##### Table of Contents

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U. S. SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, D. C. 20549



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FORM 10-QSB



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xQuarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934



For the quarterly period ended March 31, 2003



 ̈Transition Report Under Section 13 or
15(d) of the Securities Exchange Act of 1934



For the transition period ended



Commission File Number 0-21083



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SOUTH STREET FINANCIAL CORP.

(Exact name of
small business issuer as specified in its charter)



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|NORTH CAROLINA                                                |  | 56-1973261                         
|------------------------------------------------------------- |  | -----------------------------------
|(State or other jurisdiction ofincorporation or organization) |  | (IRS EmployerIdentification Number)



155
WEST SOUTH STREET, ALBEMARLE, NC 28001

(Address of principal executive office)



(704) 982-9184

(Issuers telephone number)



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



As of May 7, 2003, 3,079,867 shares of the issuers common stock, no par value, were outstanding.



This report contains 15 pages.



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##### Table of Contents

|         |  |                                                                                       |  | Page No.
|-------- |  | ------------------------------------------------------------------------------------- |  | --------
|Part I.  |  | FINANCIAL INFORMATION                                                                 |  |         
|        
|Item 1  |  | Financial Statements (Unaudited)                                                      |  |         
|        
|         |  | Consolidated Statements of Financial ConditionMarch 31, 2003 and December 31, 2002    |  | 3       
|        
|         |  | Consolidated Statements of IncomeThree Months Ended March 31, 2003 and 2002           |  | 4       
|        
|         |  | Consolidated Statements of Cash FlowsThree Months Ended March 31, 2003 and 2002       |  | 5       
|        
|         |  | Notes to Consolidated Financial Statements                                            |  | 6       
|        
|Item 2  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 8       
|        
|Item 3  |  | Controls and Procedures                                                               |  | 11      
|        
|Part II. |  | OTHER INFORMATION                                                                     |  |         
|        
|Item 6  |  | Exhibits and Reports on Form 8-K                                                      |  | 12      



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##### Table of Contents



Part I. FINANCIAL INFORMATION



Item 1Financial Statements



South Street Financial Corp. and Subsidiary



Consolidated Statements of Financial Condition



|                                                                                                                             |  | March 31, 2003(Unaudited) |         |   | December 31,2002* |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ----------------- | -
|                                                                                                                             |  | (In thousands)            |        
|ASSETS                                                                                                                       |  |                           |         |   |                   |  
|Cash and cash equivalents:                                                                                                   |  |                           |         |   |                   |  
|Non-interest-earning deposits                                                                                                |  | $                         | 3,727   |   |                   | $
|Interest-earning deposits                                                                                                    |  |                           | 21,630  |   |                   |  
|Federal funds sold                                                                                                           |  |                           | 3,069   |   |                   |  
|Securities held to maturity                                                                                                  |  |                           | 2,680   |   |                   |  
|Securities available for sale                                                                                                |  |                           | 10,087  |   |                   |  
|Federal Home Loan Bank stock                                                                                                 |  |                           | 1,509   |   |                   |  
|Loans                                                                                                                        |  |                           | 169,601 |   |                   |  
|Allowance for loan losses                                                                                                    |  |                           | (553    | ) |                   |  
|                                                                                                                             |  |                           |         |   |                   |  
|NET LOANS                                                                                                                    |  |                           | 169,048 |   |                   |  
|Real estate held for investment                                                                                              |  |                           | 1,030   |   |                   |  
|Property and equipment, net                                                                                                  |  |                           | 1,274   |   |                   |  
|Other assets                                                                                                                 |  |                           | 7,851   |   |                   |  
|                                                                                                                             |  |                           |         |   |                   |  
|TOTAL ASSETS                                                                                                                 |  | $                         | 221,905 |   |                   | $
|                                                                                                                             |  |                           |         |   |                   |  
|                                                                                                                            
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                         |  |                           |         |   |                   |  
|                                                                                                                            
|LIABILITIES                                                                                                                  |  |                           |         |   |                   |  
|Deposits                                                                                                                     |  | $                         | 177,331 |   |                   | $
|Borrowings                                                                                                                   |  |                           | 16,000  |   |                   |  
|Accrued expenses and other liabilities                                                                                       |  |                           | 3,557   |   |                   |  
|                                                                                                                             |  |                           |         |   |                   |  
|TOTAL LIABILITIES                                                                                                            |  |                           | 196,888 |   |                   |  
|                                                                                                                             |  |                           |         |   |                   |  
|STOCKHOLDERS EQUITY                                                                                                         |  |                           |         |   |                   |  
|Preferred stock, no par value: authorized 5,000,000 shares; none issued                                                      |  |                           |         |   |                   |  
|Common stock, no par value: authorized 20,000,000 shares; issued 3,079,867 shares at
March 31, 2003 and at December 31, 2002 |  |                           |         |   |                   |  
|Additional Paid in capital                                                                                                   |  |                           | 7,662   |   |                   |  
|Unearned compensation                                                                                                        |  |                           | (963    | ) |                   |  
|Unearned ESOP                                                                                                                |  |                           | (1,872  | ) |                   |  
|Retained earnings, substantially restricted                                                                                  |  |                           | 20,107  |   |                   |  
|Accumulated other comprehensive income                                                                                       |  |                           | 83      |   |                   |  
|                                                                                                                             |  |                           |         |   |                   |  
|TOTAL STOCKHOLDERS EQUITY                                                                                                   |  |                           | 25,017  |   |                   |  
|                                                                                                                             |  |                           |         |   |                   |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                   |  | $                         | 221,905 |   |                   | $
|                                                                                                                             |  |                           |         |   |                   |  

