##### 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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|x | Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------



For the quarterly period ended September 30, 2004



| ̈ | Transition Report Under Section 13 or 15(d) of the Exchange Act
|- | ---------------------------------------------------------------



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 of incorporation or organization) |  | (IRS Employer Identification 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.    Yesx    No ̈



As of October 19, 2004, 3,059,061 shares of the issuers common stock, no par value, were outstanding.



This report contains 12 pages.



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##### Table of Contents

|         |  |                                                                                                  |  |         
|-------- |  | ------------------------------------------------------------------------------------------------ |  | --------
|         |  |                                                                                                  |  | Page No.
|Part I.  |  | FINANCIAL INFORMATION                                                                            |  |         
|         |  |                                                                                                 
|Item 1 - |  | Financial Statements (Unaudited)                                                                 |  |         
|         |  |                                                                                                 
|         |  | Consolidated Statements of Financial Condition September 30, 2004 and December 31, 2003          |  | 3       
|         |  |                                                                                                 
|         |  | Consolidated Statements of Income Three Months and Nine Months Ended September 30, 2004 and 2003 |  | 4       
|         |  |                                                                                                 
|         |  | Consolidated Statements of Cash Flows Nine Months Ended September 30, 2004 and 2003              |  | 5       
|         |  |                                                                                                 
|         |  | Notes to Consolidated Financial Statements                                                       |  | 6       
|         |  |                                                                                                 
|Item 2 - |  | Managements Discussion and Analysis of Financial Condition and Results of Operations            |  | 7       
|         |  |                                                                                                 
|Item 3 - |  | Controls and Procedures                                                                          |  | 10      
|         |  |                                                                                                 
|Part II. |  | OTHER INFORMATION                                                                                |  |         
|         |  |                                                                                                 
|Item 2 - |  | Unregistered Sales of Equity Securities and Use of Proceeds                                      |  | 11      
|         |  |                                                                                                 
|Item 4 - |  | Submission of Matters to a Vote of Security Holders                                              |  | 11      
|         |  |                                                                                                 
|Item 6 - |  | Exhibits and Reports on Form 8-K                                                                 |  | 11      



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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



