<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    June 30, 1997
                                    ----------------
                                      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                                 56-1973261
         --------------                                 ----------
       (State or other jurisdiction of     (I.R.S. Employer Identification No.)
        incorporation or organization)

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

                                (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 July 25, 1997 there were issued and outstanding 4,496,500 shares of the
Registrant's common stock, no par value.
<PAGE>
 
                  SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY


                                     INDEX

<TABLE> 
<CAPTION> 

PART I - FINANCIAL INFORMATION
 
  Item 1.  Financial Statements
<S>                                                                          <C>
 
     Consolidated statements of financial condition at June 30, 1997 
     (Unaudited) and September 30, 1996                                        1
                                                                             
                                                                             
     Consolidated statements of income for the three months ended            
     June 30, 1997 and 1996 (Unaudited)                                        2
                                                                             
                                                                             
     Consolidated statements of income for the nine months ended               
     June 30, 1997 and 1996 (Unaudited)                                        3
                                                                             
     Consolidated statements of cash flows for the nine months               
     ended June 30, 1997 and 1996 (Unaudited)                                4-5
                                                                             
     Notes to consolidated financial statements (Unaudited)                  6-8

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                          9-13

 
PART II - OTHER INFORMATION
 
  Item 1.  Legal Proceedings                                                  14
                                                                 
  Item 2.  Changes in Securities                                              14
                                                                 
  Item 3.  Defaults upon Senior Securities                                    14
                                                                 
  Item 4.  Submission of Matters to a Vote of Security Holders                14
                                                                 
  Item 5.  Other Information                                                  14
                                                                 
  Item 6.  Exhibits and Reports on Form 8-K                                   14
                                                                 
  Signatures                                                                  15
</TABLE>
<PAGE>
 
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1997 and September 30, 1996

<TABLE>
<CAPTION>
 
 
                                               June 30,       September 30,
ASSETS                                           1997              1996
---------------------------------------------------------------------------
                                             (Unaudited)         (Note)*
<S>                                       <C>              <C>
Cash and cash equivalents:
  Noninterest-bearing deposits            $    2,831,000   $      2,787,000
  Interest-bearing deposits                   14,730,000         59,348,000
Securities held to maturity                   22,599,000          5,496,000
Securities available for sale                 84,866,000         34,784,000
Federal Home Loan Bank stock                   2,250,000          1,346,000
Loans receivable, net                        110,491,000        109,858,000
Real estate acquired in settlement of   
 loans                                            18,000             18,000
Accrued interest receivable                    2,109,000          1,165,000
Office properties and equipment, net           1,179,000          1,238,000
Prepaid expenses and other assets                671,000          1,914,000
                                           --------------------------------
    Total assets                          $  241,744,000   $    217,954,000
                                          =================================

<CAPTION> 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------
<S>                                       <C>              <C>
Liabilities:
 Deposits                                 $  142,252,000   $    146,398,000
 Deposits, stock offering                              -         46,601,000
 Special SAIF Assessment                               -            838,000
 Advance payments by borrowers for      
  taxes and insurance                            452,000            115,000
 Accounts payable and other liabilities        2,340,000          2,148,000
 Advances from Federal Home Loan Bank         35,000,000                  -
 Checks outstanding on disbursement     
  account                                        665,000            987,000
                                          ---------------------------------
    Total liabilities                        180,709,000        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 June 30,
   1997 and no shares September 30, 1996               -                  -
  Additional paid-in capital                  43,700,000                  -
  Unrealized gain (loss) on securities
   available for sale, net of tax               (115,000)           (35,000)
  Note receivable, ESOP                       (4,363,000)                 -
  Retained earnings, substantially      
   restricted                                 21,813,000         20,902,000
                                          ---------------------------------
    Total stockholders' equity                61,035,000         20,867,000
                                          ---------------------------------
    Total liabilities and stockholders' 
     equity                               $  241,744,000   $    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>
 
