<PAGE>
               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            Washington  D.C. 20549

                                   FORM 10-Q

 [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the quarterly period ended    December 31, 1996
                                    --------------------------------
                                       OR

 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
     SECURITIES EXCHANGE ACT OF 1934

     For the transition period from                     to
                                   ---------------------  --------------------

                        Commission File Number: 0-21083

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

      North Carolina                                 56-0266500
      --------------                                 ----------
     (State or other jurisdiction of     (I.R.S. Employer Identification No.)
     incorporation or organization)

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

                                 (704)-982-9184
                                 --------------
                        (Registrant's telephone  number)

                                      N/A
                                      ---
             (Former name, former address and former fiscal year,
                         if changed since last report)

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

As of February 10, 1997 there were issued and outstanding 4,496,500 shares of
the Registrant's common stock, no par value



<PAGE>
 
                         SOUTH STREET FINANCIAL CORP.


                                     INDEX


PART I - FINANCIAL INFORMATION
 
Item 1.  Financial Statements
 
Consolidated statements of financial condition at 
December 31, 1996 (Unaudited) and September 30, 1996             1
 
Consolidated statements of income for the three months 
ended December 31, 1996 and 1995 (Unaudited)                     2
 
Consolidated statements of cash flows for the three 
months ended December 31, 1996 and 1995 (Unaudited)            3-4
 
Notes to consolidated financial statements (Unaudited)         5-7
 
 
Item 2.  Management's Discussion and Analysis of 
         Financial Condition and Results of Operations        8-11
 
PART II - OTHER INFORMATION
 
Item 1.  Legal Proceedings                                      12
                                          
Item 2.  Changes in Securities                                  12
                                          
Item 3.  Defaults upon Senior Securities                        12
 
Item 4.  Submission of Matters to a Vote of Security Holders    12
 
Item 5.  Other Information                                      12
                                          
Item 6.  Exhibits and Reports on Form 8-K                       12
 
Signatures                                                      13


<PAGE>
 
SOUTH STREET FINANCIAL CORP.
 
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND SEPTEMBER 30, 1996
<TABLE> 
<CAPTION> 
 
                                                       December 31,          September 30,
ASSETS                                                     1996                  1996
------                                                 ------------          ------------ 
                                                        (Unaudited)            (Note)*
<S>                                                    <C>                   <C>   
Cash and cash equivalents:               
  Noninterest-bearing deposits                         $  2,301,000          $  2,787,000
  Interest-bearing deposits                              10,638,000            59,348,000
Securities held to maturity                              24,604,000             5,496,000
Securities available for sale                            75,294,000            34,784,000
Federal Home Loan Bank stock                              1,346,000             1,346,000
Loans receivable, net                                   110,937,000           109,858,000
Real estate acquired in settlement of loans                  18,000                18,000 
Accrued interest receivable                               1,718,000             1,165,000
Office properties and equipment, net                      1,221,000             1,238,000
Prepaid expenses and other assets                           446,000             1,914,000
                                                       ------------          ------------ 
    TOTAL ASSETS                                       $228,523,000          $217,954,000
                                                       ============          ============ 
                                                                                         