|                                                                                                                                                             |  |                   |         |   |                   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                             |  | September 30,2004 |         |   | December 31,2003* |  
|                                                                                                                                                             |  | (Unaudited)       |         |   |                   |  
|                                                                                                                                                             |  | (In thousands)    |        
|ASSETS                                                                                                                                                       |  |                   |         |   |                   |   |         |  
|                                                                                                                                                             |  |                  
|Cash and cash equivalents:                                                                                                                                   |  |                   |         |   |                   |   |         |  
|Non-interest-earning deposits                                                                                                                                |  | $                 | 3,287   |   |                   | $ | 5,925   |  
|Interest-earning deposits                                                                                                                                    |  |                   | 18,072  |   |                   |   | 32,461  |  
|Federal funds sold                                                                                                                                           |  |                   | 2,538   |   |                   |   | 4,116   |  
|Securities held to maturity                                                                                                                                  |  |                   | 6,790   |   |                   |   | 7,851   |  
|Securities available for sale                                                                                                                                |  |                   | 21,937  |   |                   |   | 12,323  |  
|Federal Home Loan Bank stock                                                                                                                                 |  |                   | 1,185   |   |                   |   | 1,492   |  
|Loans                                                                                                                                                        |  |                   | 149,753 |   |                   |   | 143,914 |  
|Allowance for loan losses                                                                                                                                    |  |                   | (549    | ) |                   |   | (570    | )
|                                                                                                                                                             |  |                   |         |   |                   |   |         |  
|NET LOANS                                                                                                                                                    |  |                   | 149,204 |   |                   |   | 143,344 |  
|                                                                                                                                                             |  |                  
|Real estate held for investment                                                                                                                              |  |                   | 653     |   |                   |   | 653     |  
|Foreclosed real estate                                                                                                                                       |  |                   | 262     |   |                   |   | 690     |  
|Property and equipment, net                                                                                                                                  |  |                   | 2,557   |   |                   |   | 2,584   |  
|Bank-owned life insurance                                                                                                                                    |  |                   | 6,887   |   |                   |   | 6,698   |  
|Prepaid expenses and other assets                                                                                                                            |  |                   | 1,821   |   |                   |   | 2,017   |  
|                                                                                                                                                             |  |                   |         |   |                   |   |         |  
|TOTAL ASSETS                                                                                                                                                 |  | $                 | 215,193 |   |                   | $ | 220,154 |  
|                                                                                                                                                             |  |                   |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                         |  |                   |         |   |                   |   |         |  
|                                                                                                                                                             |  |                  
|LIABILITIES                                                                                                                                                  |  |                   |         |   |                   |   |         |  
|Deposits                                                                                                                                                     |  | $                 | 185,684 |   |                   | $ | 181,120 |  
|Borrowings                                                                                                                                                   |  |                   |        |   |                   |   | 10,000  |  
|Accrued expenses and other liabilities                                                                                                                       |  |                   | 3,640   |   |                   |   | 3,387   |  
|                                                                                                                                                             |  |                   |         |   |                   |   |         |  
|TOTAL LIABILITIES                                                                                                                                            |  |                   | 189,324 |   |                   |   | 194,507 |  
|                                                                                                                                                             |  |                   |         |   |                   |   |         |  
|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 3,059,061 and 3,079,867 shares at September 30, 2004 and at December 31,
2003, respectively |  |                   | 7,154   |   |                   |   | 7,488   |  
|Unearned compensation                                                                                                                                        |  |                   | (359    | ) |                   |   | (674    | )
|Unearned ESOP                                                                                                                                                |  |                   | (799    | ) |                   |   | (1,362  | )
|Retained earnings, substantially restricted                                                                                                                  |  |                   | 19,924  |   |                   |   | 20,160  |  
|Accumulated other comprehensive income (loss)                                                                                                                |  |                   | (51     | ) |                   |   | 35      |  
|                                                                                                                                                             |  |                   |         |   |                   |   |         |  
|TOTAL STOCKHOLDERS EQUITY                                                                                                                                   |  |                   | 25,869  |   |                   |   | 25,647  |  
|                                                                                                                                                             |  |                   |         |   |                   |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                   |  | $                 | 215,193 |   |                   | $ | 220,154 |  
|                                                                                                                                                             |  |                   |         |   |                   |   |         |  

