<PAGE>
 
                          SOUTH STREET FINANCIAL CORP.
                               STOCK OPTION PLAN


  THIS IS THE STOCK OPTION PLAN ("Plan") of South Street Financial Corp. (the
"Corporation"), a North Carolina corporation, with its principal office in
Albemarle, Stanly County, North Carolina, adopted by the Board of Directors of
the Corporation and effective upon the approval of the Plan by the shareholders
of the Corporation, under which options may be granted from time to time to
eligible directors and employees of the Corporation, Home Savings Bank of
Albemarle, Inc., SSB (the "Bank") and of any corporation or other entity of
which either the Corporation or the Bank owns, directly or indirectly, not less
than fifty percent (50%) of any class of equity securities (a "Subsidiary"), to
purchase shares of common stock of the Corporation ("Common Stock"), subject to
the provisions set forth below:

  1.   PURPOSE OF THE PLAN.  The purpose of the Plan is to aid the Corporation,
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the Bank and any Subsidiary in attracting and retaining capable directors and
employees and to provide a long range incentive for directors, employees and
others to remain in the management and service of the Corporation, the Bank or
any Subsidiary, to perform at increasing levels of effectiveness and to acquire
a permanent stake in the Corporation with the interest and outlook of an owner.
These objectives will be promoted through the granting of options to acquire
shares of Common Stock pursuant to the terms of this Plan.

  2.   ADMINISTRATION.  The Plan shall be administered by a committee (the
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"Committee"), which shall consist of not less than two members of the Board of
Directors of the Corporation (the "Board") who are  "Non-Employee Directors" as
defined in Rule 16b-3(b)(3) of the Rules and Regulations under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").  Members of the Committee
shall serve at the pleasure of the Board.  In the absence at any time of a duly
appointed Committee, this Plan shall be administered by the Board. The Committee
may designate any officers or employees of the Corporation, the Bank or any
Subsidiary to assist in the administration of the Plan and to execute documents
on behalf of the Committee and perform such other ministerial duties as may be
delegated to them by the Committee.

  Subject to the provisions of the Plan, the determinations or the
interpretation and construction of any provision of the Plan by the Committee
shall be final and conclusive upon all persons affected thereby.  By way of
illustration and not of limitation, the Committee shall have the discretion (a)
to construe and interpret the Plan and all options granted hereunder and to
determine the terms and provisions (and amendments thereof) of the options
granted under the Plan (which need not be identical); (b) to define the terms
used in the Plan and in the options granted hereunder; (c) to prescribe, amend
and rescind the rules and regulations relating to the Plan; (d) to determine the
individuals to whom and the time or times at which such options shall be
granted, the number of shares to be subject to each option, the option price,
and the determination of leaves of absence which may be granted to participants
without constituting a termination of their employment for the purposes of the
Plan; and (e) to make all other determinations necessary or advisable for the
administration of the Plan.
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  It shall be in the discretion of the Committee to grant options which qualify
as "incentive stock options," as that term is defined in Section 422 of the
Internal Revenue Code of 1986, as amended ("Incentive Stock Options") or which
do not qualify as Incentive Stock Options ("Nonqualified Stock Options") (herein
referred to collectively as "Options;" however, whenever reference is
specifically made only to "Incentive Stock Options" or "Nonqualified Stock
Options," such reference shall be deemed to be made to the exclusion of the
other).  Any options granted which fail to satisfy the requirements for
Incentive Stock Options shall become Nonqualified Stock Options.

  3.   STOCK AVAILABLE FOR OPTIONS.  In the discretion of the Committee, the
       ---------------------------                                          
stock to be subject to Options under the Plan shall be authorized but unissued
shares of Common Stock which are issued directly to optionees upon exercise of
options and/or shares of Common Stock which are acquired by the Plan or the
Corporation in the open market.  The total number of shares of Common Stock for
which Options may be granted under the Plan is 449,650 shares, which is ten
percent (10%) of the total number of shares of Common Stock issued by the
Corporation in connection with the conversion of the Bank from a North Carolina
mutual savings bank to a North Carolina stock savings bank on October 2, 1996
(the "Conversion").  Such number of shares is subject to any capital adjustments
as provided in Section 16.  In the event that an Option granted under the Plan
is forfeited, released, expires or is terminated unexercised as to any shares
covered thereby, such shares thereafter shall be available for the granting of
Options under the Plan; however, if the forfeiture, expiration, release or
termination date of an Option is beyond the term of existence of the Plan as
described in Section 21, then any shares covered by forfeited, unexercised,
released or terminated options shall not reactivate the existence of the Plan
and therefore may not be available for additional grants under the Plan. The
Corporation, during the term of the Plan, will reserve and keep available a
number of shares of Common Stock sufficient to satisfy the requirements of the
Plan.  In the discretion of the Committee, the shares of Common Stock necessary
to be delivered to satisfy exercised options may be from authorized and unissued
shares of Common Stock or may be purchased in the open market.

  4.   ELIGIBILITY.  Options shall be granted only to individuals who meet all
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of the following eligibility requirements:

       (a) Such individual must be an employee or a member of the Board of
   Directors of the Corporation, the Bank or a Subsidiary. For this purpose, an
   individual shall be considered to be an "employee" only if there exists
   between the Corporation, the Bank or a Subsidiary and the individual the
   legal and bona fide relationship of employer and employee. In determining
   whether such relationship exists, the regulations of the United States
   Treasury Department relating to the determination of such relationship for
   the purpose of collection of income tax at the source on wages shall be
   applied.

       (b) Such individual must have such knowledge and experience in financial
   and business matters that he or she is capable of evaluating the merits and
   risks of the investment involved in the exercise of the Options.