LIABILITIES AND STOCKHOLDERS' EQUITY                                                     
------------------------------------
Liabilities:                                                                             
  Deposits                                             $140,716,000          $146,398,000
  Deposits, stock offering                                      --             46,601,000
  Special SAIF Assessment                                       --                838,000
  Advance payments by borrowers for taxes                                                
   and insurance                                            230,000               115,000 
  Accounts payable and other liabilities                  1,225,000             2,148,000
  Advances from Federal Home Loan Bank                   25,000,000                   -- 
  Checks outstanding on disbursement account                504,000               987,000 
                                                       ------------          ------------ 
    TOTAL LIABILITIES                                   167,675,000           197,087,000
                                                       ------------          ------------ 
Stockholders' equity:                                                                    
  Preferred stock, no par value, authorized                                              
   5,000,000 shares; no shares issued                           --                    -- 
  Common stock, no par value, authorized                                                 
   20,000,000 shares; issued 4,496,500                                                   
   shares December 31, 1996 and no shares                                                
   September 30, 1996                                           --                    -- 
  Additional paid-in capital                             43,661,000                   -- 
  Unrealized gain (loss) on securities                                                   
   available for sale, net of tax                            82,000               (35,000)
  Note receivable, ESOP                                  (4,428,000)                  -- 
  Retained earnings, substantially restricted            21,533,000            20,902,000 
                                                       ------------          ------------ 
    TOTAL STOCKHOLDERS' EQUITY                           60,848,000            20,867,000
                                                       ------------          ------------ 
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY         $228,523,000          $217,954,000 
                                                       ============          ============  
 
</TABLE>
*NOTE: The Consolidated Statement of Financial Condition as of September 30, 
       1996 has been taken from the audited financial statements of Home
       Savings Bank of Albemarle, S.S.B. at that date. South Street Financial 
       Corp. completed its stock offering on October 2, 1996 and then acquired 
       all of the common stock of Home Savings Bank of Albemarle, S.S.B.

See Notes to Consolidated Financial Statements.

                                       1
<PAGE>
<TABLE>
<CAPTION>
 
SOUTH STREET FINANCIAL CORP.
 
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
 
                                                  1996        1995
                                              ----------   ----------
                                                      (Unaudited)

<S>                                           <C>          <C>
Interest income:
  Loans                                       $2,476,000   $2,414,000 
  Mortgage-backed certificates                   195,000       88,000
  Securities                                     861,000      478,000
  Other interest-bearing deposits                321 000      174 000
                                              ----------   ----------
                                               3,853,000    3,154,000     
Interest expense on deposits and                                      
 borrowed funds                                1,935,000    1,909,000
                                              ----------   ----------
       NET INTEREST INCOME                     1,918,000    1,245,000

Provision for loan losses                             -            -          
                                              ----------   ----------
       NET INTEREST INCOME AFTER               
         PROVISION FOR LOAN LOSSES             1,918,000    1,245,000   
                                              ----------   ----------
Noninterest income, other                         27,000       49,000
                                              ----------   ----------

Noninterest expenses:                                          
  Compensation and benefits                      654,000      432,000
  Net occupancy                                   87,000       66,000
  Federal insurance premium expenses                  -        77,000
  Data processing                                 64,000       50,000
  Other                                          181,000      189,000
                                              ----------   ----------
                                                 986,000      814,000
                                              ----------   ----------
       INCOME BEFORE INCOME TAXES                959,000      480,000

Income taxes                                     328,000      176,000
                                              ----------   ----------
                                                               
       NET INCOME                             $  631,000   $  304,000
                                              ==========   ==========

Primary earnings per share                    $     0.15   $   n/a
                                              ==========   ==========
Dividends declared per share                  $       -    $   n/a
                                              ==========   ==========
Average number of common shares                
 outstanding                                   4,145,273       n/a
                                              ==========   ==========
</TABLE>
See Notes to Consolidated Financial Statements.