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|* | Derived from audited consolidated 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 EndedSeptember 30,                 |           | Nine Months EndedSeptember 30,
|                                                              |  | 2004                                            |           | 2003                           |   | 2004      |  | 2003
|                                                              |  | (In thousands, except share and per share data)
|INTEREST INCOME                                               |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|Loans, including fees                                         |  | $                                               | 2,350     |                                | $ | 2,524     |  | $    | 7,004     |  | $ | 8,274    
|Investment securities                                         |  |                                                 | 198       |                                |   | 59        |  |      | 521       |  |   | 261      
|Other interest-bearing deposits                               |  |                                                 | 93        |                                |   | 115       |  |      | 256       |  |   | 325      
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|TOTAL INTEREST INCOME                                         |  |                                                 | 2,641     |                                |   | 2,698     |  |      | 7,781     |  |   | 8,860    
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|INTEREST EXPENSE                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|Deposits                                                      |  |                                                 | 1,094     |                                |   | 1,163     |  |      | 3,281     |  |   | 3,656    
|Borrowings                                                    |  |                                                 |          |                                |   | 62        |  |      | 20        |  |   | 308      
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|TOTAL INTEREST EXPENSE                                        |  |                                                 | 1,094     |                                |   | 1,225     |  |      | 3,301     |  |   | 3,964    
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|NET INTEREST INCOME                                           |  |                                                 | 1,547     |                                |   | 1,473     |  |      | 4,480     |  |   | 4,896    
|                                                              |  |                                                 |           |                               
|PROVISION FOR LOAN LOSSES                                     |  |                                                 |          |                                |   | 30        |  |      | 60        |  |   | 90       
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES           |  |                                                 | 1,547     |                                |   | 1,443     |  |      | 4,420     |  |   | 4,806    
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|NON-INTEREST INCOME                                           |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|Service charges and fees                                      |  |                                                 | 106       |                                |   | 121       |  |      | 285       |  |   | 277      
|Income from bank-owned life insurance                         |  |                                                 | 50        |                                |   | 61        |  |      | 189       |  |   | 154      
|Other                                                         |  |                                                 | 18        |                                |   | 73        |  |      | 62        |  |   | 129      
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|TOTAL NON-INTEREST INCOME                                     |  |                                                 | 174       |                                |   | 255       |  |      | 536       |  |   | 560      
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|NON-INTEREST EXPENSE                                          |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|Compensation and benefits                                     |  |                                                 | 877       |                                |   | 871       |  |      | 2,714     |  |   | 2,631    
|Net occupancy and equipment                                   |  |                                                 | 102       |                                |   | 84        |  |      | 298       |  |   | 265      
|Data processing                                               |  |                                                 | 105       |                                |   | 70        |  |      | 267       |  |   | 184      
|Other                                                         |  |                                                 | 209       |                                |   | 217       |  |      | 687       |  |   | 645      
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|TOTAL NON-INTEREST EXPENSE                                    |  |                                                 | 1,293     |                                |   | 1,242     |  |      | 3,966     |  |   | 3,725    
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|INCOME BEFORE INCOME TAXES                                    |  |                                                 | 428       |                                |   | 456       |  |      | 990       |  |   | 1,641    
|                                                              |  |                                                 |           |                               
|INCOME TAXES                                                  |  |                                                 | 171       |                                |   | 161       |  |      | 349       |  |   | 598      
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|NET INCOME                                                    |  | $                                               | 257       |                                | $ | 295       |  | $    | 641       |  | $ | 1,043    
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|PER SHARE DATA:                                               |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|Basic and diluted net income per common share                 |  | $                                               | .09       |                                | $ | .10       |  | $    | .22       |  | $ | .36      
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|Dividends                                                     |  | $                                               | .10       |                                | $ | .10       |  | $    | .30       |  | $ | .30      
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          
|Weighted average common shares outstanding, basic and diluted |  |                                                 | 2,976,520 |                                |   | 2,922,130 |  |      | 2,966,044 |  |   | 2,907,510
|                                                              |  |                                                 |           |                                |   |           |  |      |           |  |   |          



See accompanying notes.



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##### Table of Contents

South Street Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)



