed prior to sale, the property may be sold at a
foreclosure sale. In foreclosure sales, the Bank may acquire title to the
property through foreclosure, in which case the property so acquired is offered
for sale and may be financed by a loan involving terms more favorable to the
borrower than those normally offered. Any property acquired as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until such time as it is sold or otherwise disposed of by the Bank to recover
its investment. As of December 31, 2000, the Bank had one piece of single-family
property classified as real estate owned. The property was recorded on the
Bank's books at $18,000, the unpaid principal balance of loans secured by such
property. The appraised value of the property exceeded its principal balance.
Real estate acquired through, or in lieu of, loan foreclosure is initially
recorded at fair value at the date of foreclosure, establishing a new cost
basis. After foreclosure, valuations are periodically performed by management,
and the real estate is carried at the lower of cost or fair value minus costs to
sell. Revenue and expenses from holding the properties and additions to the
valuation allowance are included in operations.

         The Bank continues to accrue interest on loans delinquent 90 days or
more. However, these loans are effectively placed on nonaccrual status as all
such interest income is reversed by the establishment of a reserve for
uncollected interest. Loans are returned to earning status when management
determines, based upon an evaluation of the underlying collateral, together with
the borrower's payment record and financial condition, that the borrower has the
capability and intent to meet the contractual obligations of the loan agreement.
Interest on loans placed on nonperforming status is charged off when management
determines it is not collectible. The allowance is established by a charge to
interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent cash payments are received until the
loan is returned to performing status. For the fiscal year ended December 31,
2000, interest income that would have been recorded net of interest income
actually recognized on nonperforming loans under the original terms of such
loans was $20,000.

         Applicable regulations require the Bank to "classify" its own assets on
a regular basis. In addition, in connection with examinations of savings
institutions, regulatory examiners have authority to identify problem assets
and, if appropriate, classify them. Problem assets are classified as
"substandard," "doubtful" or "loss," depending on the presence of certain
characteristics as discussed below.


                                        8
<PAGE>

         An asset is considered "substandard" if not adequately protected by the
current net worth and paying capacity of the obligor or the collateral pledged,
if any. "Substandard" assets include those characterized by the "distinct
possibility" that the insured institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard" with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a loss reserve is not warranted.

         As of December 31, 2000, the Bank had approximately $177,000 of loans
internally classified as "substandard," and no loans classified as "doubtful" or
"loss." The Bank also identifies assets which possess credit deficiencies or
potential weaknesses deserving close attention by management. These assets may
be considered "special mention" assets and do not yet warrant adverse
classification. At December 31, 2000, the Bank had approximately $291,000 of
loans in the "special mention" category.

         When an insured institution classifies problem assets as either
substandard or doubtful, it is required to establish general allowances for loan
losses in an amount deemed prudent by management. These allowances represent
loss allowances which have been established to recognize the inherent risk
associated with lending activities and the risks associated with particular
problem assets. When an insured institution classifies problem assets as "loss,"
it charges off the balance of the asset. The Bank's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the FDIC and the Administrator which can order the
establishment of additional loss allowances.

         The following table sets forth at December 31, 2000, the Bank's
aggregate carrying value of the assets classified as substandard, doubtful, loss
or "special mention":


<TABLE>
<CAPTION>


                                   Special Mention List        Substandard               Doubtful                    Loss
                                  ----------------------      -------------             ----------                   ----
                                   Number    Amount        Number         Amount    Number      Amount        Number       Amount
                                   ------    ------        ------         ------    ------      ------        ------       ------
                                                  (Dollars in Thousands)
<S> <C>
Real estate loans:
   Residential 1-4 family             13     $  291            5         $  123        --       $    --            --     $     --
   Residential real estate             -         --           --              -        --            --            --           --
   Nonresidential real estate         --         --           --             --        --            --            --           --
   Residential construction           --         --           --             --        --            --            --           --
   Land                               --         --            -              -        --            --            --           --
   Line of credit                                              2             45        --            --            --           --
                                    ----      -----        -----          -----     -----        ------     ---------       ------
      Total real estate loans         13        291            7            168        --            --            --           --
                                    ----      -----        -----          -----     -----        ------     ---------       ------
Consumer loans:
   Share                              --         --            -             --        --            --            --           --
   Credit reserve                     --         --            8              9        --            --            --           --
                                    ----      -----        -----          -----     -----        ------     ---------       ------
      Total consumer loans            --         --            8              9        --            --            --           --
                                    ----      -----        -----          -----     -----        ------     ---------       ------
Total                                 13     $  291           15         $  177        --       $    --            --      $     -
                                    ====      =====        =====          =====     =====        ======     =========       ======

</TABLE>


         Allowance for Loan Losses. In originating loans, the Bank recognizes
that credit losses will be experienced and that the risk of loss will vary with,
among other things, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a secured loan, the
quality of the security for the loan as well as general economic conditions. It
is management's policy to maintain an adequate


                                        9
<PAGE>

allowance for loan losses based on, among other things, the Bank's historical
loan loss experience, evaluation of economic conditions and regular reviews of
delinquencies and loan portfolio quality. Specific allowances are provided for
individual loans when ultimate collection is considered in doubt by management
after reviewing the current status of loans which are contractually past due and
considering the fair value of the security for the loans.

         Management continues to actively monitor the Bank's asset quality, to
charge off loans against the allowance for loan losses when appropriate and to
provide specific loss reserves when necessary. Although management believes it
uses the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ substantially from the economic conditions in the assumptions
used in making the initial determinations. During the fiscal year ended December
31, 2000, the Bank maintained its level of allowance for loan losses which
management believes is adequate based on the risks inherent in the loan
portfolio.

         For information on loans receivable, see Note 3 of "Notes to
Consolidated Financial Statements" in the 2000 Annual Report.

Investment Securities

         Interest and dividend income from investment securities generally
provides the second largest source of income to the Company after interest on
loans. In addition, the Company receives interest income from deposits in other
financial institutions. On December 31, 2000, the carrying value of the
Company's investment securities portfolio totaled approximately $37.8 million
and consisted of interest-bearing deposits, federal funds sold, U.S. government
and agency securities, mortgage-backed securities, and stock in the FHLB of
Atlanta. The investment securities portfolio includes interest-bearing deposits
and federal funds sold of $4.5 million at December 31, 2000. The mortgage-backed
securities consist of mortgage-backed securities issued by the GNMA, FNMA and
FHLMC.