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, 1997 and 1996

<TABLE>
<CAPTION>
 
                                              1997          1996
--------------------------------------------------------------------
                                                 (Unaudited)
<S>                                       <C>           <C>
Interest income:
 Loans                                    $  2,501,000  $  2,367,000
 Mortgage-backed certificates                  569,000       110,000
 Securities                                  1,298,000       542,000
 Other interest-bearing deposits               109,000       187,000
                                          --------------------------
                                             4,477,000     3,206,000
Interest expense on deposits and
 borrowed funds                              2,465,000     1,926,000
                                          --------------------------
  Net interest income                        2,012,000     1,280,000
Provision for loan losses                            -             -
                                          --------------------------
  Net interest income after provision   
   for loan losses                           2,012,000     1,280,000
                                          --------------------------
Noninterest income, other                       28,000        29,000
                                          --------------------------
 
Noninterest expenses:
 Compensation and benefits                     578,000       488,000
 Net occupancy                                  82,000        72,000
 Federal insurance premium expenses             23,000        81,000
 Data processing                                52,000        51,000
 Other                                         118,000       140,000
                                          --------------------------
                                               853,000       832,000
                                          --------------------------
  Income before income taxes                 1,187,000       477,000
Income taxes                                   443,000       175,000
                                          --------------------------
 
  Net Income                              $    744,000  $    302,000
                                          ==========================
 
 
Primary earnings per share                $       0.18  $     n/a
                                          ==========================
 
Dividends declared per share              $       0.10  $     n/a
                                          ==========================
 
Average number of common shares 
 outstanding                              $  4,154,369        n/a
                                          ==========================
</TABLE>

See Notes to Consolidated Financial Statements.

                                       2
<PAGE>
 
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended June 30, 1997 and 1996

<TABLE>
<CAPTION>
 
 
 
                                              1997           1996
---------------------------------------------------------------------
                                                  (Unaudited)
<S>                                       <C>            <C>
Interest income:
 Loans                                    $   7,431,000  $  7,211,000
 Mortgage-backed certificates                 1,287,000       306,000
 Securities                                   3,349,000     1,480,000
 Other interest-bearing deposits                533,000       560,000
                                          ---------------------------
                                             12,600,000     9,557,000
Interest expense on deposits and
 borrowed funds                               6,735,000     5,757,000
                                          ---------------------------
  Net interest income                         5,865,000     3,800,000
Provision for loan losses                             -       300,000
                                          ---------------------------
  Net interest income after provision   
   for loan losses                            5,865,000     3,500,000
                                          ---------------------------
Noninterest income, other                        87,000        92,000
                                          ---------------------------
 
Noninterest expenses:
 Compensation and benefits                    1,758,000     1,439,000
 Net occupancy                                  222,000       215,000
 Federal insurance premium expenses              48,000       236,000
 Data processing                                163,000       157,000
 Other                                          451,000       580,000
                                          ---------------------------
                                              2,642,000     2,627,000
                                          ---------------------------
  Income before income taxes                  3,310,000       965,000
Income taxes                                  1,205,000       364,000
                                          ---------------------------
 
  Net Income                              $   2,105,000  $    601,000
                                          ===========================
 
 
Primary earnings per share                $        0.51  $     n/a
                                          ===========================
 
Dividends declared per share              $        0.28  $     n/a
                                          ===========================
 
 
Average number of common shares 
 outstanding                                  4,154,369        n/a
                                          ===========================
</TABLE>

See Notes to Consolidated Financial Statements.

                                       3
<PAGE>
 
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended June 30, 1997 and 1996

<TABLE>
<CAPTION>
 
 
                                               1997             1996
--------------------------------------------------------------------------
                                                    (Unaudited)