       (c) Such individual, being otherwise eligible under this Section 4, shall
   have been selected by the Committee as a person to whom an Option shall be
   granted under the Plan.
<PAGE>
 
  In determining the directors and employees to whom Options shall be granted
and the number of shares to be covered by each Option, the Committee shall take
into account the nature of the services rendered by respective directors and
employees, their present and potential contributions to the success of the
Corporation, the Bank and any Subsidiary and such other factors as the Committee
shall deem relevant.  A director or employee who has been granted an Option
under the Plan may be granted an additional Option or Options under the Plan if
the Committee shall so determine.

  If, pursuant to the terms of the Plan, it is necessary that the percentage of
stock ownership of any individual be determined, stock ownership in the
Corporation or of a related corporation which is owned (directly or indirectly)
by or for such individual's brothers and sisters (whether by the whole or half
blood), spouse, ancestors, and lineal descendants or by or for any corporation,
partnership, estate or trust of which such employee is a shareholder, partner or
beneficiary shall be considered as owned by such director or employee.

  5.   OPTION AGREEMENT   Subject to the provisions of this Plan, Options shall
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be awarded to the directors and employees in such amounts as are determined by
the Committee. The proper officers on behalf of the Corporation and each
Optionee shall execute a Stock Option Grant and Agreement (the "Option
Agreement") which shall set forth the total number of shares of Common Stock to
which it pertains, the exercise price, whether it is a Nonqualified Stock Option
or an Incentive Stock Option, and such other terms, conditions, restrictions and
privileges as the Committee in each instance shall deem appropriate, provided
they are not inconsistent with the terms, conditions and provisions of this
Plan.  Each Optionee shall receive a copy of his executed Option Agreement.  Any
Option granted with the intention that it will be an Incentive Stock Option but
which fails to satisfy a requirement for Incentive Stock Options shall continue
to be valid and shall be treated as a Nonqualified Stock Option.

  6.   OPTION PRICE.
       ------------ 

       (a) The option price of each Option granted under the Plan shall be not
  less than one hundred percent (100%) of the market value of the stock on the
  date of grant of the Option. In the case of incentive stock options granted to
  a shareholder who owns stock possessing more than 10 percent (10%) of the
  total combined voting power of all classes of stock of the Corporation, the
  Bank or a Subsidiary (a "ten percent shareholder"), the option price of each
  Option granted under the Plan shall not be less than one hundred and ten
  percent (110%) of the market value of the stock on the date of grant of the
  Option. If the Common Stock is listed on a national securities exchange
  (including for this purpose the Nasdaq Stock Market, Inc. National Market) on
  the date in question, then the market value per share shall be not less than
  the average of the highest and lowest selling price on such exchange on such
  date, or if there were no sales on such date, then the market price per share
  shall be equal to the average between the bid and asked price on such date. If
  the Common Stock is traded otherwise than on a national securities exchange
  (including for this purpose the Nasdaq Stock Market, Inc. National Market) on
  the date in question, then the market price per share shall be equal to the
  average between the bid and asked price on such date, or, if there is no bid
  and asked price on such date, then on the next prior business day on which
  there was a bid and asked price. If no such bid and asked price is available,
  then the market value per share shall be its fair market value as determined
  by the Committee, in its sole and
<PAGE>
 
  absolute discretion.   The Committee shall maintain a written record of its
  method of determining such value.

       (b) The option price shall be payable to the Corporation either (i) in
  cash or by check, bank draft or money order payable to the order of the
  Corporation, or (ii) at the discretion of the Committee, through the delivery
  of shares of the common stock of the Corporation owned by the optionee with a
  market value (determined in a manner consistent with (i) above) equal to the
  option price, or (iii) at the discretion of the Committee by a combination of
  (i) and (ii) above. No shares shall be delivered until full payment has been
  made.

  7.   EXPIRATION OF OPTIONS.  The Committee shall determine the expiration date
       ---------------------                                                    
or dates of each Option, but such expiration date shall be not later than ten
(10) years after the date such Option is granted.  In the event an Incentive
Stock Option is granted to a ten percent shareholder, the expiration date or
dates of each Option shall be not later than five (5) years after the date such
Option is granted.  The Committee, in its discretion, may extend the expiration
date or dates of an Option after such date was originally set; however, such
expiration date may not exceed the maximum expiration date described in this
Section 7.

  8.   TERMS AND CONDITIONS OF OPTIONS.
       ------------------------------- 

       (a) All Options must be granted within ten (10) years of the Effective
  Date of this Plan as defined in Section 20.

       (b) The Committee may grant Options which are intended to be Incentive
  Stock Options and Nonqualified Stock Options, either separately or jointly, to
  an eligible employee.

       (c) The grant of Options shall be evidenced by a written instrument (an
  Option Agreement) containing terms and conditions established by the Committee
  consistent with the provisions of this Plan.

       (d) Not less than 100 shares may be purchased at any one time unless the
  number purchased is the total number at that time purchasable under the Plan.

       (e) The recipient of an Option shall have no rights as a shareholder with
  respect to any shares covered by his Option until payment in full by him for
  the shares being purchased. No adjustment shall be made for dividends
  (ordinary or extraordinary, whether in cash, securities or other property) or
  distributions or other rights for which the record date is prior to the date
  such stock is fully paid for, except as provided in Section 16.

       (f) The aggregate fair market value of the stock (determined as of the
  time the Option is granted) with respect to which Incentive Stock Options are
  exercisable for the first time by any participant during any calendar year
  (under all benefit plans of the Corporation, the Bank or any Subsidiary, if
  applicable) shall not exceed $100,000; provided, however, that such $100,000
  limit of this subsection (f) shall not apply to the grant of Nonqualified
  Stock Options. The Committee may grant Options which are
<PAGE>
 
  exercisable in excess of the foregoing limitations, in which case Options
  granted which are exercisable in excess of such limitation shall be
  Nonqualified Stock Options.

