##### Table of Contents

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U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549



FORM 10-QSB



x    Quarterly Report Under Section 13 or 15(d)

of the Securities Exchange
Act of 1934



For the quarterly period ended June 30, 2003



 ̈Transition Report Under Section 13

or 15(d) of
the Exchange Act



For the transition period ended



Commission File Number
0-21083



SOUTH STREET FINANCIAL CORP.

---

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



|NORTH CAROLINA                  |  |  |  | 56-1973261            
|------------------------------- |  |  |  | ----------------------
|(State or other jurisdiction of |  |  |  | (IRS Employer         
|incorporation or organization)  |  |  |  | Identification Number)

155 WEST SOUTH STREET, ALBEMARLE, NC 28001

---

(Address of principal executive office)



(704) 982-9184

---

(Issuers telephone number)



Check whether
the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.    Yes  xNo ̈



As of July 18, 2003, 3,079,867
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 June 30, 2003 and December 31, 2002                           |  | 3       
|         |  |                                                                                                             
|         |  | Consolidated Statements of Income and Comprehensive Income Three and Six Months Ended June 30, 2003 and 2002 |  | 4       
|         |  |                                                                                                             
|         |  | Consolidated Statements of Cash Flows Six Months Ended June 30, 2003 and 2002                                |  | 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 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 10      
|         |  |                                                                                                             
|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

---



|                                                                                                                            |  | June 30, 2003  |         |   | December 31, |  
|--------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ------------ | -
|                                                                                                                            |  | (Unaudited)    |         |   | 2002*        |  
|                                                                                                                            |  | (In thousands) |        
|ASSETS                                                                                                                      |  |                |         |   |              |  
|Cash and cash equivalents:                                                                                                  |  |                |         |   |              |  
|Non-interest-earning deposits                                                                                               |  | $              | 5,576   |   |              | $
|Interest-earning deposits                                                                                                   |  |                | 25,581  |   |              |  
|Federal funds sold                                                                                                          |  |                | 3,192   |   |              |  
|Securities held to maturity                                                                                                 |  |                | 2,430   |   |              |  
|Securities available for sale                                                                                               |  |                | 7,649   |   |              |  
|Federal Home Loan Bank stock                                                                                                |  |                | 1,492   |   |              |  
|Loans                                                                                                                       |  |                | 158,668 |   |              |  
|Allowance for loan losses                                                                                                   |  |                | (581    | ) |              |  
|                                                                                                                            |  |                |         |   |              |  
|NET LOANS                                                                                                                   |  |                | 158,087 |   |              |  
|                                                                                                                            |  |               
|Real estate held for investment                                                                                             |  |                | 984     |   |              |  
|Property and equipment, net                                                                                                 |  |                | 1,624   |   |              |  
|Other assets                                                                                                                |  |                | 7,658   |   |              |  
|                                                                                                                            |  |                |         |   |              |  
|TOTAL ASSETS                                                                                                                |  | $              | 214,273 |   |              | $
|                                                                                                                            |  |                |         |   |              |  
|                                                                                                                            |  |               
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                        |  |                |         |   |              |  
|                                                                                                                            |  |               
|LIABILITIES                                                                                                                 |  |                |         |   |              |  
|Deposits                                                                                                                    |  | $              | 175,524 |   |              | $
|Borrowings                                                                                                                  |  |                | 10,000  |   |              |  
|Accrued expenses and other liabilities                                                                                      |  |                | 3,528   |   |              |  
|                                                                                                                            |  |                |         |   |              |  
|TOTAL LIABILITIES                                                                                                           |  |                | 189,052 |   |              |  
|                                                                                                                            |  |                |         |   |              |  
|                                                                                                                            |  |               
|STOCKHOLDERS EQUITY                                                                                                        |  |                |         |   |              |  
|Preferred stock, no par value: authorized 5,000,000 shares; none issued                                                     |  |                |        |   |              |  
|Common stock, no par value: authorized 20,000,000 shares; issued 3,079,867 shares at June 30, 2003 and at December 31,
2002 |  |                | 7,590   |   |              |  
|Unearned compensation                                                                                                       |  |                | (851    | ) |              |  
|Unearned ESOP                                                                                                               |  |                | (1,823  | ) |              |  
|Retained earnings, substantially restricted                                                                                 |  |                | 20,244  |   |              |  
|Accumulated other comprehensive income                                                                                      |  |                | 61      |   |              |  
|                                                                                                                            |  |                |         |   |              |  
|TOTAL STOCKHOLDERS EQUITY                                                                                                  |  |                | 25,221  |   |              |  
|                                                                                                                            |  |                |         |   |              |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                  |  | $              | 214,273 |   |              | $
|                                                                                                                            |  |                |         |   |              |  



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



See accompanying notes.