<S>                                       <C>               <C>   
Cash Flows from Operating Activities
 Net income                                $   2,105,000    $     601,000
 Adjustments to reconcile net income to
  net cash provided by operating 
   activities:
   Provision for loan losses                        -             300,000
   Net accretion of premiums and        
    discounts on securities                      (74,000)            -
   Amortization of deferred loan fees             49,000             -
   Gain on sale of real estate acquired 
    in settlement of loans                          -              (4,000)
   Gain on sale of fixed assets                   (4,000)            -
   Provision for depreciation                     89,000           75,000
   Deferred Income Taxes                         170,000         (249,000)
   (Increase) Decrease in assets:
     Accrued interest receivable                (944,000)        (144,000)
     Prepaid and other assets                  1,243,000         (176,000)
     Income tax refund receivable                   -             242,000
  Increase (Decrease) in liabilities:
     Accounts payable and other liabilities     (646,000)         323,000
       Interest payable                          104,000           26,000
       Checks outstanding on disbursement
        accounts                                (322,000)         (51,000)
                                           -------------------------------
          Net cash provided by operating    
           activities                          1,770,000          943,000
                                           -------------------------------
 
 
 
Cash Flows from Investing Activities
  Purchases of securities held to       
   maturity                                  (19,307,000)      (1,961,000)
  Purchases of securities available for 
   sale                                      (57,254,000)     (20,000,000)
  Purchase of FHLB stock                        (904,000)            -
  Proceeds from maturities and recalls
   of securities available for sale            7,159,000       15,960,000
  Principal collected on securities     
   held to maturity                            2,161,000          753,000
  Loan originations and principal       
   payments on loans, net                       (682,000)         559,000
  Purchase of office properties and     
   equipment                                     (56,000)         (12,000)
  Proceeds from sale of fixed assets              30,000             -
  Proceeds from sale of foreclosed real 
   estate                                           -             107,000
                                           -------------------------------
        Net cash provided by (used in)  
         investing activities                (68,853,000)      (4,594,000)
                                           -------------------------------
                                  (Continued)
 
</TABLE>

                                       4
<PAGE>
 
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY (CONTINUED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended June 30, 1997 and 1996

<TABLE>
<CAPTION>
 
 
 
                                               1997             1996
-------------------------------------------------------------------------
<S>                                       <C>              <C>   
Cash Flows from Financing Activities
 Net increase (decrease) in deposits      $  (50,851,000)  $   9,111,000
 Net increase (decrease) in advance
  payments by borrowers for taxes and 
  insurance                                      337,000         348,000
 Proceeds received from issuance of
  common stock  
     net of stock issuance costs incurred     43,645,000            -
 Principal receipts for ESOP debt                165,000            -
 Note receivable originated to ESOP           (4,528,000)           -
 Dividends paid to stockholders               (1,259,000)           -
 Proceeds from Federal Home Loan Bank                                 
  borrowings                                  35,000,000            - 
                                          -------------------------------
  Net cash provided by financing        
   activities                             $   22,509,000   $   9,459,000
                                          -------------------------------
 
  Increase (decrease) in cash and cash  
   equivalents                               (44,574,000)      5,808,000
Cash and cash equivalents:
 Beginning                                    62,135,000      11,494,000
                                          -------------------------------
 Ending                                   $   17,561,000   $  17,302,000
                                          ===============================
 
Supplemental Disclosures of Cash Flow
 Information
 Cash and cash equivalents:
  Cash and short-term investments:
   Noninterest-bearing                    $    2,831,000   $  14,387,000
   Interest-bearing                           14,730,000       2,915,000
                                          -------------------------------
                                          $   17,561,000   $  17,302,000
                                          ===============================
 
Transfer from loans to real estate      
 acquired in settlement of loans          $         -      $     144,000
                                          ===============================
 
Net change in unrealized (gain) loss on
 securities available for sale,
  net of deferred taxes (credits)         $     (131,000)  $    (100,000)
                                          ===============================
 
Loans originated to finance the sale of
 real estate acquired in settlement of 
 loans                                    $         -      $     163,000
                                          ===============================
                                         
See Notes to Consolidated Financial Statements.
 
</TABLE>
                                       5
<PAGE>
 
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

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 and
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 and nine month periods ended June 30, 1997 are not
necessarily indicative of the results of operations that may be expected for the
year ended September 30, 1997.

The accounting policies of the company 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 $1,320,000 in conversion costs).  The Company
transferred $19,558,000 of the net proceeds to Home Savings for purchase of all
of the capital stock of the Bank.