       (g) All stock obtained pursuant to an option which qualifies as an
  Incentive Stock Option shall be held in escrow for a period which ends on the
  later of (i) two (2) years from the date of the granting of the Option or (ii)
  one (1) year after the transfer of the stock pursuant to the exercise of the
  Option. The stock shall be held by the Corporation or its designee. The
  employee who has exercised the Option shall during such holding period have
  all rights of a shareholder, including but not limited to the rights to vote,
  receive dividends and sell the stock. The sole purpose of the escrow is to
  inform the Corporation of a disqualifying disposition of the stock within the
  meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and
  it shall be administered solely for that purpose.

  9.   EXERCISE OF OPTIONS.
       ------------------- 

       (a) Unless otherwise set forth in the Option Agreement, all Options
  granted to an optionee by virtue of his position as a nonemployee director of
  the Corporation or the Bank (as stated in the Option Agreement) shall be fully
  vested, exercisable and nonforfeitable immediately at the time of the grant.

       (b) Options granted to an optionee by virtue of his position as an
  employee (as stated in the Option Agreement) shall become vested and
  exercisable at the times, at the rate and subject to such limitations as may
  be set forth in the Option Agreement executed in connection therewith;
  provided, however, that all outstanding and nonforfeited options shall be
  exercisable, if not sooner, on the day prior to the expiration date thereof.

       (c) Notwithstanding the foregoing, Options shall become exercisable with
  respect to all of the shares subject thereto upon the optionee's death,
  retirement or disability within the meaning of Section 22(e)(3) of the
  Internal Revenue Code of 1986, as amended, and in the event of a change in
  control as set forth in Section 13 of this Plan.

       (d) Any right to exercise Options in annual installments shall be
  cumulative and any vested installments may be exercised, in whole or in part,
  at the election of the optionee. The exercise of any Option must be evidenced
  by written notice to the Corporation that the optionee intends to exercise his
  Option.

       (e) In no event shall an Option be deemed granted by the Corporation or
  exercisable by a recipient prior to the mutual execution by the Corporation
  and the recipient of an Option Agreement which comports with the requirements
  of Section 5 and Section 8(c).

       (f) The inability of the Corporation or Bank to obtain approval from any
  regulatory body or authority deemed by counsel to be necessary to the lawful
  issuance and sale of any shares of Common Stock hereunder shall relieve the
  Corporation and the Bank of any liability in respect of the non-issuance or
  sale of such shares. As a condition to the exercise of an option, the
  Corporation may require the person exercising the Option to make such
  representations and warranties as may be necessary to assure 
<PAGE>
 
  the availability of an exemption from the registration requirements of federal
  or state securities laws.

       (g) The Committee shall have the discretionary authority to impose in the
  Option Agreements such restrictions on shares of Common Stock as it may deem
  appropriate or desirable, including but not limited to the authority to impose
  a right of first refusal or to establish repurchase rights or both of these
  restrictions.

       (h) Notwithstanding anything to the contrary herein, an optionee
  receiving the grant of an Option by virtue of his or her position as a
  director or as an employee of the Corporation, the Bank or a Subsidiary (as
  stated in the Option Agreement), shall be required to exercise his or her
  Options within the periods set forth in Sections 10, 11 and 12 below.

  10.  TERMINATION OF EMPLOYMENT - EXCEPT BY DISABILITY, RETIREMENT OR DEATH.
       ---------------------------------------------------------------------  
If any optionee receiving the grant of an Option by virtue of his position as a
director (as stated in the Option Agreement) ceases to be a director of at least
one of the Corporation, the Bank or any Subsidiary for any reason other than
death, retirement (as defined in Section 11) or disability (as defined in
Section 11) or if any optionee receiving the grant of an Option by virtue of his
position as an employee (as stated in the Option Agreement) ceases to be an
employee of at least one of the Corporation, the Bank and any Subsidiary for any
reason other than death, retirement (as defined in Section 11) or disability (as
defined in Section 11), he may, (i) at any time within three (3) months after
his date of termination, but not later than the date of expiration of the
Option, exercise any Option designated in the Option Agreement as an Incentive
Stock Option and (ii) at any time prior to the date of expiration of the Option,
exercise any option designated in the Option Agreement as a Nonqualified Stock
Option. However, in either such event the optionee may exercise any Option only
to the extent it was vested and he or she was entitled to exercise the Option on
the date of termination.  Any Options or portions of Options of terminated
optionees not so exercised shall terminate and be forfeited.

  11.  TERMINATION OF EMPLOYMENT - DISABILITY OR RETIREMENT. If any optionee
       ----------------------------------------------------                 
receiving the grant of an Option by virtue of his position as a director (as
stated in the Option Agreement) ceases to be a director of at least one of the
Corporation, the Bank or any Subsidiary due to his becoming disabled within the
meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as amended, or
if any employee receiving the grant of an Option by virtue of his position as an
employee (as stated in the Option Agreement) ceases to be employed by at least
one of the Corporation, the Bank and any Subsidiary due to his becoming disabled
within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as
amended, all unvested and forfeitable Options of such optionee shall immediately
become vested and nonforfeitable and he may, (i) at any time within 12 months
after his date of termination, but not later than the date of expiration of the
Option, exercise any option designated in the Option Agreement as an Incentive
Stock Option with respect to all shares subject thereto and (ii) at any time
prior to the date of expiration of the Option, exercise any Option designated in
the Option Agreement as a Nonqualified Stock Option with respect to all shares
subject thereto.  Any portions of Options of optionees who are terminated
because they become disabled which are not so exercised shall terminate.