|                                                                                          |  |                                |         |   |      |   |         |  
|----------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                          |  | Nine Months EndedSeptember 30, |        
|                                                                                          |  | 2004                           |         |   | 2003 |  
|                                                                                          |  | (In thousands)                 |        
|CASH FLOWS FROM OPERATING ACTIVITIES                                                      |  |                                |         |   |      |   |         |  
|Net income                                                                                |  | $                              | 641     |   |      | $ | 1,043   |  
|Adjustments to reconcile net income to net cash provided by operating activities:         |  |                                |         |   |      |   |         |  
|Net accretion of premiums and discounts on securities                                     |  |                                | 106     |   |      |   | 131     |  
|Amortization of deferred loan fees                                                        |  |                                | (278    | ) |      |   | (342    | )
|Depreciation                                                                              |  |                                | 153     |   |      |   | 137     |  
|Provision for loan losses                                                                 |  |                                | 60      |   |      |   | 90      |  
|Gain on sale of real estate held for investment                                           |  |                                |        |   |      |   | (41     | )
|Loss on sale for foreclosed real estate                                                   |  |                                |        |   |      |   | 3       |  
|Income from bank-owned life insurance                                                     |  |                                | (189    | ) |      |   | (154    | )
|Amortization of unearned compensation                                                     |  |                                | 315     |   |      |   | 296     |  
|ESOP contribution                                                                         |  |                                | (125    | ) |      |   | (214    | )
|(Increase) decrease in other assets                                                       |  |                                | 251     |   |      |   | 280     |  
|Increase in accrued expenses and other liabilities                                        |  |                                | 250     |   |      |   | 111     |  
|                                                                                          |  |                                |         |   |      |   |         |  
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                 |  |                                | 1,184   |   |      |   | 1,340   |  
|                                                                                          |  |                                |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                      |  |                                |         |   |      |   |         |  
|Purchase of securities available for sale                                                 |  |                                | (17,000 | ) |      |   |        |  
|Proceeds from maturities, calls and principal repayments of securities available for sale |  |                                | 7,228   |   |      |   | 5,990   |  
|Proceeds from maturities, calls and principal repayments of securities held to maturity   |  |                                | 973     |   |      |   | 1,005   |  
|Loan originations and principal payments on loans, net                                    |  |                                | (5,564  | ) |      |   | 25,626  |  
|Purchase of property and equipment                                                        |  |                                | (126    | ) |      |   | (496    | )
|Proceeds from sale of real estate held for investment                                     |  |                                |        |   |      |   | 178     |  
|Investment in real estate held for investment                                             |  |                                |        |   |      |   | (14     | )
|Proceeds from sale of foreclosed assets                                                   |  |                                | 350     |   |      |   | 45      |  
|Investment in bank-owned life insurance                                                   |  |                                |        |   |      |   | (5,795  | )
|Proceeds from redemption of FHLB stock                                                    |  |                                | 307     |   |      |   | 17      |  
|                                                                                          |  |                                |         |   |      |   |         |  
|NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES                                          |  |                                | (13,832 | ) |      |   | 26,556  |  
|                                                                                          |  |                                |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                      |  |                                |         |   |      |   |         |  
|Net increase (decrease) in deposits                                                       |  |                                | 4,564   |   |      |   | 5,115   |  
|Payment of dividends                                                                      |  |                                | (875    | ) |      |   | (808    | )
|Purchases and retirement of common stock                                                  |  |                                | (209    | ) |      |   |        |  
|Repayments on borrowings, net                                                             |  |                                | (10,000 | ) |      |   | (11,000 | )
|Principal payment received on ESOP note                                                   |  |                                | 563     |   |      |   | 96      |  
|                                                                                          |  |                                |         |   |      |   |         |  
|NET CASH USED BY FINANCING ACTIVITIES                                                     |  |                                | (5,957  | ) |      |   | (6,597  | )
|                                                                                          |  |                                |         |   |      |   |         |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                      |  |                                | (18,605 | ) |      |   | 21,299  |  
|                                                                                          |  |                               
|CASH AND CASH EQUIVALENTS, BEGINNING                                                      |  |                                | 42,502  |   |      |   | 31,715  |  
|                                                                                          |  |                                |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTS, ENDING                                                         |  | $                              | 23,897  |   |      | $ | 53,014  |  
|                                                                                          |  |                                |         |   |      |   |         |  



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 September 30, 2004 and for the three and nine month periods ended September 30, 2004 and 2003, 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 and nine month periods ended September 30, 2004 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2004.



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 2003 annual report on Form 10-KSB. This quarterly
report should be read in conjunction with such annual report.



NOTE B -
EARNINGS PER SHARE



The Companys basic earnings per share is based
on net income 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 that have not been allocated to participant accounts are not assumed to be outstanding.



At September 30, 2004 and 2003, there were 449,650 exercisable options outstanding which had no dilutive effect.



NOTE C - COMPREHENSIVE INCOME



For the quarters ended September 30, 2004 and 2003, total comprehensive income, consisting
of net income and unrealized securities gains and losses, net of taxes, was $301,000 and $265,000, respectively.



For the nine months ended September 30, 2004 and 2003, total comprehensive income, consisting of net income and unrealized securities gains and losses, net of taxes, was
$555,000 and $949,000, respectively.