         Investments in mortgage-backed securities involve a risk that, because
of changes in the interest rate environment, actual prepayments may be greater
than estimated prepayments over the life of the security, which may require
adjustments to the amortization of any premium or accretion of any discount
relating to such instruments, thereby reducing the net yield on such securities.
There is also reinvestment risk associated with the cash flows from such
securities. In addition, the market value of such securities may be adversely
affected by changes in interest rates.

         Statement of Financial Accounting Standards No. 115 ("SFAS 115")
"Accounting for Certain Investments in Debt and Equity Securities" addresses the
accounting and reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities. These
investments are to be classified in three categories and accounted for as
follows: (1) debt securities that the entity has the positive intent and ability
to hold to maturity are classified as held-to-maturity and reported at amortized
cost; (2) debt and equity securities that are bought and held principally for
the purpose of selling them in the near term are classified as trading
securities and reported at fair value, with net unrealized gains and losses
included in earnings; and (3) debt securities not classified as either
held-to-maturity or trading securities and equity securities not classified as
trading securities are classified as securities available-for-sale and reported
at fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of equity. The Company has no trading
securities. See Note 2 of "Notes to Consolidated Financial Statements" in the
2000 Annual Report.

         The amortized cost of securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest income
from investments. Realized gains and losses, and declines in value judged to be
other than temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method.



                                       10
<PAGE>

         As a member of the FHLB of Atlanta, the Bank is required to maintain an
investment in stock of the FHLB of Atlanta equal to the greater of 1% of the
Bank's outstanding home loans or 5% of its outstanding advances from the FHLB of
Atlanta. No ready market exists for such stock, which is carried at cost. As of
December 31, 2000, the Bank's investment in stock of the FHLB of Atlanta was
$1.2 million.

         North Carolina regulations require the Bank to maintain a minimum
amount of liquid assets which may be invested in specified short-term
securities. The Bank is also permitted to make certain other securities
investments. The Bank's current investment policy states that the Bank's
investments will be limited to U.S. Treasury obligations, federal agency
securities, corporate notes and time deposits in the FHLB.

         Investment decisions are made by authorized officers of the Bank under
policies established by the Board of Directors. Such investments are managed in
an effort to produce the highest yield consistent with maintaining safety of
principal and compliance with regulations governing the savings industry.

         See Note 2 of "Notes to Consolidated Financial Statements" in the 2000
Annual Report for further information on investment securities.

Deposits and Borrowings

         General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from loan principal repayments, loan interest income, the stock offering,
investment income, interest-bearing deposit income, interest income from
mortgage-backed securities and otherwise from its operations. Loan repayments
are a relatively stable source of funds while deposit inflows and outflows may
be significantly influenced by general interest rates and money market
conditions. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes.

         Deposits. On December 31, 2000, December 31, 1999, and September 30,
1999, the Bank's deposits totaled approximately $155.0 million, $148.3 million,
and $144.3 million, respectively.

         The following table sets forth information relating to the Bank's
deposit flows during the periods shown and total deposits at the end of the
periods shown.


<TABLE>
<CAPTION>


                               At and for the
                                Year Ended
                                December 31               At or For the Year Ended September 30,
                                -----------         ------------------------------------------------
                                    2000          1999            1998              1997           1996
                                    ----          ----            ----              ----           ----
                                                                       (In Thousands)
<S> <C>
Total deposits at                 $148,314      $148,444       $ 141,755          $146,398      $137,647
beginning of period
Net increase (decrease)               (648)      (11,116)           (614)          (11,998)          976
before interest credited
Interest credited                    7,369         6,944           7,303             7,355         7,775
                                  --------      --------       ---------          --------      --------
Total deposits at end of
period                            $155,035      $144,272       $ 148,444          $141,755      $146,398
                                  ========      ========       =========          ========      ========

</TABLE>


                                       11
<PAGE>

         The Bank attracts both short-term and long-term deposits from the
general public by offering a variety of accounts and rates. The Bank offers
statement savings accounts, negotiable order of withdrawal accounts, money
market accounts, and fixed interest rate certificates with varying maturities.
All deposit flows are greatly influenced by economic conditions, the general
level of interest rates, competition, and other factors, including the
restructuring of the thrift industry. The Bank's savings deposits traditionally
have been obtained primarily from its primary market area. The Bank utilizes
traditional marketing methods to attract new customers and savings deposits,
including print media advertising, local radio, local cable television and
direct mailings. The Bank does not advertise for deposits outside of its local
market area or utilize the services of deposit brokers. The vast majority of the
Bank's depositors are residents of North Carolina. In the unlikely event the
Bank is liquidated following the Conversion, depositors will be entitled to full
payment of their deposit accounts prior to any payment being made to
stockholders in accordance with the regulations of the Administrator.

         In December 1998, the Bank joined the HONOR network (which merged into
the STAR network in 1999) and the CIRRUS network for ATMs and Point of Sale
("POS") terminals, which allows the Bank's cardholders to enjoy the convenience
and accessability of approximately 324,000 ATMs and over 400,000 POS terminals
worldwide.

         Borrowings. The FHLB system functions in a reserve credit capacity for
savings institutions. As a member, the Bank is required to own capital stock in
the FHLB of Atlanta and is authorized to apply for advances from the FHLB of
Atlanta on the security of that stock and a floating lien on certain of its real
estate secured loans and other assets. Each credit program has its own interest
rate and range of maturities. Depending on the program, limitations on the
amount of advances are based either on a fixed percentage of an institution's
net worth or on the FHLB of Atlanta's assessment of the institution's
creditworthiness. The Bank had $16.0 million in outstanding borrowings from the
FHLB of Atlanta at December 31, 2000.

         See Notes 7 and 8 of "Notes to Consolidated Financial Statements" in
the 2000 Annual Report for further information on deposits and borrowings.