                                       6
<PAGE>
 
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

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 definitive 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 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 and nine month periods ended June
30, 1997 is based on 4,154,369 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 nine month  period  ended  June 30, 1997  is reported based  upon
the assumption that such shares had been outstanding from the beginning of the
nine month period.  Earnings per share for the nine month period ended June 30,
1996 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 June 9, 1997, the Company's Board of Directors declared a dividend of $ .10 a
share for stockholders of record as of June 20, 1997 and payable on July 7,
1997.  In addition, on June 9, 1997, the Board of Directors of Home Savings
declared an upstream dividend of $202,875 to the Company, which was paid on June
11, 1997.

                                       7
<PAGE>
 
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


Note 6.      Advances From Federal Home Loan Bank

<TABLE>
<CAPTION>

Advances from the Federal Home Loan Bank ("FHLB") at June 30, 1997 consist of
the following:
 
<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
Advances due FHLB, interest at 6.05%, due March 18, 1998             6,000,000
Advances due FHLB, interest at 5.73%, due July 18, 1997              4,000,000
                                                                 -------------
                                                                 $  35,000,000
                                                                 =============
 
</TABLE>

                                       8
<PAGE>
 
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

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

Comparison of Financial Condition at June 30, 1997 and September 30, 1996:

This Form contains certain forward-looking statements consisting of estimates
with respect to the financial condition, results of operations and other
business of the Bank that are subject to various factors which could cause
actual results to differ materially from those estimates. Factors which could
influence the estimates include changes in general and local market conditions,
legislative and regulatory conditions and an adverse interest rate environment.

Total assets increased by $23.8 million or 10.9%, to $241.8 million at June 30,
1997 from $218.0 million at September 30, 1996.  The increase in assets was
primarily attributable to the difference between the proceeds received from
advances from Federal Home Loan Bank of $35.0 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
purchased by the ESOP).  The majority of the decrease in deposits of $50.7
million or 26.2% between September 30, 1996 and June 30, 1997 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 $44.5 million or 71.7% to
$17.6 million at June 30, 1997 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 $633,000 or 0.6% to $110.5 million at June 30,
1997 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 $17.1 million or 311.2%, to $22.6 million at June 30, 1997
from $5.5 million at September 30, 1996.  Likewise, investment securities
classified as available for sale increased $50.1 million or 143.9%, to $84.9
million at June 30, 1997 from $34.8 million at September 30, 1996.  The Company
reinvested the proceeds from the stock offering previously maintained in short
term interest bearing deposit accounts and additional borrowings from FHLB.  The
Bank had borrowings of $35.0 million outstanding at the end of the nine month
period ended June 30, 1997.  No borrowings were outstanding at September 30,
1996.  The borrowings were used 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, net
of $165,000 principal repayment made during the nine months ended June 30, 1997,
is reported as a reduction of stockholders' equity.  Retained earnings increased
by $911,000 to $21.8 million at June 30, 1997, which is attributable to the
Company's consolidated earnings during the nine months ended June 30, 1997, less
dividends accrued at June 30, 1997 in the amount of  $450,000.

At June 30, 1997, the Company's stockholders' equity amounted to $61.0 million,
or 25.3% of total assets.  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 $41.3 million at June
30, 1997 and  was substantially in excess of all such capital requirements.

                                       9
<PAGE>
 
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

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

Comparison of Financial Condition at June 30, 1997 and September 30, 1996:
(Continued)

The Bank's level of nonperforming loans, defined as loans past due 90 days or
more, as a percentage of loans outstanding, was .57% and .60% at June 30, 1997
and September 30, 1996, respectively. During the three month periods ended June
30, 1997 and 1996, 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 three quarters of
fiscal 1997.

The Company will hold a special meeting of shareholders on October 15, 1997 for
the purpose of asking the shareholders to approve a Stock Option Plan and the
Management Recognition Plan.

                                      10
<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 and Nine Months Ended June 30,
1997 and 1996:

General.  Net income for the three month and nine month periods ended June 30,
1997 was $744,000 and $2.1 million, respectively, or $442,000 and $1.5 million
more than the $302,000 and $601,000 earned during the same period in 1996.  As
discussed below, the increase in net income was primarily attributable to
increases in net interest income for the three and nine month periods ended June
30, 1997 as compared to the same period in 1996.