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##### Table of Contents

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



This Quarterly Report on Form 10-QSB contains certain forward-looking statements with respect to the financial condition, results of operations and business of the
Company and the Bank. These forward-looking statements involve risks and uncertainties, and are based on the beliefs and assumptions of management of the Company and the Bank and on the information available to management at the time that these
disclosures were prepared. These statements can be identified by the use of words like expect, anticipate, estimate and believe, variations of these words, and other similar expressions. Readers should
not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause actual results to differ materially
include, but are not limited to, (1) competition in the Banks markets, (2) changes in the interest rate environment, (3) general national, regional or local economic conditions that are less favorable than expected, resulting in, among other
things, a deterioration in credit quality and the possible impairment of collectibility of loans, (4) legislative or regulatory changes, including changes in accounting standards, (5) significant changes in the federal and state legal and regulatory
environment and tax laws, (6) the impact of changes in monetary and fiscal policies, laws, rules and regulations, and (7) other risks and factors identified in the Companys other filings with the SEC. The Company undertakes no obligation to
update any forward-looking statements.



Comparison of Financial Condition at

September 30, 2004 and December 31, 2003



The Companys total consolidated assets decreased $5.0 million during the nine months
ended September 30, 2004 from $220.2 million at December 31, 2003 to $215.2 million. This decrease in our assets resulted primarily from a decrease in cash and cash equivalents comprised of interest and non-interest bearing deposits and federal
funds sold. Cash and cash equivalents decreased by $18.6 million, from $42.5 million at December 31, 2003 to $23.9 million at September 30, 2004. This decrease in liquid assets occurred principally due to managements decision to pay in full
all borrowings from the Federal Home Loan Bank of $10.0 million combined with a net increase in available for sale securities of $9.6 million. Managements use of liquid assets was based on a concentrated effort to reduce interest expense and
utilize low interest earning cash deposits in a more profitable way. Consistent with managements philosophy in 2003, loan rates have not been adjusted aggressively to grow the portfolio in a market with declining rates. However, due to the two
market rate increases of 25 basis points each in the third quarter of 2004 loans began to grow once again. This growth is attributable to the rising market rates which in turn made the Companys floor rates offered more attractive to borrowers.
As a consequence, the Banks loan portfolio has increased by $5.9 million, from $143.3 million at December 31, 2003 to $149.2 million at September 30, 2004. The Company has utilized the liquidity provided by the increase in deposits from our
customers of $4.6 million, along with a portion of the decrease in cash and cash equivalents discussed above to fund the purchase of additional investments held as available for sale as well as the growth in loans.



Comparison of Operating Results for the

Three Months Ended September 30, 2004 and 2003



General.Net income for the three-month period ended September 30, 2004 was $257,000, or $38,000 less than the $295,000 earned during the same period in 2003.



Interest income. Interest income decreased by $57,000 from $2.7 million
for the three months ended September 30, 2003 to $2.6 million for the three months ended September 30, 2004. The level of our average interest-earning assets decreased from approximately $203.3 million during the third quarter of 2003 to
approximately $197.7 million during the third quarter of 2004,



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##### Table of Contents

and the yield on our average interest-earning assets dropped approximately 72 basis points. This decrease in our yield
resulted primarily from the shift in our earning assets from loans and investment securities with higher yields to newer loans and investment securities with significantly lower current market yields.



Interest expense.Interest expense on deposits and borrowed funds decreased by
$131,000 from $1.2 million for the three months ended September 30, 2003 to $1.1 million for the three months ended September 30, 2004. As with our interest-earning assets, the volume of our interest-bearing liabilities decreased from approximately
$188.1 million in the third quarter of 2003, to $186.7 million in the third quarter of 2004. The average rates for our interest-bearing liabilities dropped approximately 48 basis points in comparison to the third quarter of 2003.



Net interest income. Net interest income increased by $74,000 from $1.5 million for
the three months ended September 30, 2003 to $1.5 million for the three months ended September 30, 2004. This increase resulted primarily from the decrease in our interest expense outpacing the decline in interest income as discussed above.



Provision for loan losses. The provision for loan losses charged to
income during the three months ended September 30, 2003 was $30,000. There was no provision for loan losses charged to income in the current quarter. Provisions, which are charged to operations, and the resulting loan loss allowance are amounts the
Banks management believes will be adequate to absorb losses inherent in our loan portfolio. Loans are charged off against the allowance when management believes that collectibility is unlikely.