Subsidiaries

         The Company has no subsidiaries other than the Bank. The Bank has a
wholly-owned subsidiary, South Street Development Corp. ("SSDC"), which is a
100% owner of a premier residential subdivision. In June 1998, SSDC and Park
Ridge Associates, L.L.C. ("Park Ridge") acquired 25.6 acres of prime real estate
located within the city limits of Albemarle, North Carolina. Park Ridge acquired
the real estate to develop it into a residential subdivision. The upscale
subdivision consists of 30 building lots of which 3 have been retained by the
sellers and 11 have been committed to buyers. The project now has been
completed, and is being marketed. The Bank has recognized $288,000 in gains on
the sale of real estate since the inception of the project. There can be no
assurances that the Bank will be successful in recovering its investment in the
joint venture, due to the uncertainty inherent in the construction industry and
in the real estate market.

Competition

         The Bank faces strong competition both in attracting deposits and
making real estate and other loans. Its most direct competition for deposits has
historically come from other savings institutions, credit unions and commercial
banks located in its primary market area, including large financial institutions
which have greater financial and marketing resources available to them. The Bank
also has faced significant competition for investors' funds from short-term
money market securities and other corporate and government securities. At
December 31, 2000, there were at least 7 other commercial banks, credit unions
and mortgage companies as well as numerous other financial services providers
located in the Bank's market area. At December 31, 2000, the Bank had a deposit
market share of approximately 25% in Stanly County. The ability of the Bank to
attract and retain savings deposits


                                       12
<PAGE>

depends on its ability to generally provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities.

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

Federal Income Taxation

         Savings institutions such as the Bank are subject to the taxing
provisions of the Internal Revenue Code, for corporations, as modified by
certain provisions specifically applicable for financial or thrift institutions.
Income is reported using the accrual method of accounting. The maximum corporate
federal income tax rate is 35%.

         For fiscal years beginning prior to December 31, 1995, thrift
institutions which qualified under certain definitional tests and other
conditions of the Code were permitted certain favorable provisions regarding
their deductions from taxable income for annual additions to their bad debt
reserve. A reserve could be established for bad debts on qualifying real
property loans (generally loans secured by interests in real property improved
or to be improved) under (i) a method based on a percentage of the institution's
taxable income, as adjusted (the "percentage of taxable income method") or (ii)
a method based on actual loss experience (the "experience method"). The reserve
for nonqualifying loans was computed using the experience method.

         The percentage of taxable income method was limited to 8% of taxable
income. This method could not raise the reserve to exceed 6% of qualifying real
property loans at the end of the year. Moreover, the additions for qualifying
real property loans, when added to nonqualifying loans, could not exceed 12% of
the amount by which total deposits or withdrawable accounts exceed the sum of
surplus, undivided profits and reserves at the beginning of the year. This
limitation precluded the Bank from taking a bad debt deduction in its 1996 and
1995 tax returns. The experience method was the amount necessary to increase the
balance of the reserve at the close of the year to the greater of (i) the amount
which bore the same ratio to loans outstanding at the close of the year as the
total net bad debts sustained during the current and five preceding years bore
to the sum of the loans outstanding at the close of such six years or (ii) the
balance in the reserve account at the close of the last taxable year beginning
before 1988 (assuming that the loans outstanding have not declined since such
date).

         In order to qualify for the percentage of income method, an institution
had to have at least 60% of its assets as "qualifying assets" which generally
included, cash, obligations of the United States government or an agency or
instrumentality thereof or of a state or political subdivision, residential real
estate-related loans, or loans secured by savings accounts and property used in
the conduct of its business. In addition, it had to meet certain other
supervisory tests and operate principally for the purpose of acquiring savings
and investing in loans.

         Institutions which became ineligible to use the percentage of income
method had to change to either the reserve method or the specific charge-off
method that applied to banks. Large thrift institutions, those generally
exceeding $500 million in assets, had to convert to the specific charge-off
method. In computing its bad debt reserve for federal income taxes, the Bank
used the reserve method in fiscal years 2000, 1999 and 1998.

         Bad debt reserve balances in excess of the balance computed under the
experience method or amounts maintained in a supplemental reserve built up prior
to 1962 ("excess bad debt reserve") require inclusion in taxable income upon
certain distributions to its stockholders. Distributions in redemption or
liquidation of stock or distributions with respect to its stock in excess of
earnings and profits accumulated in years beginning after December 31, 1951, are
treated as a distribution from the excess bad debt reserve. When such a
distribution takes place and it is treated as from the excess bad debt reserve,
the thrift is required to reduce its reserve by such amount


                                       13
<PAGE>

and simultaneously recognize the amount as an item of taxable income increased
by the amount of income tax imposed on the inclusion. Dividends not in excess of
earnings and profits accumulated since December 31, 1951 will not require
inclusion of part or all of the bad debt reserve in taxable income. The Bank has
accumulated earnings and profits since December 31, 1951 and has an excess in
its bad debt reserve. Distributions in excess of current and accumulated
earnings and profits will increase taxable income. Retained earnings at December
31, 2000 includes approximately $2.9 million for which no provision for federal
income tax has been made. See Note 11 to "Notes to Consolidated Financial
Statements" in the 2000 Annual Report.

         Legislation passed by the U.S. Congress and signed by the President in
August 1996 contains a provision that repeals the percentage of taxable income
method of accounting for thrift bad debt reserves for tax years beginning after
December 31, 1995. The legislation will trigger bad debt reserve recapture for
post-1987 excess reserves over a six-year period. At December 31, 2000, the
Bank's post-1987 excess reserves amounted to approximately $638,000. A special
provision suspended recapture of post-1987 excess reserves for two years
because, during those years, the institution satisfied a "residential loan
requirement." This requirement was met because the principal amount of the
institution's residential loans exceeded the base year amount, which was
measured by the average of the institution's residential loans during the six
taxable years ending before January 1, 1996. During the year ended December 31,
2000, the Bank recaptured $171,000 of the excess reserve.