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|* |  | Derived from audited financial statements
|- |  | -----------------------------------------



See accompanying notes.



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##### Table of Contents

South Street Financial Corp. and Subsidiary



Consolidated Statements of Income (Unaudited)



|                                                             |  | Three Months EndedMarch 31,         
|------------------------------------------------------------ |  | ------------------------------------
|                                                             |  | 2003                                
|                                                             |  | (In thousands, exceptper share data)
|INTEREST INCOME                                              |  |                                     
|Loans, including fees                                        |  | $                                   
|Investment securities                                        |  |                                     
|Other interest-earning deposits                              |  |                                     
|                                                             |  |                                     
|TOTAL INTEREST INCOME                                        |  |                                     
|                                                             |  |                                     
|INTEREST EXPENSE                                             |  |                                     
|Deposits                                                     |  |                                     
|Borrowings                                                   |  |                                     
|                                                             |  |                                     
|TOTAL INTEREST EXPENSE                                       |  |                                     
|                                                             |  |                                     
|NET INTEREST INCOME                                          |  |                                     
|                                                             |  |                                     
|PROVISION FOR LOAN LOSSES                                    |  |                                     
|                                                             |  |                                     
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES          |  |                                     
|                                                             |  |                                     
|NON-INTEREST INCOME                                          |  |                                     
|Service charges and fees                                     |  |                                     
|Other                                                        |  |                                     
|                                                             |  |                                     
|TOTAL NON-INTEREST INCOME                                    |  |                                     
|                                                             |  |                                     
|NON-INTEREST EXPENSE                                         |  |                                     
|Compensation and benefits                                    |  |                                     
|Net occupancy and equipment                                  |  |                                     
|Data processing                                              |  |                                     
|Other                                                        |  |                                     
|                                                             |  |                                     
|TOTAL NON-INTEREST EXPENSE                                   |  |                                     
|                                                             |  |                                     
|INCOME BEFORE INCOME TAXES                                   |  |                                     
|                                                            
|INCOME TAXES                                                 |  |                                     
|                                                             |  |                                     
|NET INCOME                                                   |  | $                                   
|                                                             |  |                                     
|PER SHARE DATA:                                              |  |                                     
|Basic and diluted net income per common share                |  | $                                   
|                                                             |  |                                     
|Dividends                                                    |  | $                                   
|                                                             |  |                                     
|Weighted average common shares outstandingbasic and diluted |  |                                     
|                                                             |  |                                     



See
accompanying notes.