                                       2

<PAGE>

SOUTH STREET FINANCIAL CORP.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION> 
                                                                  1996             1995
------------------------------------------------------------------------------------------
                                                                       (Unaudited)
<S>                                                               <C>              <C>
Cash Flows from Operating Activities
  Net income                                                      $   631,000      304,000
  Adjustments to reconcile net income to net cash provided by
    operating activities:
    Provision for loan losses                                              -            -      
    Net accretion of premiums and discounts on securities              10,000       (2,000) 
    Amortization of deferred loan fees                                (33,000)     (28,000)
    Gain on sale of real estate acquired in settlement of loans            -        (4,000)
    Gain on sale of fixed assets                                       (2,000)          -
    Provision for depreciation                                         28,000       27,000
    Deferred Income Taxes                                             (16,000)     (18,000)
    (Increase) Decrease in  assets:
      Accrued interest receivable                                    (553,000)     (36,000)
      Prepaid and other assets                                      1,468,000     (151,000)
    Increase (Decrease) in liabilities:
      Accounts payable and other liabilities                       (1,769,000)     242,000
      Interest payable                                                (47,000)      27,000
      Checks outstanding on disbursement accounts                    (483,000)    (169,000)
                                                                   -----------   ----------
          NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES        (766,000)     192,000
                                                                   -----------   ----------     
Cash Flows from Investing Activities
  Purchases of securities held to maturity                        (19,307,000)          -
  Purchases of securities available for sale                      (40,354,000)  (3,000,000)
  Proceeds from maturities and recalls of securities available
    for sale                                                               -     3,960,000
  Principal collected on securities held to maturity                  171,000      220,000
  Loan originations and principal payments on loans, net           (1,041,000)     323,000
  Purchase of office properties and equipment                         (26,000)     (12,000)
  Proceeds from sale of fixed assets                                   15,000           -
  Proceeds from sale of foreclosed real estate                             -        55,000
                                                                  -----------   ----------
      NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES         (60,542,000)   1,546,000
                                                                  -----------   ----------
</TABLE> 
                                             (Continued)

                                       3

<PAGE>
 
SOUTH STREET FINANCIAL CORP.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995

<TABLE> 
<CAPTION> 
                                                             1996               1995
                                                         ------------       ------------     
<S>                                                      <C>                <C> 
Cash Flows from Financing Activities
  Net increase (decrease) in deposits                    $(52,236,000)       $ 3,538,000
  Net increase (decrease) in advance payments by 
   borrowers for taxes and insurance                          115,000             85,000
  Proceeds received from issuance of common 
   stock net of stock issuance costs incurred              43,661,000               --
  Principal receipts for ESOP debt                            100,000               --
  Note receivable originated to ESOP                       (4,528,000)              --
  Proceeds from Federal Home Loan Bank borrowings          25,000,000
                                                         ------------       ------------     
      NET CASH PROVIDED BY FINANCING ACTIVITIES            12,112,000          3,623,000
                                                         ------------       ------------     
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS    (49,196,000)         5,361,000
 
Cash and cash equivalents:
  Beginning                                                62,135,000         11,494,000
                                                         ------------       ------------      
  Ending                                                 $ 12,939,000       $ 16,855,000
                                                         ============       ============
Supplemental Disclosures of Cash Flow Information
  Cash payments (receipts) for:
    Interest                                             $  1,920,000       $  1,882,000
                                                         ------------       ------------      
    Income taxes                                         $    (73,000)      $    (45,000)
                                                         ------------       ------------      
  Cash and cash equivalents:                
    Cash and short-term investments:        
      Interest-bearing                                   $  2,301,000       $  2,575,000
      Noninterest-bearing                                  10,638,000         14,280,000
                                                         ------------       ------------       
                                                         $ 12,939,000       $ 16,855,000
                                                         ============       ============  
 
Transfer from loans to real estate
 acquired in settlement of loans                         $        --        $     79,000      
                                                         ------------       ------------       
Net change in unrealized (gain) loss on
 securities available for sale, net of 
 deferred taxes (credits)                                $    117,000       $     81,000
                                                         ------------       ------------       
Loans originated to finance the sale of
 real estate acquired in settlement of loans             $        --        $     89,000
                                                         ------------       ------------       
</TABLE> 
 
See Notes to Consolidated Financial Statements.