Interest income.  Interest income increased by $1.3 million from $3.2 million 
for the three months ended June 30, 1996 to $4.5 million for the three months
ended June 30, 1997. Interest income increased by $3.0 million from $9.5 million
for the nine months ended June 30, 1996 to $12.6 million for the nine months
ended June 30, 1997. 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 $237.8 million at June 30, 1997 as compared to $168.9 million at
June 30, 1996.

Interest Expense.  Interest expense on deposits and borrowed funds increased by
$539,000 from $1.92 million for the three months ended June 30, 1996 to $2.46
million for the three months ended June 30, 1997.  Interest expense on deposits
and borrowed funds increased by $978,000 from $5.76 million for the nine months
ended June 30, 1996 to $6.73 million for the nine months ended June 30, 1997.
The increase was primarily due to an increase in the volume of interest-bearing
deposits and borrowed funds for the nine months ended June 30, 1997 compared to
the same period in 1996.  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 $518,000 for the quarter ended June 30, 1997 compared to
none for the quarter ended June 30, 1996.

Net interest income.  Net interest income increased by $732,000 from $1.3
million for the three months ended June 30, 1996 to $2.0 million for the three
months ended June 30, 1997.  Net interest income increased by $2.1 million from
$3.8 million for the nine months ended June 30, 1996 to $5.9 million for the
nine months ended June 30, 1997.  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 June 30, 1997 as compared to the same period in
1996.

Provision for loan losses.  There were no provisions for loan losses charged to
income during the three and nine months ended June 30, 1997. A provision for
loan losses of $300,000 was charged to income during the nine months ended June
30, 1996.  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.

                                      11
<PAGE>
 
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

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


Provision for loan losses. (Continued)

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 and nine month periods ended June 30, 1997 and 1996
was minimal.

At June 30, 1997, the Bank's level of general valuation allowances for loan
losses amounted to $428,000, which management believes is adequate to absorb
potential losses in its loan portfolio.

Noninterest income.  Noninterest income decreased by $1,000 from $29,000 for the
three month period ended June 30, 1996 to $28,000 for the three month period
ended June 30, 1997.  This decrease was attributable to a decrease in various
small items during the three months ended June 30, 1997 as compared to the same
period in 1996.  Noninterest income decreased by $5,000 from $92,000 for the
nine month period ended June 30, 1996 to $87,000 for the nine month period ended
June 30, 1997.

Noninterest expense.  Noninterest expense increased by $21,000 from $832,000 for
the three month period ended June 30, 1996 to  $853,000 for the three month
period ended June 30, 1997. For the nine month period ended June 30, 1997,
noninterest expense increased by $15,000 to $2.64 million from $2.62 million for
the nine month period ended June 30, 1996.   The increase in noninterest expense
is principally due to an increase in benefits expense associated with the
establishment of an ESOP as discussed below.

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.

                                      12
<PAGE>
 
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

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

Capital Resources and Liquidity (Continued)

During the nine month period ended June 30, 1997, cash and cash equivalents, a
significant source of liquidity, decreased by approximately $44.6 million.  This
decrease is a direct result of the Company's reinvestment of proceeds from the
stock offering which closed on October 2, 1996.  Cash flow resulting from
internal operating activities provided for an increase of $1,770,000 in cash
during the nine month period ended June 30, 1997.  Financing activities,
principally net proceeds from the stock offering of $43.7 million and proceeds
of $35.0  million from Federal Home Loan Bank borrowings reduced by deposit
outflows of $50.8 million provided an additional $22.5 million.  A portion of
the funding generated by investing activities provided cash for loan
originations and purchases of investment securities for a total of $68.8
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 June 30, 1997, 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.

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 June 30,
1997.

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.

                                      13
<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY
 
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

                  Not applicable

         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
 
                       None

                                      14
<PAGE>
 
 
SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

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

                                      15