At September 30, 2004 the Banks allowance for loan losses amounted to $549,000, which
management believes is adequate to absorb losses inherent in its loan portfolio. The allowance for loan losses as a percentage of gross loans outstanding was .37% and .40% at September 30, 2004 and December 31, 2003, respectively.



Non-interest income. The Company earned non-interest income of $174,000 during the
three months ended September 30, 2004 compared to the $255,000 that was earned during the same period in 2003. This decrease in non-interest income of $81,000 was primarily attributable to the $69,000 decrease in presold mortgage origination fee
income.



Non-interest expense. Non-interest expense increased by $51,000
for the three months ended September 30, 2004 compared to the three months ended September 30, 2003. This increase resulted primarily from an increase in occupancy and equipment expense of $18,000 and data processing of $35,000. The increase in data
processing occurred principally due to increased deposit activity.



Provision for income taxes. The Companys effective tax rate (income taxes as a percentage of income before income taxes) was 40.0% for the period ending September 30, 2004 as compared to 35.3% for the period ending September
30, 2003.



Comparison of Operating Results for the

Nine Months Ended September 30, 2004 and 2003



General.Net income for the nine-month period ended September 30, 2004 was $641,000, or $402,000 less than the $1,043,000 earned
during the same period in 2003. This decrease in our earnings resulted principally from the decrease in interest income of $1.1 million during the current nine month period, which is explained below.



Interest income. Interest income decreased by $1.1 million from $8.9 million for the
nine months ended September 30, 2003 to $7.8 million for the nine months ended September 30, 2004. The level of our average interest-earning assets decreased from approximately $207.9



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million during the first nine months of 2003 to approximately $198.6 million during the first nine months of 2004, and
the yield on our average interest-earning assets dropped approximately 75 basis points. This decrease in our yield resulted primarily from the shift in our earning assets from loans and investment securities with higher yields to newer loans and
investment securities with significantly lower current market yields.



Interest expense.Interest expense on deposits and borrowed funds decreased by $663,000 from $4.0 million for the nine months ended September 30, 2003 to $3.3 million for the nine months ended September 30, 2004. As with our
interest-earning assets, the volume of our interest-bearing liabilities decreased from approximately $191.6 million in the first nine months of 2003, to $187.0 million in the first nine months of 2004. The average rates for our interest-bearing
liabilities dropped approximately 50 basis points in comparison to the first half of 2003.



Net interest income. Net interest income decreased by $416,000 from $4.9 million for the nine months ended September 30, 2003 to $4.5 million for the nine months ended September 30, 2004. This decrease resulted
primarily from the decrease in our interest income discussed above.



Provision for loan losses. The provision for loan losses charged to income during the nine months ended September 30, 2004 and 2003 was $60,000 and $90,000, respectively. Provisions, which are charged to operations, and the resulting
loan loss allowance are amounts the Banks management believes will be adequate to absorb losses inherent in our loan portfolio. Loans are charged off against the allowance when management believes that collectibility is unlikely.



Non-interest income. The Company earned non-interest income of $536,000 during the
nine months ended September 30, 2004 compared to the $560,000 that was earned during the same period in 2003. This decrease in non-interest income of $24,000 was primarily attributable to increased income from bank owned life insurance of $40,000
offset with a decrease in presold mortgage origination fee income of $59,000.



Non-interest expense. Non-interest expense increased by $241,000 for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. This increase resulted primarily from an increase in compensation
expense of $83,000, occupancy and equipment expense of $33,000, data processing of $83,000 and other non-interest expense of $42,000. The increase in compensation expense was 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. The increase in data processing occurred principally due to increased deposit activity while the increase in other non-interest expense
resulted primarily from an $27,000 increase in expenses related to the maintenance and repair of foreclosed real estate.



Provision for income taxes. The Companys effective tax rate (income taxes as a percentage of income before income taxes) was 35.3% for the period ending
September 30, 2004 as compared to 36.4% for the period ending September 30, 2003. This decrease resulted principally from an increase in the level of the Companys non-taxable income.