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##### Table of Contents

South Street Financial Corp. and Subsidiary



Consolidated Statements of Cash Flows (Unaudited)



|                                                                                          |  | Three Months EndedMarch 31, |       
|----------------------------------------------------------------------------------------- |  | --------------------------- | ------
|                                                                                          |  | 2003                        |       
|                                                                                          |  | (In thousands)              |       
|CASH FLOWS FROM OPERATING ACTIVITIES                                                      |  |                             |       
|Net income                                                                                |  | $                           | 350   
|Adjustments to reconcile net income to net cash provided by operating
activities:         |  |                             |       
|Net accretion of premiums and discounts on securities                                     |  |                             | 48    
|Amortization of deferred loan fees                                                        |  |                             | (95   
|Depreciation                                                                              |  |                             | 44    
|Provision for loan losses                                                                 |  |                             | 30    
|Amortization of unearned compensation                                                     |  |                             | 113   
|ESOP Contribution                                                                         |  |                             | (86   
|Increase in other assets                                                                  |  |                             | (254  
|Increase in accrued expenses and other liabilities                                        |  |                             | 338   
|                                                                                          |  |                             |       
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                 |  |                             | 488   
|                                                                                          |  |                             |       
|CASH FLOWS FROM INVESTING ACTIVITIES                                                      |  |                             |       
|Proceeds from maturities, calls and principal repayments of securities available for
sale |  |                             | 1,751 
|Proceeds from maturities, calls and principal repayments of securities held to
maturity   |  |                             | 522   
|Loan originations and principal payments on loans, net                                    |  |                             | 3,201 
|Purchase of property and equipment                                                        |  |                             | (40   
|Investment in real estate held for investment                                             |  |                             |      
|Purchase of bank owned life insurance                                                     |  |                             | (5,670
|Purchase of FHLB stock                                                                    |  |                             |      
|                                                                                          |  |                             |       
|NET CASH USED IN INVESTING ACTIVITIES                                                     |  |                             | (236  
|                                                                                          |  |                             |       
|CASH FLOWS FROM FINANCING ACTIVITIES                                                      |  |                             |       
|Net increase (decrease) in deposits                                                       |  |                             | 1,672 
|Payment of dividends                                                                      |  |                             | (261  
|Purchases and retirement of common stock                                                  |  |                             |      
|Repayments on borrowings, net                                                             |  |                             | (5,000
|Principal payment received on ESOP note                                                   |  |                             | 48    
|                                                                                          |  |                             |       
|NET CASH USED BY FINANCING ACTIVITIES                                                     |  |                             | (3,541
|                                                                                          |  |                             |       
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                                 |  |                             | (3,289
|                                                                                         
|CASH AND CASH EQUIVALENTS, BEGINNING                                                      |  |                             | 31,715
|                                                                                          |  |                             |       
|CASH AND CASH EQUIVALENTS, ENDING                                                         |  | $                           | 28,426
|                                                                                          |  |                             |       



See
accompanying notes.



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##### Table of Contents

South Street Financial Corp. and Subsidiary



Notes to Consolidated Financial Statements



NOTE ABASIS OF PRESENTATION



In
managements opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three month
periods ended March 31, 2003 and 2002 in conformity with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of South Street Financial Corp. (the Company)
and its wholly-owned subsidiary, Home Savings Bank of Albemarle, S.S.B., (Home Savings or the Bank), the Banks wholly-owned subsidiary, South Street Development Corporation (SSDC), and SSDCs
wholly-owned subsidiary, Park Ridge Associates, LLC (Park Ridge). All significant intercompany transactions and balances have been eliminated in consolidation. Operating results for the three month period ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2003.



The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to the consolidated financial statements filed as part of the
Companys 2002 annual report on Form 10-KSB. This quarterly report should be read in conjunction with such annual report.



Certain amounts in the 2002 financial statements have been placed into different account groupings to conform to the 2003 presentation. These
reclassifications had no effect on net income or stockholders equity as previously reported.



NOTE BEARNINGS PER SHARE



The Companys basic earnings per common share for the three month period ended March 31, 2003 is based on net income earned divided by the weighted average number of shares outstanding from the beginning of the period
to the end of the period. Diluted earnings per share is adjusted for all potential common stock instruments having a dilutive effect. For purposes of this computation, the number of shares of common stock purchased by the ESOP which have not been
allocated to participant accounts are not assumed to be outstanding.



At March 31, 2003, there were 449,650 exercisable options outstanding which had no dilutive effect.



NOTE CDIVIDENDS DECLARED



On March 17, 2003, the Companys Board of Directors declared a dividend of $.10 per share for shareholders of record as of March 31, 2003 and payable
on April 10, 2003. In addition, on March 17, 2003, the Board of Directors of the Bank declared an upstream dividend of $307,987 to the Company.