                                       4
<PAGE>
 
SOUTH STREET FINANCIAL CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------

NOTE 1.     NATURE OF BUSINESS

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

NOTE 2.     BASIS OF PRESENTATION


The accompanying unaudited consolidated financial statements (except for the
statement of financial condition at September 30, 1996, which is audited) have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q of
Regulation S-X.  Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.  In the opinion of management, all adjustments (none of
which were other than normal recurring accruals) necessary for a fair
presentation of the financial position and results of operations for the periods
presented have been included.  The financial statements of the Company are
presented on a consolidated basis with those of Home Savings, although the
Company did not own any shares of the Bank and had no assets, liabilities,
equity or operations at any date prior to October 2, 1996.  Therefore, although
certain financial statements presented in this Form 10-Q include periods prior
to October 2, 1996, such statements for all periods prior to October 2, 1996
include only the accounts and operations of Home Savings.  The results of
operations for the three month period ended December 31, 1996 are not
necessarily indicative of the results of operations that may be expected for the
year ended September  30, 1997.

The accounting policies followed are as set forth in Note 1 of the Notes to
Financial Statements in the 1996 Home Savings financial statements.

NOTE 3.     PLAN OF CONVERSION


On October 2, 1996, pursuant to a Plan of Conversion which was approved by its
members and regulators, Home Savings converted from a North Carolina-chartered
mutual savings bank to a North Carolina-chartered stock savings bank (the
"Conversion"), and became a wholly-owned subsidiary of South Street Financial
Corp.  The Company was formed to acquire all of the common stock of the Bank
upon its conversion to stock form.  The Company has no operations and conducts
no business of its own other than owning Home Savings, investing its portion of
the net proceeds received in the Conversion, and lending funds to the Employee
Stock Ownership Plan (the "ESOP") which was formed in connection with the
Conversion.  The closing of the offering occurred on October 2, 1996 and
resulted in a stock issuance of 4,496,500 shares of common stock at a price of
$10.00 per share for proceeds of $43,661,000 (including $4,528,000 in shares
purchased by the ESOP and net of $1,304,000 in conversion costs).  The Company
transferred $19,567,000 of the net proceeds to Home Savings for purchase of all
of the capital stock of the Bank.


                                       5

<PAGE>
 
SOUTH STREET FINANCIAL CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------

NOTE 3.     PLAN OF CONVERSION ( CONTINUED)


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

The Bank may not declare or pay a cash dividend on or repurchase any of its
common stock if its net worth would thereby be reduced below either the
aggregate amount then required for the liquidation account.  In addition, as a
North Carolina-chartered stock savings bank, Home Savings may not declare or pay
a cash dividend on, or repurchase any of its capital stock if the effect of such
transaction would be to reduce the net worth of Home Savings to an amount which
is less than the minimum amount required by applicable federal and state
regulations.  For a period of five years after its conversion from mutual to
stock form, Home Savings must obtain a written approval from the Administrator
of the North Carolina Savings Institutions Division before declaring or paying a
cash dividend on its capital stock in an amount in excess of one-half of the
greater of (i) Home Savings net income for the most recent fiscal year end, or
(ii) the average of Home Saving's net income after dividends for the most recent
year end and not more than two of the immediately preceding fiscal year ends.

NOTE 4.     EARNINGS PER SHARE


The Company's earnings per share for the three month period ended December 31,
1996 is based on 4,145,773 shares assumed to be outstanding for the period.
Earnings per share has been calculated in accordance with Statement of Position
93-6 "Employers' Accounting for Employee Stock Ownership Plans."  Earnings per
share for the three month  period  ended  December 31, 1996  is reported based
upon the assumption that such shares had been outstanding from the beginning of
the three month period.  Earnings per share for the three month period ended
December 31, 1995 have not been presented in the consolidated statements of
income because the Bank had not converted to stock form and the Company had not
completed its stock offering at any time during that period.

NOTE 5.     DIVIDENDS DECLARED


On January 13, 1997, the Board of Directors of South Street Financial Corp.
declared a dividend of $ .08 a share for stockholders of record as of January
24, 1997 and payable on February 7, 1997.  In addition, on January 13, 1997, the
Board of Directors of Home Savings declared an upstream dividend of $194,373 to
South Street Financial Corp., which was paid on February 3, 1997.