  If any optionee receiving the grant of an Option by virtue of his position as
a director (as stated in the Option Agreement) ceases to be a director of at
least one of the Corporation, the
<PAGE>
 
Bank or any Subsidiary due to his retirement, or if any employee receiving the
grant of an Option by virtue of his position as an employee (as stated in the
Option Agreement) ceases to be employed by at least one of the Corporation, the
Bank and any Subsidiary due to his retirement, all unvested and forfeitable
Options of such optionee shall immediately become vested and nonforfeitable and
he may, at any time prior to the date of expiration of the Option, exercise such
Option; provided, however, that if the Option is exercised more than three
months after such retirement, the Option may be treated as a Nonqualified Stock
Option.  Any portions of Options of retired directors or employees not so
exercised shall terminate.  For purposes of this Plan, the term "retirement," as
it relates to any optionee receiving a grant of an Option as a result of his or
her position as an employee of the Corporation, the Bank or any Subsidiary,
shall mean (i) the termination of the optionee's employment under conditions
which would constitute retirement under any tax qualified retirement plan
maintained by the Corporation, the Bank or a Subsidiary, or (ii) termination of
employment after attaining age 65.  The term "retirement," as it relates to any
optionee receiving a grant of an Option as a result of his or her position as a
director shall mean the cessation of membership on such board of directors (i)
with the approval of such board of directors, at any time after such optionee
reaches age 65, or (ii) at the election of the optionee at any time after not
less than 25 years of service as a member of the such board of directors, as
applicable.

  12.  TERMINATION OF EMPLOYMENT - DEATH.  If an optionee receiving the grant of
       ---------------------------------                                        
an option by virtue of his position as a director (as stated in the Option
Agreement) dies while a director of the Corporation, the Bank or any Subsidiary
or if any employee receiving the grant of an option by virtue of his position as
an employee (as stated in the Option Agreement) dies while in the employment of
the Corporation, the Bank or a Subsidiary, all unvested and forfeitable Options
of such optionee shall immediately become vested and nonforfeitable and the
person or persons to whom the Option is transferred by will or by the laws of
descent and distribution may exercise the Option at any time until the term of
the Option has expired, with respect to all shares subject thereto, to the same
extent and upon the same terms and conditions the optionee would have been
entitled to do so had he lived.  Any Options or portions of options of deceased
directors or employees not so exercised shall terminate.

  13.  CHANGE IN CONTROL.  In the event that an optionee ceases to be an
       -----------------                                                
employee, a director of the Corporation, the Bank or a Subsidiary (which
position resulted in his or her receipt of an option pursuant to this Plan) for
any reason after the occurrence of a "change in control" and prior to the time
that all shares allocated to him or her would be 100% vested, nonforfeitable and
exercisable in accordance with  Sections 9 and 10 above, then, notwithstanding
Sections 9 and 10 above, all Options granted to such optionee shall immediately
become fully vested and nonforfeitable.  For purposes of this Plan, a "change in
control" shall mean (i) a change in control of a nature that would be required
to be reported by the Corporation in response to Item 1 of the Current Report on
Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of
the Exchange Act; (ii) such time as any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation or Bank representing 25 percent or
more of the combined voting power of the outstanding Common Stock of the
Corporation or outstanding common stock of the Bank, as applicable; or (iii)
individuals who constitute the Board or the board of directors of the Bank on
the date hereof (the "Incumbent Board" and "Incumbent Bank Board," respectively)
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of
<PAGE>
 
the directors comprising the Incumbent Board or Incumbent Bank Board, as
applicable, or whose nomination for election by the Corporation's or Bank's
shareholders was approved by the Corporation's or Bank's Board of Directors or
Nominating Committee, shall be considered as though he or she were a member of
the Incumbent Board or Incumbent Bank Board, as applicable; or (iv) either the
Corporation or the Bank consolidates or merges with or into another corporation,
association or entity or is otherwise reorganized, where neither the Corporation
nor the Bank, respectively, is the surviving corporation in such transaction; or
(v) all or substantially all of the assets of either the Corporation or the Bank
are sold or otherwise transferred to or are acquired by any other entity or
group.

  As set forth in Section 10, in the event of such a termination after a change
in control, the Optionee must exercise any Incentive Stock Options within three
(3) months after his date of termination and may exercise any Nonqualified Stock
Options at any time prior to the date of expiration of the Option.

  14.  STOCK APPRECIATION RIGHTS.
       ------------------------- 

       (a) General Terms and Conditions. The Committee may, but shall not be
  obligated to, grant rights to optionees to surrender an exercisable Option, or
  any portion thereof, in consideration for the payment by the Corporation of an
  amount equal to the excess of the market value (determined as set forth in
  Section 6 above) of the shares of Common Stock subject to the Option, or
  portion thereof, surrendered over the exercise price of the Option with
  respect to such shares (any such authorized surrender and payment being
  hereinafter referred to as a "Stock Appreciation Right"). Such payment, at the
  discretion of the Committee, may be made in shares of Common Stock valued at
  the then market value thereof (determined as set forth in Section 6 above), or
  in cash, or partly in cash and partly in shares of Common Stock.

       The terms and conditions set with respect to a Stock Appreciation Right
  may include (without limitation), subject to other provisions of this Section
  14 and this Plan, the period during which, date by which or event upon which
  the Stock Appreciation Right may be exercised (which shall be on the same
  terms as the Option to which is related); the method for valuing shares of
  Common Stock for purposes of this Section 14; a ceiling on the amount of
  consideration which the Corporation may pay in connection with exercise of the
  Stock Appreciation Right; and arrangements for income tax withholding. The
  Committee shall have complete discretion to determine whether, when and to
  whom Stock Appreciation Rights may be granted.