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South Street Financial Corp. and Subsidiary



Notes to Consolidated Financial Statements



NOTE DBORROWINGS



Borrowings, which consisted solely of advances from the FHLB, totaled $16,000,000 at March 31, 2003. The weighted average
interest rate of the advances was 2.08%. The advances mature at varying dates from 2003 through 2004.



NOTE ECOMPREHENSIVE INCOME



For the three months ended March 31, 2003 and 2002, total comprehensive income, consisting of net income and unrealized securities gains and losses, net of taxes, was $308,000 and $290,000, respectively.



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Item 2Managements Discussion and Analysis of Financial Condition and Results of Operations



This Quarterly Report on Form 10-QSB may contain certain forward-looking statements consisting of estimates with respect to the financial condition,
results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in
interest rates, deposit flows, loan demand, real estate values, and conditions; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and
technological factors affecting the Companys operations, pricing, products and services.



Comparison of Financial Condition at

March 31, 200 and
December 31, 2002



The Companys total consolidated
assets decreased $2.9 million during the three months ended March 31, 2003 from $224.8 million at December 31, 2002 to $221.9 million. During the first three months of 2003, our liquid assets, consisting of interest earning deposits, non-interest
earning deposits, federal funds sold, and investment securities decreased $5.7 million to $41.2 million and our loan portfolio decreased $3.1 million to $169.0 million. The liquidity provided by the decreases in these asset categories and from an
increase in deposits from our customers during the quarter of $1.7 million was used to make a $5.7 million investment in bank owned life insurance and to reduce the level of the Companys borrowings. During the quarter, the Company reduced its
borrowings, which consist solely of advances from the Federal Home Loan Bank, from $21.0 million to $16.0 million.



The Bank has guaranteed the repayment of the ESOPs note payable to the Company, which it incurred on October 2, 1996 in order to purchase 359,720
shares of stock in the Company. The Companys note receivable from the ESOP totals $1.9 million at March 31, 2003 and is reported as a reduction of stockholders equity. Retained earnings increased by $89,000 to $20.1 million at March 31,
2003, which is attributable to the Companys net income of $350,000 net of dividends paid for the three months ended March 31, 2003 in the amount of $261,000. Common stock and unearned compensation increased by $27,000 to $6.7 million at March
31, 2003. The increase was primarily attributable to the amortization during the quarter of unearned compensation.



As a North Carolina chartered stock savings bank, the Bank is required to meet various capital standards established by federal and state banking
agencies. At March 31, 2003, the Banks stockholders equity amounted to $22.3 million, or 10.2% of total assets and exceeds all regulatory capital requirements.



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Comparison of Operating Results for the

Three Months Ended March 31, 2003 and 2002



General.Net income for the three-month period
ended March 31, 2003 was $350,000, or $11,000 less than the $361,000 earned during the same period in 2002. This decrease resulted principally from increases in the provision for loan losses and non-interest expenses of $30,000 and $43,000,
respectively during the quarter. These changes, which negatively affected our earnings, were partially offset by the increases in our net interest income and non-interest income of $47,000 and $6,000, respectively.



Interest income. Interest income decreased by $414,000 from $3.6
million for the three months ended March 31, 2002 to $3.2 million for the three months ended March 31, 2003. While the level of our average interest earning assets increased from approximately $202.7 million during the first quarter of 2002 to
approximately $209.9 million during the first quarter of 2003, the yield on our average interest earning assets dropped approximately 86 basis points. This decrease in yield resulted primarily from industry wide rate reductions, and offset the
effects of the increase in the volume of our interest earning assets during the current quarter.



Interest expense.Interest expense on deposits and borrowings decreased by $461,000 from $1.9 million for the three months ended March 31, 2002 to $1.4 million for the three months ended March
31, 2003. As with our interest earning assets, the volume of our average interest-bearing liabilities increased from approximately $184.3 million in the first quarter of 2002, to $188.5 million in the first quarter of 2003. However, the decrease in
the rates we paid on these liabilities decreased more significantly than did the rates on our earning assets. The average rates for our interest bearing liabilities dropped approximately 108 basis points in comparison to the first quarter of 2002.
Again, as with our earning assets, the decrease in interest rates had a more significant impact than did the increase in volume of our interest-bearing liabilities.