                                       6

<PAGE>
 
SOUTH STREET FINANCIAL CORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------


NOTE 6.     ADVANCES FROM FEDERAL HOME LOAN BANK

Advances from the Federal Home Loan Bank ("FHLB") at December 31 consist of the
following:
<TABLE>
<CAPTION>
 
<S>                                                             <C>
Advances due FHLB, interest at 5.69%, due December, 1997        $  10,000,000
Advances due FHLB, interest at 5.98%, due June, 1998               15,000,000
                                                                --------------
                                                                $  25,000,000
                                                                ==============
</TABLE>


                                       7

<PAGE>
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
--------------------------------------------------------------------------------

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND SEPTEMBER 30, 1996:

Total assets increased by $10.6 million or 4.8%, to $228.6 million at December
31, 1996 from $218.0 million at September 30, 1996.  The increase in assets was
attributable to the proceeds received from advances from Federal Home Loan Bank
of $25.0 million which was used to fund additional security purchases and a
return of $11.6 million in stock offering deposits to subscribers due to an
oversubscription.  On October 2, 1996, the Company issued 4,496,500 shares of
common stock and received $43.7 million which represented the actual net
proceeds from the offering (including $4.6 million in shares purchased by the
ESOP).  The majority of the decrease in deposits of $52.3 million or 27.1%
between September 30, 1996 and December 31, 1996 is due to recording $43.7
million in additional paid-in capital upon closing the offering.  Net cash and
short-term cash investments decreased by $49.2 million or 79.2% to $12.9 million
at December 31, 1996 from $62.1 million at September 30, 1996.  This decrease
was attributable to reinvestment of the cash received from the stock offering in
higher rate longer term investment securities.

Net loans receivable increased by $1.1 million or 1.0% to $110.9 million at
December 31, 1996 from $109.8 million at September 30, 1996.  Such loan growth
has been typical for the Bank, which operates in a lending market that has
sustained stable loan demand over the past several years.  Investment securities
held to maturity increased $19.1 million or 347.7%, to $24.6 million at December
31, 1996 from $5.5 million at September 30, 1996.  Likewise, investment
securities classified as available for sale increased $40.5 million or 116.5%,
to $75.3 million at December 31, 1996 from $34.8 million at September 30, 1996.
The Company has reinvested proceeds from the stock offering which it had been
holding in short term interest-bearing deposits into U.S. government and
mortgage backed securities.  The Bank had borrowings of $25 million outstanding
at the end of the three month period ended December 31, 1996.  No borrowings
were outstanding at September 30, 1996.  The borrowings were made in order to
finance the purchase of investment securities which management has determined
will provide a profitable return.  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 totaling $4.4 million, which includes a $100,000
principal repayment during the quarter ended December 31, 1996, is reported as a
reduction of stockholders' equity.  Retained earnings increased by $631,000 to
$21.5 million at December 31, 1996, which is attributable to the Company's
consolidated earnings during the three months ended December 31, 1996.

At December 31, 1996, the Company's stockholders' equity amounted to $60.8
million, which as a percentage of total assets was 26.6%.  As a North Carolina
chartered stock savings bank, the Bank is required to meet various capital
standards established by federal and state banking agencies.  The Bank's stand-
alone equity was $40.9 million at December 31, 1996 and  was substantially in
excess of all such capital requirements.

The Bank's level of nonperforming loans, defined as loans past due 90 days or
more, as a percentage of  loans outstanding, was .80% and .60% at December 31,
1996 and September 30, 1996, respectively.  During the three month periods ended
December 31, 1996 and 1995, the Bank's level of nonperforming loans remained
consistently low in relation to prior periods and to total loans outstanding,
and the Bank's charge-offs of loans was minimal. Management determined based on
their analysis that no loan loss provisions were necessary during  the first
quarters of fiscal 1997 or 1996.