         The Bank may also be subject to the corporate alternative minimum tax
("AMT"). This tax is applicable only to the extent it exceeds the regular
corporate income tax. The AMT is imposed at the rate of 20% of the corporation's
alternative minimum taxable income ("AMTI") subject to applicable statutory
exemptions. AMTI is calculated by adding certain tax preference items and making
certain adjustments to the corporation's regular taxable income. Preference
items and adjustments generally applicable to financial institutions include,
but are not limited to, the following: (i) the excess of the bad debt deduction
over the amount that would have been allowable on the basis of actual
experience; (ii) interest on certain tax-exempt bonds issued after August 7,
1986; and (iii) 75% of the excess, if any, of a corporation's adjusted earnings
and profits over its AMTI (as otherwise determined with certain adjustments).
Net operating loss carryovers, subject to certain adjustments, may be used to
offset up to 90% of the AMTI. Credit for AMT paid may be available in future
years to reduce future regular federal income tax liability. The Bank has not
been subject to the AMT in recent years.

         The Bank's federal income tax returns have not been audited in over 13
years.

State Taxation

         Under North Carolina law, the corporate income tax for the year 2000 is
6.90% of federal taxable income as computed under the Code, subject to certain
prescribed adjustments. An annual state franchise tax is imposed at a rate of
0.15% applied to the greatest of the institutions (i) capital stock, surplus and
undivided profits, (ii) investment in tangible property in North Carolina or
(iii) appraised valuation of property in North Carolina.

         The North Carolina corporate tax rate will remain at 6.90% after 2000.

                           SUPERVISION AND REGULATION

         The following is a summary of certain statutes and regulations
applicable to the Company and the Bank, but is not intended to be exhaustive and
is qualified in its entirety by reference to all particular statutory or
regulatory provisions.

         The business of bank holding companies and state savings banks are
subject to extensive regulation and supervision under both federal and state
law.



                                       14
<PAGE>

Regulation of the Company

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

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

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

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

         In addition, the "cross-guarantee" provisions of the Federal Deposit
Insurance Act, as amended, require insured depository institutions under common
control to reimburse the FDIC for any loss suffered by either the Savings
Association Insurance Fund (the "SAIF") or the Bank Insurance Fund (the "BIF")
as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The FDIC may decline to
enforce the cross-guarantee provisions if it determines that a waiver is in the
best interest of the SAIF or the BIF or both. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or any
affiliate but is subordinate


                                       15
<PAGE>

to claims of depositors, secured creditors and holders of subordinated debt
(other than affiliates) of the commonly controlled insured depository
institutions.

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

         Financial Services Modernization Legislation. The Gramm-Leach-Bliley
Act (the "Act" or the "GLB Act") was signed into law on November 12, 1999 to
remove barriers separating banking, securities and insurance firms and to make
other reforms. Certain provisions of the Act were effective immediately upon
signing; other provisions generally took effect between 120 days and 18 months
following enactment.

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

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

                  Subject to approval by the appropriate state banking
regulatory authority and upon meeting certain eligibility criteria, state banks
may have financial subsidiaries that can engage in activities permitted for
financial subsidiaries of national banks.

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

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

                  Privacy. The Act imposes restrictions on the ability of
financial services firms such as the Company and the Bank to share customer
information with non-affiliated third parties. The Act: 1) requires financial
services firms to establish privacy policies and disclose them annually to
customers, explaining how nonpublic personal information is shared with
affiliates and third parties; 2) currently requires regulatory agencies to have
standards for sharing customer information; 3) permits customers to prohibit
("opt-out") of the disclosure of personal information to non-affiliated third
parties; 4) prohibits the sharing of customer information with marketers of
credit card and other account numbers; and, 5) prohibits "pretext" calling. The
privacy provisions, however, do allow a community bank to share information with
third parties that sell financial products, such as insurance


                                       16
<PAGE>

companies or securities firms. The privacy provision became effective in
November 2000, with full compliance required by July 1, 2001.

                  Additional Provisions. (1) The Act reforms the Federal Home
Loan Bank System to provide small banks with greater access to funds for making
loans to small business and small farmers. (2) The Act obligates operators of
automated teller machines ("ATMs") to provide notices to customers regarding
surcharge practices. (3) The Act provides that financial institutions with less
than $250 million in assets will normally be examined for compliance with the
Community Reinvestment Act ("CRA") only once every five years if they maintain
an "outstanding" rating and once every four years they if have a "satisfactory"
rating. CRA agreements between financial institutions and community groups must
be disclosed and reported to the public.

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

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

         Repurchase Limitations. Federal regulations require that the Company
must obtain Federal Reserve approval in order to use more than 10% of its net
worth to make stock repurchases during any 12 month period unless the Company
(i) both before and after the redemption satisfies capital requirements for
"well capitalized" state member banks; (ii) received a one or two rating in its
last examination; and (iii) is not the subject of any unresolved supervisory
issues.

         Federal Securities Laws. The Company has registered its Common Stock
with the SEC pursuant to Section 12(g) of the Exchange Act, and has not
deregistered it. As a result of such registration, the proxy and tender offer
rules, insider trading reporting requirements, annual and periodic reporting and
other requirements of the Exchange Act are applicable to the Company.

         The registration under the Securities Act of the Offerings of the
Common Stock does not cover the resale of such shares. Shares of the Common
Stock purchased by persons who are not affiliates of the Company may be resold
without registration. Shares purchased by an affiliate of the Company are
subject to the resale provisions of Rule 144 under the Securities Act. So long
as the Company meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of the Company who complies with the
other conditions of Rule 144 (including those that require the affiliate's sale
to be aggregated with those of certain other persons) will be able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such


                                       17
<PAGE>

shares during the preceding four calendar weeks. Provision may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances. There are currently
no demand registration rights outstanding. However, in the event the Company at
some future time determines to issue additional shares from its authorized but
unissued shares, the Company might offer registration rights to certain of its
affiliates who want to sell their shares.

Regulation of the Bank

         General. The Bank is an insured North Carolina-chartered savings bank
that is a member of the FHLB system. Its deposits are insured through the SAIF,
and it is subject to supervision and examination by and the regulations and
reporting requirements of the FDIC and the Administrator, which are its primary
federal and state banking regulators respectively.