Net interest income. Net interest income increased by $47,000 to $1.7 million for the three months ended March 31,
2003. This increase resulted from an increase in our net interest-earning assets during the quarter combined with the drop in interest rates discussed in the interest income and interest expense captions. The net yield on our average
interest-earning assets increased approximately 22 basis points during the quarter ended March 31, 2003 as compared to the same period in 2002.



Provision for loan losses. The provision for loan losses charged to income during the three months ended March 31, 2003 was $30,000 while there was
no provision for loan losses made during the same period ended 2002. Provisions, which are charged to operations, and the resulting loan loss allowance, are amounts the Banks management believes will be adequate to absorb probable losses
inherent in our loan portfolio. Loans are charged off against the allowance when management believes that collectibility is unlikely. The decision to increase or decrease the provision and resulting allowance is based upon an evaluation of both
prior loan loss experience and other factors, such as changes in the nature and volume of the loan portfolio, overall portfolio quality, and current economic conditions. In consideration of current state and local economic conditions, management
feels it is prudent to increase the provision for loan losses for the current and succeeding quarters of fiscal year 2003.



At March 31, 2003, the Banks allowance for loan losses amounted to $553,000, which management believes is adequate to absorb probable losses
inherent in its loan portfolio. The Bank had no loan charge-offs during the first quarter of 2003.



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Non-interest income.
The Company earned non-interest income of $91,000 during the three months ended March 31, 2003 compared to the $85,000 that was earned during the same period in 2002. This increase in non-interest income of $6,000 was primarily attributable to
income from bank owned life insurance during the quarter of $22,000 net of a decrease in service charges and fees of $15,000.



Non-interest expense. Non-interest expense increased by $43,000 from $1.22 million for the three months ended March 31, 2002 to $1.26 million for
the three months ended March 31, 2003. This increase resulted primarily from an increase in compensation expense of $39,000 due largely to expense associated with normal and expected compensation adjustments, additional personnel, and increases in
the cost of employee benefits such as health insurance.



Liquidity and Capital Resources



The term liquidity generally refers to an organizations ability to generate adequate amounts of funds to meet its needs for cash. More specifically for financial institutions, liquidity ensures that adequate funds
are available to meet deposit withdrawals, fund loan and capital expenditure commitments, maintain reserve requirements, pay operating expenses, and provide funds for debt service, dividends to stockholders, and other institutional commitments.
Funds are primarily provided through financial resources from operating activities, expansion of the deposit base, borrowings, through the sale or maturity of investments, the ability to raise equity capital, or maintenance of shorter term
interest-bearing deposits.



As a state chartered stock savings
bank, the Bank must meet certain liquidity requirements that are established by the North Carolina Commissioner of Banks (the Commissioner). The Banks liquidity ratio at March 31, 2003, as computed under such regulations, was
considerably in excess of such requirements. Given its excess liquidity and its ability to borrow from the FHLB of Atlanta, the Bank believes that it will have sufficient funds available to meet anticipated future loan commitments, unexpected
deposit withdrawals, or other cash requirements.



The FDIC
requires the Bank to have a minimum leverage ratio of Tier I Capital (principally consisting of retained earnings and any common stockholders equity, less any intangible assets) to all assets of at least 3%, provided that it receives the
highest rating during the examination process. For institutions that receive less than the highest rating, the Tier I capital requirement is 1% to 2% above the stated minimum. The FDIC also requires the Bank to have a ratio of total capital to
risk-weighted assets of 8%, of which at least 4% must be in the form of Tier I capital. The Commissioner requires a net worth equal to at least 5% of total assets. The Bank complied with all of the capital requirements of both the FDIC and the
Commissioner at March 31, 2003.



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Item 3Controls and Procedures



Within the 90 days prior to the date of this report, the Company carried out an evaluation under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14 and Item 307 of Regulation S-K. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Companys
periodic SEC Filings. There were no significant changes in the Companys internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.



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Part II. OTHER INFORMATION



Item 6. Exhibits and Reports on Form 8-K



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SIGNATURES



In accordance with the requirements of
the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                    |  |  |  | SOUTH STREET FINANCIAL CORP.
|------------------- |  |  |  | ----------------------------
|                   
|Date:  May 14, 2003 |  |  |  | By:                         
|                    |  |  |  |                             
|                   
|Date:  May 14, 2003 |  |  |  | By:                         
|                    |  |  |  |                             



13