                                       8

<PAGE>
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION

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

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND
1995:

GENERAL.  Net income for the three month period ended December 31, 1996 was
$631,000, or $327,000 more than the $304,000 earned during the same period in
1995.  As discussed below, the increase in net income was primarily attributable
to increases in net interest income for the three month period ended December
31, 1996 as compared to the same period in 1995.

INTEREST INCOME.  Interest income increased by $699,000 from $3.2 million for
the three months ended December 31, 1995 to $3.9 million for the three months
ended December 31, 1996.  These increases were attributable in part to a slight
overall increase in market interest rates but were principally affected by a
change in the volume of interest-earning assets outstanding.  Due primarily to
an infusion of cash received in the stock offering, interest-earning assets
amounted to $222.8 million at December 31, 1996 as compared to $158.4 million at
December 31, 1995.

INTEREST EXPENSE.  Interest expense on deposits and borrowed funds increased by
$26,000 from $1.91 million for the three months ended December 31, 1995 to $1.94
million for the three months ended December 31, 1996.  The increase was
primarily due to an increase in the volume of interest-bearing deposits and
borrowed funds for the quarter ended December 31, 1996 compared to the same
period in 1995.  Home Savings prices its deposits to be at or near the top of
the market because of its dependence on the local market for funds availability.
Interest expense incurred from the Federal Home Loan Bank advances amounted to
$65,000 for the quarter ended December 31, 1996 compared to none for the quarter
ended December 31, 1995.

NET INTEREST INCOME.  Net interest income increased by $673,000 from $1.2
million for the three months ended December 31, 1995 to $1.9 million for the
three months ended December 31, 1996.  These increases resulted from the
combination of an increase in the volume of interest-earning assets in excess of
an increase in the volume of interest-bearing liabilities during a period of
steady to slightly decreasing interest rate spreads.  The Bank's interest rate
spread decreased primarily because its deposits were more rate sensitive than
its interest earning assets, while overall market interest rates were higher
during the three month period ended December 31, 1996 as compared to the same
period in 1995.  The purchase of government obligations with the Federal Home
Loan Bank advances provided net interest income of approximately $90,000 for the
quarter ended December 31, 1996.

PROVISION FOR LOAN LOSSES.  There were no provisions for loan losses charged to
income during the three months ended December 31, 1996 and 1995.  Provisions,
which  are  charged  to operations, and  the  resulting  loan loss allowances
are amounts the Bank's management believes will be adequate to absorb  losses on
existing loans that may become uncollectible. Loans are charged off against the
allowance when management believes that collectibility is unlikely. The decision
to increase or decrease the provision and resulting allowances 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.  The Bank's level of nonperforming loans has
remained consistently low in relation to prior periods and total loans
outstanding, and the Bank's charge-offs of loans during either of  the three
month periods ended December 31, 1996 and 1995 was minimal.

At December 31, 1996, the Bank's level of general valuation allowances for loan
losses amounted to $429,000, which management believes is adequate to absorb
potential losses in its loan portfolio.


                                       9

<PAGE>
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION

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

NONINTEREST INCOME.  Noninterest income decreased by $22,000 from $49,000 for
the three month period ended December 31, 1995 to $27,000 for the three month
period ended December 31, 1996.  This decrease was attributable to a decrease in
service charges during the three months ended December 31, 1996 as compared to
the same period in 1995.

NONINTEREST EXPENSE.  Noninterest expense increased by $172,000 to $986,000 for
the three month period ended December 31, 1996 from $814,000 for the comparable
quarter in 1995.  The increase in noninterest expense is principally due to an
increase in benefits expense associated with the establishment of an ESOP as
discussed below.   ESOP expense amounted to $168,000 for the three months ended
December 31, 1996.