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

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

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

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

         Transactions with Affiliates. Under current federal law, transactions
between the Bank and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of the Bank is any company or entity that
controls, is controlled by or is under common control with the savings bank.
Generally, subsidiaries of a bank, other than a bank subsidiary, and certain
other types of companies are not considered to be affiliates. Generally,
Sections 23A and 23B (i) limit the extent to which the Bank or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such the Bank's capital stock and surplus, and contain an aggregate
limit on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the Bank or the
subsidiary as those provided to a nonaffiliate. The term "covered transaction"
includes the making


                                       18
<PAGE>

of loans or other extensions of credit to an affiliate, the purchase of assets
from an affiliate, the purchase of, or an investment in, the securities of an
affiliate, the acceptance of securities of an affiliate as collateral for a loan
or extension of credit to any person, or issuance of a guarantee, acceptance or
letter of credit on behalf of an affiliate.

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

         FDIC Insurance Assessments. The Bank is also subject to insurance
assessments imposed by the FDIC. The FDIC currently uses a risk-based assessment
system that takes into account the risks attributable to different categories
and concentrations of assets and liabilities for purposes of calculating deposit
insurance assessments payable by insured depository institutions. The risk-based
assessment system categorizes institutions as "well capitalized," "adequately
capitalized" or "undercapitalized." These three categories are substantially
similar to the prompt corrective action categories (see "-Prompt Corrective
Action"), with the "undercapitalized" category including institutions that are
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized" for prompt corrective action purposes. Institutions also are
assigned by the FDIC to one of three supervisory subgroups within each capital
group. The particular supervisory subgroup to which an institution is assigned
is based on a supervisory evaluation provided to the FDIC by the institution's
primary federal banking regulator and information which the FDIC determines to
be relevant to the institution's financial condition and the risk posed to the
deposit insurance fund. An institution's insurance assessment rate then is
determined based on the capital category and supervisory subgroup to which it is
assigned. Under the risk-based assessment system, there are nine assessment risk
classifications (i.e., combinations of capital groups and supervisory subgroups)
to which different assessment rates (ranging from zero to 31 basis points) are
applied. The Bank's federal deposit insurance premium expense was $31,000,
$87,000, and $89,000 for the years ended December 31, 2000, September 30, 1999,
and September 30, 1998, respectively. In addition, the bank pays premiums
assessed against all banks based on their deposit levels to service debt on
bonds issued to recapitalize the deposit insurance funds.

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

         Based on the current financial condition and capital levels of the
Bank, the Bank does not expect that FDIC insurance assessments will have a
material impact on the Bank's future earnings.

         Community Reinvestment Act. Under the Community Reinvestment Act
("CRA") as implemented by regulations of the FDIC, an insured institution has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions, nor


                                       19
<PAGE>

does it limit an institution's discretion to develop, consistent with the CRA,
the types of products and services that it believes are best suited to its
particular community. The CRA requires the federal banking regulators, in
connection with their examinations of insured institutions, to assess the
institutions' records of meeting the credit needs of their communities, using
the ratings of "outstanding," "satisfactory," "needs to improve," or
"substantial noncompliance," and to take that record into account in its
evaluation of certain applications by those institutions. All institutions are
required to make public disclosure of their CRA performance ratings. The Bank
received a "satisfactory" rating in its last CRA examination which was conducted
on October 5, 1999. For further discussion regarding the CRA, see "-Financial
Services Modernization Legislation."

         Net Worth and Capital Adequacy Requirements Applicable to the Bank. The
Bank is required to comply with the capital adequacy standards established by
state and federal laws and regulations. The Administrator requires that savings
banks maintain net worth not less than 5% of its total assets. Intangible assets
must be deducted from net worth and assets when computing compliance with this
requirement. The Bank complied with the Administrator's net worth requirements
as of December 31, 2000.

         In addition, the FDIC has promulgated risk-based capital and leverage
capital guidelines for determining the adequacy of a bank's capital, and all
applicable capital standards must be satisfied for the Bank to be considered in
compliance with the FDIC's requirements. Under the FDIC's risk-based capital
measure, the minimum ratio ("Total Risk-Based Capital Ratio") of a bank's total
capital to its risk-weighted assets (including certain off-balance- sheet items,
such as standby letters of credit) is 8.0%. At least half of total capital must
be composed of common equity, undivided profits, minority interests in the
equity accounts of consolidated subsidiaries, qualifying non- cumulative
perpetual preferred stock, and a limited amount of cumulative perpetual
preferred stock, less goodwill and certain other intangible assets ("Tier 1
Capital"). The remainder may consist of certain subordinated debt, certain
hybrid capital instruments and other qualifying preferred stock, a limited
amount of loan loss reserves, and net unrealized holding gains on equity
securities ("Tier 2 Capital"). At December 31, 2000, the Bank's Total Risk-
Based Capital Ratio and its ratio of Tier 1 Capital to risk-weighted assets
("Tier 1 Risk-Based Capital Ratio") were 21.55% and 21.14%, respectively, which
were well above the FDIC's minimum risk-based capital guidelines.

         Under the FDIC's leverage capital measure, the minimum ratio (the
"Leverage Capital Ratio") of Tier 1 Capital to total assets is 3.0% for banks
that meet certain specified criteria, including having the highest regulatory
rating. All other banks generally are required to maintain an additional cushion
of 100 to 200 basis points above the stated minimum. The FDIC's guidelines also
provide that banks experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
levels without significant reliance on intangible assets, and the FDIC has
indicated that it will consider a bank's "Tangible Leverage Ratio" (deducting
all intangible assets) and other indicia of capital strength in evaluating
proposals for expansion or new activities. At December 31, 2000, the Bank's
Leverage Capital Ratio was 11.34% which was well above the FDIC's minimum
leverage capital guidelines.

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

         Loans-To-One-Borrower. The Bank is subject to the Administrator's
loans-to-one-borrower limits. Under these limits, no loans and extensions of
credit to any borrower outstanding at one time and not fully secured by readily
marketable collateral shall exceed 15% of the net worth of the savings bank.
Loans and extensions of credit fully secured by readily marketable collateral
may comprise an additional 10% of net worth. These limits


                                       20
<PAGE>

also authorize savings banks to make loans-to-one-borrower, for any purpose, in
an amount not to exceed $500,000. A savings bank also is authorized to make
loans-to-one-borrower to develop domestic residential housing units, not to
exceed the lesser of $30 million or 30% of the savings bank's net worth,
provided that the purchase price of each single-family dwelling in the
development does not exceed $500,000 and the aggregate amount of loans made
pursuant to this authority does not exceed 150% of the savings bank's net worth.
These limits also authorize a savings bank to make loans-to-one-borrower to
finance the sale of real property acquired in satisfaction of debts in an amount
up to 50% of the savings bank's net worth.