       (b) Time Limitations. A Stock Appreciation Right may be exercised only
  within the period, if any, within which the Option to which it relates may be
  exercised. Notwithstanding the foregoing, any election by an optionee to
  exercise Stock Appreciation Rights shall be made during the period beginning
  on the third business day following the release for publication of quarterly
  or annual financial information required to be prepared and disseminated by
  the Corporation pursuant to the requirements of the Exchange Act and ending on
  the twelfth business day following such date. The required release of
  information shall be deemed to have been satisfied when the specified
  financial data appears on or in a wire service, financial news service or
  newspaper of general circulation or is otherwise first made publicly
  available.
<PAGE>
 
       (c) Effects of Exercise of Stock Appreciation Rights or Options.  Upon
  the exercise of a Stock Appreciation Right, the number of shares of Common
  Stock available under the Option to which it relates shall decrease by a
  number equal to the number of shares for which the Stock Appreciation Right
  was exercised. Upon the exercise of an Option, any related Stock Appreciation
  Right shall terminate as to any number of shares of Common Stock subject to
  the Stock Appreciation Right that exceeds the total number of shares for which
  the Option remains unexercised.

       (d) Time of Grant.  A Stock Appreciation Right granted in connection with
  an Incentive Stock Option must be granted concurrently with the Option to
  which is relates, while a Stock Appreciation Right granted in connection with
  a Nonqualified Stock Option may be granted concurrently with the Option to
  which it relates or at any time thereafter prior to the exercise or expiration
  of such Option. No optionee shall have any Stock Appreciation Rights unless
  (i) in the case of Incentive Stock Options and Nonqualified Stock Options, the
  Stock Option Agreement shall so state or (ii) in the case of Nonqualified
  Stock Options, the Committee shall have executed an amendment to the Stock
  Option Agreement so stating.

       (e) Non-Transferable.  A Stock Appreciation Right may not be transferred
  or assigned except in connection with a transfer of the Option to which it
  relates.

  15.  RESTRICTIONS ON TRANSFER.  An Option granted under this Plan may not be
       ------------------------                                               
transferred except by will or the laws of descent and distribution and, during
the lifetime of the optionee to whom it was granted, may be exercised only by
such optionee.

  16.  CAPITAL ADJUSTMENTS AFFECTING COMMON STOCK.
       ------------------------------------------ 

       (a) If the outstanding shares of Common Stock of the Corporation are
  increased, decreased, changed into or exchanged for a different number or kind
  of shares or other securities of the Corporation or another entity as a result
  of a recapitalization, reclassification, stock dividend, stock split,
  amendment to the Corporation's Certificate of Incorporation, reverse stock
  split, merger or consolidation, an appropriate adjustment shall be made in the
  number and/or kind of securities allocated to the Options and Stock
  Appreciation Rights previously and subsequently granted under the Plan,
  without change in the aggregate purchase price applicable to the unexercised
  portion of the outstanding Options but with a corresponding adjustment in the
  price for each share or other unit of any security covered by the Options.

       (b) In the event that the Corporation shall declare and pay any dividend
  with respect to the Common Stock (other than a dividend payable in shares of
  the Corporation's Common Stock or a regular quarterly cash dividend),
  including a dividend which results in a nontaxable return of capital to the
  holders of shares of Common Stock for federal income tax purposes, or
  otherwise than by dividend makes distribution of property to the holders of
  its shares of Common Stock, the Committee, in its discretion applied uniformly
  to all outstanding Options, may adjust the exercise price per share of
  outstanding Options in such a manner as the Committee may determine to be
  necessary to reflect the effect of the dividend or other distribution on the
  fair market value of a share of Common Stock.
<PAGE>
 
       (c) To the extent that the foregoing adjustments described in Sections
  16(a) and (b) above relate to particular Options or to particular stock or
  securities of the Corporation subject to Option under this Plan, such
  adjustments shall be made by the Committee, whose determination in that
  respect shall be final and conclusive.

       (d) The grant of an Option or Stock Appreciation Right pursuant to this
  Plan shall not affect in any way the right or power of the Corporation to make
  adjustments, reclassifications, reorganizations or changes of its capital or
  business structure or to merge or to consolidate or to dissolve, liquidate or
  sell, or transfer all or any part of its business or assets.

       (e) No fractional shares of stock shall be issued under the Plan for any
  such adjustment.

       (f) Any adjustment made pursuant to this Section 16, shall be made, to
  the extent practicable, in such manner as not to constitute a modification of
  any outstanding Incentive Stock Options within the meaning of Section 424(h)
  of the Internal Revenue Code of 1986, as amended.

  17.  INVESTMENT PURPOSE.  At the discretion of the Committee, any Option
       ------------------                                                 
Agreement may provide that the optionee shall, by accepting the Option,
represent and agree, for himself and his transferees by will or the laws of
descent and distribution, that all shares of stock purchased upon the exercise
of the Option will be acquired for investment and not for resale or
distribution, and that upon each exercise of any portion of an Option, the
person entitled to exercise the same shall furnish evidence of such facts which
is satisfactory to the Corporation. Certificates for shares of stock acquired
under the Plan may be issued bearing such restrictive legends as the Corporation
and its counsel may deem necessary to ensure that the optionee is not an
"underwriter" within the meaning of the regulations of the Securities Exchange
Commission.

  18.  APPLICATION OF FUNDS.  The proceeds received by the Corporation from the
       --------------------                                                    
sale of Common Stock pursuant to Options will be used for general corporate
purposes.

  19.  NO OBLIGATION TO EXERCISE.  The granting of an Option or Stock
       -------------------------                                     
Appreciation Right shall impose no obligation upon the optionee to exercise such
Option or Stock Appreciation Right.