As a part of the conversion, the Company established an ESOP that acquired a
total of 359,720 shares of the stock offered in the conversion with funds
provided in the form of a loan from the Company.  The loan is expected to be
repaid over a fifteen year period with funds provided by the Bank sufficient to
amortize the debt.  The expense associated with the ESOP is reported in
accordance with SOP 93-6 "Employers' Accounting for Employee Stock Ownership
Plans."

CAPITAL RESOURCES AND LIQUIDITY:

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-earning deposits.

During the three month period ended December 31, 1996, cash and cash
equivalents, a significant source of liquidity, decreased by approximately $49.2
million.  This decrease is a direct result of the Company's stock offering which
closed on October 2, 1996.  Cash flow resulting from internal operating
activities provided for a decrease of $766,000 in cash during the three month
period ended December 31, 1996.  Financing activities, principally net proceeds
from the stock offering of $43.7 million and proceeds of $25.0  million from
Federal Home Loan Bank borrowings reduced by deposit outflows of $52.2 million
provided an additional $12.1 million.  A portion of the funding generated by
financing activities provided cash for loan originations and purchases of
investment securities for a total of $60.5 million.

As a state chartered stock savings bank, Home Savings must meet certain
liquidity requirements which are established by the Administrator.  Home's
liquidity ratio at December 31, 1996, as computed under such regulations, was
considerably in excess of such requirements.  Given its excess liquidity and its
ability to borrow from the Federal Home Loan Bank of Atlanta, Home Savings
believes that it will have sufficient funds available to meet anticipated future
loan commitments, unexpected deposit withdrawals, or other cash requirements.


                                      10

<PAGE>
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

MANAGMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION

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

CAPITAL RESOURCES AND LIQUIDITY (CONTINUED)

The FDIC requires Home Savings 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 Administrator requires a
net worth equal to at least 5% of total assets.  Home Savings complied with all
of the capital requirements of both the FDIC and the Administrator at December
31, 1996.

The consolidated financial statements and accompanying footnotes have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without consideration for changes in the relative purchasing
power of money over time due to inflation.  The assets and liabilities of the
Company are primarily monetary in nature and changes in interest rates have a
greater impact on the Company's performance than do the effect of inflation.


                                      11

<PAGE>
 
Part II.  OTHER INFORMATION

       Item 1.  Legal Proceedings

                The Company is not engaged in any legal proceedings at the
                present time. From time to time, the Bank is a party to legal
                proceedings within the normal course of business wherein it
                enforces its security interest in loans made by it, and other
                matters of a similar nature.

       Item 2.  Changes in Securities

                Not applicable

       Item 3.  Defaults Upon Senior Securities

                Not applicable

       Item 4.  Submission of Matters to a Vote of Security Holders

                There has been no submission of matters to a vote of
                shareholders during the quarter ended December 31, 1996.

       Item 5.  Other Information

                Not applicable

       Item 6.  Exhibits and Reports on Form 8-K

                (a)      Exhibits

                         Exhibit (27) Financial Data Schedule

                (b)      Reports on Form 8-K
 
                         On October 17, 1996, the Company filed a Form 8-K with
                         the SEC announcing the conversion of Home Savings and
                         the acceptance of subscriptions for 4,496,500 shares of
                         the Company's common stock in its initial public
                         offering. The financial statements as of June 30, 1996
                         of Home Savings including Management's Discussion and
                         Analysis of Financial Condition and Results of
                         Operations were included in the Form 8-K.


                                      12

<PAGE>
 
SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the
    Registrant has duly caused this report to be signed on its behalf by the
    undersigned thereunto duly authorized.

                                          SOUTH STREET FINANCIAL CORP.

    Dated ------------------              By: /s/ Carl M. Hill
                                              ----------------
                                              Carl M. Hill

                                          President and Chief Executive Officer

    Dated ------------------              By: /s/ Christopher F. Cranford
                                              ---------------------------
                                              Christopher F. Cranford

                                          Treasurer and Controller


                                      13