         As of December 31, 2000, the largest aggregate amount of loans which
the Bank had to any one borrower was $3,664,000. The Bank does not believe that
the loans-to-one-borrower limits will have a significant impact on its business,
operations and earnings.

         Limits on Rates Paid on Deposits and Brokered Deposits. Regulations
promulgated by the FDIC place limitations on the ability of insured depository
institutions to accept, renew or roll-over deposits by offering rates of
interest which are significantly higher than the prevailing rates of interest on
deposits offered by other insured depository institutions in the depository
institution's normal market area. Under these regulations, "well capitalized"
depository institutions may accept, renew or roll-over such deposits without
restriction, "adequately capitalized" depository institutions may accept, renew
or roll-over such deposits with a waiver from the FDIC (subject to certain
restrictions on payments of rates) and "undercapitalized" depository
institutions may not accept, renew, or roll-over such deposits. The regulations
contemplate that the definitions of "well capitalized," "adequately capitalized"
and "undercapitalized" will be the same as the definitions adopted by the FDIC
to implement the corrective action provisions discussed below. See "-Prompt
Corrective Action." As of December 31, 2000, the Bank was considered "well
capitalized," and, thus, was not subject to the limitations on rates payable on
its deposits.

         Only "well capitalized" depository institutions may accept, renew or
roll-over brokered deposits without prior regulatory approval. "Adequately
capitalized" banks and savings banks may accept, renew or roll-over brokered
deposits with a waiver from the FDIC (subject to certain restrictions on payment
of rates), while "undercapitalized" banks and savings banks may not accept,
renew or roll-over brokered deposits. The regulations contemplate that the
definitions of "well capitalized," "adequately capitalized" and
"undercapitalized" are the same as the definitions adopted by the agencies to
implement the prompt corrective action provisions discussed below.
See "-Prompt Corrective Action."

         Federal Home Loan Bank System. The FHLB system provides a central
credit facility for member institutions. As a member of the FHLB of Atlanta, the
Bank is required to own capital stock in the FHLB of Atlanta in an amount at
least equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, or 5% of its outstanding advances (borrowings)
from the FHLB of Atlanta. On December 31, 2000, the Bank was in compliance with
this requirement.

         Each FHLB is required to contribute at least 10% of its reserves and
undivided profits to fund the principal and a portion of the interest on certain
bonds and certain other obligations which are used to fund the resolution of
troubled savings association cases, and to transfer a percentage of its annual
net earnings to the Affordable Housing Program. These contributions continue to
reduce the FHLB of Atlanta's earnings and the Bank's dividends on its FHLB of
Atlanta stock.

         Reserve Requirements. Pursuant to regulations of the FRB, all
FDIC-insured depository institutions must maintain average daily reserves
against their transaction accounts. No reserves are required to be maintained on
the first $5.0 million of transaction accounts, but reserves equal to 3.0% must
be maintained on the aggregate balances of transaction accounts between $5.0
million and $44.3 million, and reserves equal to 10.0% must be maintained on
aggregate balances in excess of $44.3 million. These percentages are subject to
adjustment by the FRB. Because the


                                       21
<PAGE>

Bank's reserves are required to be maintained in the form of vault cash or in a
non-interest-bearing account at a Federal Reserve Bank, one effect of the
reserve requirement is to reduce the amount of the Bank's interest-earning
assets. At December 31, 2000, the Bank met FDIC reserve requirements.

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

         Liquidity. The Bank is subject to the liquidity requirements
established by the Administrator. North Carolina law requires savings banks to
maintain cash and readily marketable investments of not less that 10% of the
savings bank's total assets. The computation of liquidity under North Carolina
regulation allows the inclusion of mortgage-backed securities and investments
which, in the judgment of the Administrator, have a readily marketable value,
including investments with maturities in excess of five years. On December 31,
2000, the Bank's liquidity ratio, calculated in accordance with North Carolina
regulations, was approximately 10.37%.

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

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



                                       22
<PAGE>

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

         At December 31, 2000, the Bank had the requisite capital levels to
qualify as "well capitalized."

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

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

         Restrictions on Dividends and Other Capital Distributions. A North
Carolina-chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal and state regulations. In
addition, a North Carolina-chartered stock savings bank, for a period of five
years after its conversion from mutual to stock form, must obtain the written
approval from the Administrator before declaring or paying a cash dividend on
its capital stock in an amount in excess of one-half of the greater of (i) the
institution's net income for the most recent fiscal year end, or (ii) the
average of the institution's net income after dividends for the most recent
fiscal year end and not more than two of the immediately preceding fiscal year
ends, if applicable. Under FDIC regulations, stock repurchases may be made by
the savings bank only upon receipt of FDIC approval.

         Also, without the prior written approval of the Administrator, a North
Carolina-chartered stock savings bank, for a period of five years after its
conversion from mutual to stock form, may not repurchase any of its capital
stock. The Administrator will give approval to repurchase only upon a showing
that the proposed repurchase will not adversely affect the safety and soundness
of the institution.

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



                                       23
<PAGE>

         The Company paid regular cash dividends totaling $0.40 per share during
the year ended December 31, 2000.

         Other Federal and North Carolina Regulations. The federal banking
agencies, including the FDIC, have developed joint regulations requiring
disclosure of contingent assets and liabilities and, to the extent feasible and
practicable, supplemental disclosure of the estimated fair market value of
assets and liabilities. Additional joint regulations require annual examinations
of all insured depository institutions by the appropriate federal banking
agency, with some exceptions for small, well-capitalized institutions and
state-chartered institutions examined by state regulators, and establish
operational and managerial, asset quality, earnings and stock valuation
standards for insured depository institutions, as well as compensation standards
when such compensation would endanger the insured depository institution or
would constitute an unsafe practice. The Bank does not believe that these
regulations have had or will have a material adverse effect on its current
operations.