  20.  EFFECTIVE DATE OF PLAN.  The Plan will become effective upon the approval
       ----------------------                                                   
of the Plan by the shareholders of the Corporation and receipt of any necessary
regulatory approvals.

  21.  TERM OF PLAN.  Options and Stock Appreciation Rights may be granted
       ------------                                                       
pursuant to this Plan from time to time within ten (10) years from the effective
date of the Plan.

  22.  TIME OF GRANTING OF OPTIONS.  Nothing contained in the Plan or in any
       ---------------------------                                          
resolution adopted or to be adopted by the Committee or the shareholders of the
Corporation and no action taken by the Committee shall constitute the granting
of any Option or Stock Appreciation Right hereunder.  The granting of an Option
and Stock Appreciation Right pursuant to the Plan shall take place only when an
Option Agreement shall have been duly executed and delivered by and on behalf of
the Corporation at the direction of the Committee.
<PAGE>
 
  23.  CASH PAYMENTS.  At the time of the payment of any dividend or other
       -------------                                                      
distribution with respect to the Common Stock, in the absolute discretion of,
and upon direction of the Board, the Corporation shall cause to be paid to
existing directors and employees of the Corporation, the Bank or any Subsidiary
who hold nonforfeited, unexercised Options under this Plan, regardless of
whether or not such Options are vested and nonforfeitable, a cash amount equal
to the number of shares of Common Stock subject to nonforfeited, unexercised
options held by such optionee multiplied by the amount of any dividends or other
distributions paid per share of Common Stock outstanding.  The Board shall have
the discretion to approve cash payments at the time of some dividends or
distributions but not others.  Notwithstanding the foregoing, no amounts shall
be paid to optionees pursuant to this Section 23 with respect to any dividend or
distribution if at the time of such dividend or distribution, the exercise price
of the Options shall have been reduced pursuant to Section 16(b) above.

  If any director or employee of the Corporation, the Board or any Subsidiary
shall receive any cash payment from the Company, the Board or any Subsidiary
pursuant to this Section 23 with respect to an Option which is not vested and
exercisable, and if such Option shall be forfeited, then within 30 days after
the effective date of such forfeiture, the optionee shall pay to the
Corporation, the Bank or the Subsidiary (as applicable) an amount equal to the
cash payment received by such optionee with respect to such forfeited Option.
In the alternative, at the option of the Corporation, the Bank or the Subsidiary
(as applicable) the amount to be repaid may be withheld from the final
compensation payable to the optionee.

  24.  WITHHOLDING TAXES.  Whenever the Corporation proposes or is required to
       -----------------                                                      
cause to be issued or transferred shares of stock, cash or other assets pursuant
to this Plan, the Corporation shall have the right to require the optionee to
remit to the Corporation an amount sufficient to satisfy any federal, state
and/or local withholding tax requirements prior to the issuance of any
certificate or certificates for such shares or delivery of  such cash or other
assets. Alternatively, the Corporation may issue or transfer such shares of
stock or make other distributions of cash or other assets net of the number of
shares or other amounts sufficient to satisfy the withholding tax requirements.
For withholding tax purposes, the shares of stock, cash and other assets to be
distributed shall be valued on the date the withholding obligation is incurred.

  25.  TERMINATION AND AMENDMENT.  The Board may at any time alter, suspend,
       -------------------------                                            
terminate or discontinue the Plan, subject to any applicable regulatory
requirements and any required stockholder approval or any stockholder approval
which the Board may deem advisable for any reason, such as for the purpose of
obtaining or retaining any statutory or regulatory benefits under tax,
securities or other laws or satisfying applicable stock exchange or quotation
system listing requirements.  The Board may not, without the consent of the
holder of an Option or Stock Appreciation Right previously granted, make any
alteration which would deprive the optionee of his rights with respect thereto.

  26.  CAPTIONS AND HEADINGS; GENDER AND NUMBER.  Captions and paragraph
       ----------------------------------------                         
headings used herein are for convenience only, do not modify or affect the
meaning of any provision herein, are not a part, and shall not serve as a basis
for interpretation or construction of, this Plan.  As used herein, the masculine
gender shall include the feminine and neuter, and the singular number shall
include the plural, and vice versa, whenever such meanings are appropriate.
<PAGE>
 
  27.  COST OF PLAN; EXCULPATION AND INDEMNIFICATION.  All costs and expenses
       ---------------------------------------------                         
incurred in the operation and administration of the Plan shall be borne by the
Corporation, the Bank and the Subsidiaries.  In connection with this Plan, no
member of the Board, no member of the Board of Directors of the Bank, and no
member of the Board of Directors of any Subsidiary, and no member of the
Committee shall be personally liable for any act or omission to act, nor for any
mistake in judgment made in good faith, unless arising out of, or resulting
from, such person's own bad faith, willful misconduct or criminal acts.  To the
extent permitted by applicable law and regulation, the Corporation shall
indemnify, defend and hold harmless the members of the Board, the members of the
Board of Directors of the Bank and the members of the Board of Directors of any
Subsidiary, and members of the Committee, and each other officer or employee of
the Bank, the Corporation or of any Subsidiary to whom any power or duty
relating to the administration or interpretation of this Plan may be assigned or
delegated, from and against any and all liabilities (including any amount paid
in settlement of a claim with the approval of the Board), and any costs or
expenses (including counsel fees) incurred by such persons arising out of or as
a result of, any act or omission to act, in connection with the performance of
such person's duties, responsibilities and obligations under this Plan, other
than such liabilities, costs, and expenses as may arise out of, or result from
the bad faith, willful misconduct or criminal acts of such persons.

  28.  GOVERNING LAW.  Without regard to the principles of conflicts of laws,
       -------------                                                         
the laws of the State of North Carolina shall govern and control the validity,
interpretation, performance, and enforcement of this Plan.