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



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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
Banks liquidity ratio at September 30, 2004, 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 September 30, 2004.



Item 3. Controls and Procedures



As of the end
of the period covered by this Report, the Companys management carried out an evaluation, under the supervision and with the participation of 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 Rule 13a-15 of the Securities and Exchange Act of 1934 (the Exchange Act). Based upon that evaluation, the Companys management, including its
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 (including its consolidated subsidiaries)
required to be included in the Companys Exchange Act filings.



There have
been no significant changes in internal control over financial reporting during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial
reporting.



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Part II. OTHER INFORMATION



Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds



The following table provides information with respect to purchases made by or on behalf of the Company or any affiliated purchases (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of
1934), of the Companys common stock during the three months ended September 30, 2004.



|                  |  |                                |  |                              |       |                                                                                 |       |                                                                                |        
|----------------- |  | ------------------------------ |  | ---------------------------- | ----- | ------------------------------------------------------------------------------- | ----- | ------------------------------------------------------------------------------ | -------
|Period            |  | Total NumberOf SharesPurchased |  | Average Price Paid Per Share |       | Total Number ofShares Purchasedas Part of PubliclyAnnounced PlansOr Programs(1) |       | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
|Aug. 1 - 31, 2004 |  | 9,100                          |  | $                            | 10.05 |                                                                                 | 9,100 |                                                                                | 144,308



Note: On June 8, 2004, the
Company publicly announced a share repurchase program. Under the program, the Company may repurchase up to 153,408 outstanding shares. The program has no termination date.



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



None



Item 6. Exhibits and Reports on Form 8-K



|6(a) | Exhibits
|---- | --------



|                  |  |                                                                                                                                                                                                         
|----------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit (3)(i)    |  | Certificate of Incorporation, incorporated herein by reference to Exhibit (3)(i) to the Registration Statement on Form S-1, Registration No. 333-04509, dated May 24, 1996, and amended on July
25, 1996
|                  | 
|Exhibit (3)(ii)   |  | Bylaws, incorporated herein by reference to Exhibit (3)(ii) to the Registration Statement on Form S-1, Registration No. 333-04509, dated May 24, 1996, and amended on July 25,
1996                     
|                  | 
|Exhibit (4)       |  | Specimen Stock Certificate, incorporated herein by reference to Exhibit (4) to the Registration Statement on Form S-1, Registration No. 333-04509, dated May 24, 1996, and amended on July 25,
1996     
|                  | 
|Exhibit (10)(i)   |  | Employment Agreement between R. Ronald Swanner and Home Savings Bank of Albemarle, Inc., S.S.B., incorporated herein by reference to the Form 10-K dated September 30, 1996                             
|                  | 
|Exhibit (10)(ii)  |  | South Street Financial Corp. Stock Option Plan, incorporated herein by reference to the Form 10-K dated September 30, 1997                                                                              
|                  | 
|Exhibit (10)(iii) |  | Home Savings Bank of Albemarle, Inc., SSB Management Recognition Plan and Trust Agreement, incorporated herein by reference to the Form 10-K dated September 30, 1997                                   
|                  | 
|Exhibit (11)      |  | Statement Regarding Computation of Per Share Earnings                                                                                                                                                   
|                  | 
|Exhibit (31.1)    |  | Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002                                                                                                      
|                  | 
|Exhibit (31.2)    |  | Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002                                                                                                      
|                  | 
|Exhibit (32)      |  | Certification of Periodic Financial Report Pursuant to Section 906 of Sarbanes-Oxley Act of 2002                                                                                                        



|6(b) | Reports on Form 8-K
|---- | -------------------



None were filed during the quarter ended September 30, 2004



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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: November 9, 2004 |  | By:                          |  | /s/ R. Ronald Swanner                
|                       |  |                              |  | R. Ronald Swanner                    
|                       |  |                              |  | President and Chief Executive Officer
|                       |  |                             
|Date: November 9, 2004 |  | By:                          |  | /s/ Christopher F. Cranford          
|                       |  |                              |  | Christopher F. Cranford              
|                       |  |                              |  | Treasurer and Chief Financial Officer



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