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

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

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



ITEM 2.          PROPERTIES

Properties

         The following table sets forth the location of the Bank's principal
office in Albemarle, North Carolina and its full service branch office in
Locust, North Carolina, as well as certain other information relating to these
offices as of December 31, 2000. The Bank owns both the Albemarle and Locust
offices. The Bank also owns two vacant lots which are adjacent to its Albemarle
office and a lot in Oakboro, but has no plans for these lots at the present
time.


                                       24
<PAGE>

                                         Net Book Value
         Address                           of Property              Deposits
         -------                          -------------            ---------
Albemarle:                                 $  642,000            $126,535,000
  155 West South Street
  Albemarle, North Carolina 28001

  Two (2) Vacant Lots                      $   26,000            $         --
  South Second Street
  Albemarle, North Carolina 28001

Locust:                                    $  215,000            $ 28,500,000
  406 West Main Street
  Locust, North Carolina 28097

Oakboro:                                   $  265,000            $         --
 Highway 205
 Oakboro, North Carolina 28129

Totals                                     $1,148,000            $155,035,000


         The Bank's management considers the property to be in good condition
and is of the opinion that it is adequately covered by insurance. The total net
book value of the Bank's furniture, fixtures and equipment on December 31, 2000
was $356,000. Any property acquired as a result of foreclosure or by deed in
lieu of foreclosure is classified as real estate owned until such time as it is
sold or otherwise disposed of by the Bank to recover its investment. As of
December 31, 2000, the Bank had recorded $18,000 for real estate acquired in
settlement of loans.

ITEM 3.          LEGAL PROCEEDINGS

         On or about March 6, 2000, the Office of the United States Attorney for
the Middle District of North Carolina filed an in rem civil forfeiture action
against a piece of real property upon which the Bank has a security interest. On
February 7, 2001, the Bank received a copy of the Verified Complaint of
Forfeiture filed by the United States. On February 20, 2001, the Bank filed a
Verified Claim as an "innocent owner" of the property within the meaning of 18
U.S.C. ss. 983(d). The Bank intends to pursue its interests in the subject
property as an innocent mortgagee to the fullest extent possible under the law.
The value of the security interest is approximately $26,000.

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

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

         No matter was submitted to a vote of the Company's stockholders during
the quarter ended December 31, 2000.

                                     PART II

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

         See the information under the section captioned "Common Stock
Information" on page 66 in the


                                       25
<PAGE>

Company's 2000 Annual Report, which section is incorporated herein by reference.
See "Item 1. DESCRIPTION OF BUSINESS--Regulation of the Bank--Restrictions on
Dividends and Other Capital Distributions" above for regulatory restrictions
which limit the ability of the Bank to pay dividends to the Company.

ITEM 6.          SELECTED FINANCIAL DATA

         The information required by this Item is set forth in the table
captioned "Selected Consolidated Financial Data" on the inside cover of the
Company's 2000 Annual Report which is incorporated herein by reference.

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

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

<TABLE>
<CAPTION>


                                                     Year Ended                       Year Ended
                                                     December 31,                    September 30,
                                                     ------------      --------------------------------------------
                                                         2000          1999         1998          1997         1996
                                                         ----          ----         ----          ----         ----
<S> <C>
Return on Average Assets (Net income divided
   by average total assets)                              0.39%         0.15%        0.35%         1.24%        0.30%
Return on Average Equity (Net income divided
   by average shareholders' equity                       2.94%         0.96%        1.89%         4.70%        2.45%
Average Equity to Average Assets Ratio
   (Average shareholders' equity divided by
   average total assets)                                13.12%        16.12%       18.43%        26.40%       12.23%
Interest Rate Spread for the Period                      2.39%         2.48%        1.97%         2.02%        2.52%
Average Interest-Earning Assets to Average
   Interest-Bearing Liabilities                        115.11%       118.68%      123.10%       136.08%      112.00%
Net Interest Margin                                      3.07%         3.24%        2.98%         3.46%        3.09%
Loan Loss Allowance to Nonperforming Assets
   at Period End                                        93.87%       222.23%      135.76%        81.25%       63.69%
</TABLE>


         See also the information set forth under Item 1 above and the
information set forth under the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operation" on pages 4 through 18
in the Company's 2000 Annual Report which section is incorporated herein by
reference.

ITEM 7A          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Pages 5 through 7 of the 2000 Annual Report are herein incorporated by
reference.

         Interest Rate Risk Management

         The Company's net income is dependent on its net interest income. Net
interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than
interest- earning assets. When interest-bearing liabilities mature or reprice
more quickly than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net interest income.
Similarly,


                                       26
<PAGE>

when interest-earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could result in a decrease
in net income.

         In an attempt to manage its exposure to changes in interest rates,
management monitors the Company's interest rate risk. Management meets monthly
to review the Company's interest rate risk position and profitability, and to
recommend adjustments for consideration by the Board of Directors. Management
also reviews the Bank's securities portfolio, formulates investment strategies,
and oversees the timing and implementation of transactions to assure attainment
of the Board's objectives in the most effective manner. Notwithstanding the
Company's interest rate risk management activities, the potential for changing
interest rates is an uncertainty that can have an adverse effect on net income.

         In adjusting the Company's asset/liability position, the Board and
management attempt to manage the Company's interest rate risk while enhancing
net interest margins. At times, depending on the level of general interest
rates, the relationship between long and short-term interest rates, market
conditions and competitive factors, the Board and management may determine to
increase the Company's interest rate risk position somewhat in order to increase
its net interest margin. The Company's results of operations and net portfolio
values remain vulnerable to increases in interest rates and to fluctuations in
the difference between long- and short-term interest rates.

         Consistent with the asset/liability management philosophy described
above, the Company has taken several steps to manage its interest rate risk.
First, the Company has structured the security portfolio to shorten the lives of
its interest-earning assets. The Company's recent purchases of securities,
including mortgage-backed securities have had short or medium terms to maturity.
At December 31, 2000, the Company had securities totaling $37.8 million, of
which $20.4 million have contractual maturities of five years or less.
Mortgage-backed securities amortize and experience prepayments of principal; the
Company has received average cash flows from principal paydowns, sales,
maturities and calls of securities of $31.6 million annually over the past three
fiscal years. The Company also controls interest rate risk reduction by
emphasizing non-certificate depositor accounts. The Board and management believe
that such accounts carry a lower cost than certificate accounts, and that a
material portion of such accounts may be more resistant to changes in interest
rates than are certificate accounts. At December 31, 2000, the Company had $20.6
million of regular savings accounts, and $13.3 million of money market, demand
and NOW accounts, representing 21.8% of total depositor accounts.