  29.  INSPECTION OF PLAN.  A copy of this Plan, and any amendments thereto,
       ------------------                                                   
shall be maintained by the Secretary of the Corporation and shall be shown to
any proper person making inquiry about it.

  30.  OTHER PROVISIONS.  The Option Agreements authorized under this
       ----------------                                              
Plan shall contain such other provisions not inconsistent with the foregoing,
including, without limitation, increased restrictions upon the exercise of
options, as the Committee may deem advisable.
<PAGE>
 
                                   EXHIBIT A
                                   ---------


                        STOCK OPTION GRANT AND AGREEMENT

  THIS STOCK OPTION GRANT AND AGREEMENT ("Agreement"), being made according to
and subject to the terms and conditions of the STOCK OPTION PLAN  of South
Street  Financial Corp. ("Plan"), a copy of which is attached hereto as Annex A
and is hereby incorporated by reference and made a part of this Agreement, is
herein executed and effective the _______ day of _______________, _____, between
South Street Financial Corp. (the "Corporation") and ____________________
("Optionee"):

     1.   Grant.  As of the above date, the Corporation hereby grants to the
          -----                                                             
          Optionee (applicable provisions are marked):

          [_] an Incentive Stock Option [as that term is defined in Section 422
          of the Internal Revenue Code of 1986, as amended (the "Code")] to
          purchase  ________ shares of Common Stock of the Corporation at the
          price stated in this Agreement;

          [_] a Nonqualified Stock Option to purchase __________ shares of 
          Common Stock of the Corporation at the price stated in this Agreement.

          The Optionee [_] shall [_] shall not have Stock Appreciation Rights in
          connection with the Options granted hereby, in accordance with Section
          14 of the Plan.

          The Option(s) and any Stock Appreciation Rights granted under this
          section and as described in this Agreement is (are) in all respects
          subject to and conditioned by the terms, definitions, and provisions
          of this Agreement and of the Plan.  Capitalized terms in this
          Agreement which are not otherwise defined but which are defined in the
          Plan shall have the same meaning given to those terms in the Plan.

          The Optionee has been granted Options under the Plan as a result of
          the Optionee's position as a [_] director [_] employee of the 
          Corporation, the Bank or a Subsidiary.

     2.   Price.  The Option price is $_____________ for each share.
          -----                                                     

    3.   Exercise of Option.  The Option(s) granted under this Agreement shall
         ------------------
         be exercisable pursuant to the terms and conditions of the Plan and as
         set forth below:

         (a)  Right to Exercise:  In addition to the terms and conditions
              -----------------
         imposed on the Optionee's right to exercise his Options and any Stock
         Appreciation Rights imposed in the Plan, the following terms and
         conditions are applicable:
<PAGE>
 
--------------------------------------------------------------------------------
(b)  [_] (Marked if applicable)   Annual Installments:  Subject to the terms and
                                -------------------                           
conditions of the Plan, the Incentive Stock Options can be exercised in annual
installments as follows:

          __________________ shares beginning on __________________, 19__

          __________________ shares beginning on __________________, 19__

          __________________ shares beginning on __________________, 19__

          __________________ shares beginning on __________________, 19__

          __________________ shares beginning on __________________, 19__


          Subject to the terms and conditions of the Plan, the Nonqualified
          Options can be exercised in annual installments as follows:

          __________________ shares beginning on __________________, 19__

          __________________ shares beginning on __________________, 19__

          __________________ shares beginning on __________________, 19__

          __________________ shares beginning on __________________, 19__

          __________________ shares beginning on __________________, 19__

          The right to exercise the Option(s) in annual installments shall be
          cumulative.  In addition, the option(s) shall be exercisable upon
          disability, death, retirement and a change in control as set forth in
          the Plan.

          (c) [_] (Marked if applicable)  Immediate Vesting:  Subject to the
                                          -----------------
          terms and conditions of the Plan, all of the Options are vested,
          nonforfeitable and exercisable.

          (d)  Method of Exercise:  The Options and any Stock Appreciation
               ------------------                       
          Rights granted under this Agreement shall be exercisable by a written
          notice to the Secretary of the Corporation which shall:

               (1) State the election to exercise the Option or the election to
               surrender an exercisable Option and exercise Stock Appreciation
               Rights, the number of shares in respect of which the Option or
               Stock Appreciation Right is being exercised, the person in whose
               name any stock certificate or certificates for such shares of
               Common Stock is to be registered or to whom any cash is to be
               paid, his or her address, and social security number;

               (2) Contain any such representation and agreements as to
               Optionee's investment intent with respect to shares of Common
               Stock as may be required by the Committee;
<PAGE>
 
               (3) Be signed by the person entitled to exercise the Option and,
               if the Option is being exercised by any person or persons other
               than the Optionee, be accompanied by proof, satisfactory to the
               Corporation, of the right of such person or persons to exercise
               the Option or Stock Appreciation Rights in accordance with the
               Plan; and

               (4) Be accompanied by payment of the purchase price of any shares
               with respect to which the Option is being exercised which payment
               shall be in form acceptable to the Committee pursuant to Section
               6(b) of the Plan.

          (e)  Representations and Warranties:  In order to exercise an Option
               ------------------------------
          or Stock Appreciation Right, the person exercising the Option or Stock
          Appreciation Right must make the representations and warranties to the
          Corporation as may be required by any applicable law or regulation, or
          as may otherwise be required pursuant to the Plan.

          (f)  Approvals.  In order for an Option or Stock Appreciation Right to
               ---------
          be exercised, all filings and approvals required by applicable law and
          regulations or pursuant to the Plan must have been made and obtained.

     4.   Non-transferability.  Neither any Option nor any Stock Appreciation
          -------------------                                                
Rights may be transferred in any manner otherwise than by will or the laws of
descent and distribution and such Option and any Stock Appreciation Rights may
be exercised during the life of the Optionee only by him or her.

     5.   Investment Purpose.  This Option and any Stock Appreciation Rights may
          ------------------
not be exercised if the issuance of shares or payment of cash upon such exercise
would constitute a violation of any applicable federal or state securities law
or other law or valid regulation.

     6.   Expiration.  This Option and any corresponding Stock Appreciation
          ----------
Rights shall expire on _____________, _________.

     7.   Escrow.  All stock purchased pursuant to an Incentive Stock Option
          ------
shall be held in escrow for a period which ends on the later of (i) two (2)
years from the date of the granting of the option or (ii) one (1) year after the
transfer of the stock pursuant to the exercise of the Option. The stock shall be
held by the Corporation or its designee. The Optionee who has exercised the
Option shall have all rights of a stockholder, including, but not limited to,
the rights to vote, receive dividends and sell the stock. The sole purpose of
the escrow is to inform the Corporation of a disqualifying disposition of the
stock within the meaning of Section 422 of the Code, and it shall be
administered solely for this purpose.

     8.   Repayment of Cash Payments.  If the Optionee hereunder forfeits any
          --------------------------                                         
Options pursuant to the Plan, the Optionee shall, within 30 days after the
effective date of such forfeiture, pay the Corporation, the Bank or a Subsidiary
(as applicable) an amount equal to the cash payments received by the Optionee
from the Corporation, the Bank or any Subsidiary with respect to such forfeited
Options pursuant to Section 23 of the Plan. In the alternative, at the option of
the Corporation, the Bank or a Subsidiary, the amount to be repaid may be
withheld by
<PAGE>
 
the Corporation, the Bank or a Subsidiary from the final compensation or fees
payable to the Optionee.  Each acceptance by  an Optionee of cash payments
pursuant to such Section 23 with respect to Options still subject to forfeiture
shall constitute a reaffirmation of the agreements set forth in this 
paragraph 8.

  9.   Tax Withholding.  All stock, cash and other assets distributed pursuant
       ---------------                                                        
to this Agreement shall be subject to applicable federal, state and local
withholding for taxes.  The Optionee expressly acknowledges and agrees to such
withholding.  The Optionee acknowledges and agrees to the tax withholding
provisions which are set forth in the Plan.

  10.  Resolution of Disputes.  Any dispute or disagreement which should arise
       ----------------------                                                 
under, or as a result of, or in any way relate to, the interpretation,
construction, or application of this Agreement or the Plan will be determined by
the Committee designated in Section 2 of the Plan. Any determination made by
such Committee shall be final, binding, and conclusive for all purposes.

  11.  Construction Controlled by Plan.  The Options and any corresponding Stock
       -------------------------------                                          
Appreciation Rights evidenced hereby shall be subject to all of the
requirements, conditions and provisions of the Plan.  This Agreement shall be
construed so as to be consistent with the Plan; and the provisions of the Plan
shall be deemed to be controlling in the event that any provision should appear
to be inconsistent therewith.

  12.  Severability.  Whenever possible, each provision of this Agreement shall
       ------------                                                            
be interpreted in such a manner as to be valid and enforceable under applicable
law, but if any provision of this Agreement is determined to be unenforceable,
invalid or illegal, the validity of any other provision or part thereof shall
not be affected thereby and this Agreement shall continue to be binding on the
parties hereto as if such unenforceable, invalid or illegal provision or part
thereof had not been included herein.

  13.  Modification of Agreement; Waiver.  This Agreement may be modified,
       ---------------------------------                                  
amended, suspended or terminated, and any terms, representations or conditions
may be waived, but only by a written instrument signed by each of the parties
hereto and only subject to the limitations set forth in the Plan.  No waiver
hereunder shall constitute a waiver with respect to any subsequent occurrence or
other transaction hereunder or of any other provision.

  14.  Captions and Headings; Gender and Number.  Captions and paragraph
       ----------------------------------------                         
headings used herein are for convenience only, do not modify or affect the
meaning of any provision herein, are not a part, and shall not serve as a basis
for interpretation or construction, of this Agreement.  As used herein, the
masculine gender shall include the feminine and neuter, and the singular number
shall include the plural, and vice versa, whenever such meanings are
appropriate.

  15.  Governing Law; Venue and Jurisdiction.  Without regard to the principles
       -------------------------------------                                   
of conflicts of laws, the laws of the State of North Carolina shall govern and
control the validity, interpretation, performance, and enforcement of this
Agreement.

  16.  Binding Effect.  This Agreement shall be binding upon and shall inure to
       --------------                                                          
the benefit of the Corporation, and its successors and assigns, and shall be
binding upon and inure to
<PAGE>
 
the benefit of the Optionee, and his or her heirs, legatees, personal
representative, executor, administrator and permitted assigns.

  17.  Entire Agreement.  This Agreement and the Plan constitute and embody the
       ----------------                                                        
entire understanding and agreement of the parties hereto and, except as
otherwise provided hereunder, there are no other agreements or understandings,
written or oral, in effect between the parties hereto relating to the matters
addressed herein.

  18.  Counterparts.  This Agreement may be executed in any number of
       ------------                                                  
counterparts, each of which when executed and delivered shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.

  IN WITNESS WHEREOF, the parties have set their hands and seals the day and
year first above written.

ATTEST:                                    SOUTH STREET FINANCIAL CORP.

                                           By:
----------------------------------            -------------------------------
(Corporate Seal)                                                    President
                                              ----------------------


                                           OPTIONEE:

                                           -----------------------------------
                                           (SEAL)
                              
<PAGE>
 
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