         The Company does not currently engage in trading activities or use
derivative instruments to control interest rate risk. Even though such
activities may be permitted with the approval of the Board of Directors, the
Company does not intend to engage in such activities in the immediate future.
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of the Company's
business activities.

ITEM 8.          FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The consolidated financial statements of the Company and supplementary
data set forth on pages 20 through 64 of the Company's 2000 Annual Report are
incorporated herein by reference.

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

         As of February 21, 2001, Dixon Odom PLLC was engaged as the Bank's new
independent auditor. Prior to that time, McGladrey & Pullen, LLP ("M&P") served
as the Bank's independent auditor. The decision to change independent auditors
was made by the Company's Audit Committee after soliciting bids on the Company's
auditing work from accounting firms and was approved by the Board of Directors.
M&P's report on the Bank's financial statements for the fiscal years ended
September 30, 1998, September 30, 1999 and December 31, 2000 did not contain an
adverse opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope


                                       27
<PAGE>

or procedure which, if not resolved to the satisfaction of the auditor, would
have caused it to make reference to the subject of such disagreement in
connection with its reports. During its three most recent fiscal years, the Bank
has not consulted Dixon Odom PLLC with regard to either (i) application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on the Bank's financial
statements, or (ii) any matter that was either the subject of a disagreement or
reportable event.

         The Board of Directors of the Bank has selected Dixon Odom PLLC as
independent certified public accounts to audit the financial statements of the
Bank for the fiscal year ending December 31, 2001. Such selection is being
submitted to the Company's stockholders for ratification. The Company filed a
Form 8-K on February 23, 2001 disclosing this change in the Company's
independent auditors and filed a Form 8-K/A on March 6, 2001 with a letter from
McGladrey & Pullen, LLP ("M&P") stating that M&P agrees with the statements in
the Company's February 23, 2001 Form 8-K.

                                    PART III

ITEM 10.         DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

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

ITEM 11.         EXECUTIVE COMPENSATION

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

ITEM 12.         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13.         CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         There have been no reportable transactions during the two most recent
fiscal years nor are any reportable transactions proposed as of the date of this
Form 10-K. See also the Proxy Statement section captioned "Proposal 1 - Election
of Directors - Certain Indebtedness and Transactions of Management," which
section is incorporated herein by reference.




                                       28
<PAGE>

                                     PART IV



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

14(a)1.          Consolidated Financial Statements (contained in the Bank's 2000
                 Annual Report attached hereto as Exhibit (13) and incorporated
                 herein by reference)

                 (a)      Independent Auditor's Report

                 (b)      Statements of Financial Condition as of December 31,
                          2000 and 1999 and September 30, 1999

                 (c)      Statements of Income and Comprehensive Income for the
                          Years Ended December 31, 2000, September 30, 1999 and
                          1998, and three months ended December 31, 1999

                 (d)      Statements of Stockholders' Equity for the Years
                          Ended December 31, 2000, three months ended December
                          31, 1999 and years ended September 30, 1999 and 1998

                 (e)      Statements of Cash Flows for the Years Ended December
                          31, 2000, September 30, 1999 and 1998, and three
                          months ended December 31, 1999

                 (f)      Notes to Consolidated Financial Statements

14(a)2.          Financial Statement Schedules

                 All schedules have been omitted as the required information is
                 either inapplicable or included in the Notes to Consolidated
                 Financial Statements.

14(a)3.          Exhibits

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

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

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

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

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



                                       29
<PAGE>

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

                  Exhibit (10)(v)     1995 Retirement Payment Agreements with
                                      Carl M. Hill, R. Ronald Swanner, Caldwell
                                      A. Holbrook, Jr., Joel A. Huneycutt,
                                      Douglas Dwight Stokes and Greg E.
                                      Underwood, incorporated herein by
                                      reference to the Form 10-K dated
                                      September 30, 1996

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

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

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

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

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

                  Exhibit (11)        Statement Regarding Computation of Per
                                      Share Earnings

                  Exhibit (12)        Statement Regarding Computation of Ratios

                  Exhibit (13)        Portions of the 2000 Annual Report to
                                      Security Holders

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

                  Exhibit (23)        Consent of Independent Certified Public
                                      Accountants


                                       30
<PAGE>

                                   SIGNATURES

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

                                          SOUTH STREET FINANCIAL CORP.


Date:    March 22, 2001              By:   /s/ Carl M.  Hill
                                          -------------------------------------
                                          Carl M.  Hill
                                          President and Chief Executive Officer

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

Signature                              Title                        Date
---------                              -----                        ----

/s/ Carl M. Hill              President, Chief Executive       March 22, 2001
---------------------------   Officer and Director
Carl M.  Hill

/s/ R. Ronald Swanner         Executive Vice President,        March 22, 2001
---------------------------   Secretary and Director
R.  Ronald Swanner

/s/ Christopher F. Cranford   Controller and Treasurer         March 22, 2001
---------------------------
Christopher F. Cranford

/s/ Caldwell A. Holbrook,     Director                         March 22, 2001
---------------------------
Caldwell A. Holbrook, Jr.

/s/ Joel A. Huneycutt         Director                         March 22, 2001
---------------------------
Joel A. Huneycutt

/s/ Douglas Dwight Stokes     Director                         March 22, 2001
---------------------------
Douglas Dwight Stokes

/s/ Greg E. Underwood         Director                         March 22, 2001
---------------------------
Greg E. Underwood



                                       31
<PAGE>

                                INDEX TO EXHIBITS



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

Exhibit (11)         Statement Regarding Computation of Per Share Earnings

Exhibit (12)         Statement Regarding Computation of Ratios

Exhibit (13)         2000 Annual Report

Exhibit (23)         Consent of Independent Certified Public Accountants





                                       32