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##### Table of Contents

South Street Financial Corp. and Subsidiary

Consolidated Statements of Income and Comprehensive Income (Unaudited)

---





|                                                              |  | Three Months EndedJune 30,            |           | Six Months EndedJune 30,
|------------------------------------------------------------- |  | ------------------------------------- | --------- | ------------------------
|                                                              |  | 2003                                  |           | 2002                    
|                                                              |  | (In thousands, except per share data)
|INTEREST INCOME                                               |  |                                       |           |                         
|Loans, including fees                                         |  | $                                     | 2,797     |                         
|Investment securities                                         |  |                                       | 87        |                         
|Other interest-bearing deposits                               |  |                                       | 109       |                         
|                                                              |  |                                       |           |                         
|TOTAL INTEREST INCOME                                         |  |                                       | 2,993     |                         
|                                                              |  |                                       |           |                         
|INTEREST EXPENSE                                              |  |                                       |           |                         
|Deposits                                                      |  |                                       | 1,210     |                         
|Borrowings                                                    |  |                                       | 104       |                         
|                                                              |  |                                       |           |                         
|TOTAL INTEREST EXPENSE                                        |  |                                       | 1,314     |                         
|                                                              |  |                                       |           |                         
|NET INTEREST INCOME                                           |  |                                       | 1,679     |                         
|PROVISION FOR LOAN LOSSES                                     |  |                                       | 30        |                         
|                                                              |  |                                       |           |                         
|NET INTEREST INCOME AFTERPROVISION FOR LOAN LOSSES            |  |                                       | 1,649     |                         
|                                                              |  |                                       |           |                         
|NON-INTEREST INCOME                                           |  |                                       |           |                         
|Service charges and fees                                      |  |                                       | 91        |                         
|Other                                                         |  |                                       | 123       |                         
|                                                              |  |                                       |           |                         
|TOTAL NON-INTEREST INCOME                                     |  |                                       | 214       |                         
|                                                              |  |                                       |           |                         
|NON-INTEREST EXPENSE                                          |  |                                       |           |                         
|Compensation and benefits                                     |  |                                       | 873       |                         
|Net occupancy and equipment                                   |  |                                       | 88        |                         
|Data processing                                               |  |                                       | 38        |                         
|Other                                                         |  |                                       | 225       |                         
|                                                              |  |                                       |           |                         
|TOTAL NON-INTEREST EXPENSE                                    |  |                                       | 1,224     |                         
|                                                              |  |                                       |           |                         
|INCOME BEFORE INCOME TAXES                                    |  |                                       | 639       |                         
|INCOME TAXES                                                  |  |                                       | 241       |                         
|                                                              |  |                                       |           |                         
|NET INCOME                                                    |  | $                                     | 398       |                         
|                                                              |  |                                       |           |                         
|                                                              |  |                                       |           |                         
|PER SHARE DATA:                                               |  |                                       |           |                         
|Basic and diluted net income per common share                 |  | $                                     | .14       |                         
|                                                              |  |                                       |           |                         
|Dividends                                                     |  | $                                     | .10       |                         
|                                                              |  |                                       |           |                         
|                                                              |  |                                       |           |                         
|Weighted average common shares outstanding, basic and diluted |  |                                       | 2,905,932 |                         
|                                                              |  |                                       |           |                         



See accompanying notes.





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##### Table of Contents

South Street Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

---



|                                                                                          |  | Six Months EndedJune 30, |        
|----------------------------------------------------------------------------------------- |  | ------------------------ | -------
|                                                                                          |  | 2003                     |        
|                                                                                          |  | (In Thousands)           |        
|CASH FLOWS FROM OPERATING ACTIVITIES                                                      |  |                          |        
|Net income                                                                                |  | $                        | 748    
|Adjustments to reconcile net income to net cash provided by operating activities:         |  |                          |        
|Net accretion of premiums and discounts on securities                                     |  |                          | 63     
|Amortization of deferred loan fees                                                        |  |                          | (231   
|Provision for depreciation                                                                |  |                          | 90     
|Provision for loan losses                                                                 |  |                          | 60     
|Gain on sale of real estate held for investment                                           |  |                          | (35    
|Amortization of unearned compensation                                                     |  |                          | 225    
|ESOP contribution                                                                         |  |                          | (158   
|Increase in other assets                                                                  |  |                          | (61    
|Increase in accrued expenses and other liabilities                                        |  |                          | 323    
|                                                                                          |  |                          |        
|NET CASH PROVIDEDBY OPERATING ACTIVITIES                                                  |  |                          | 1,024  
|                                                                                          |  |                          |        
|CASH FLOWS FROM INVESTING ACTIVITIES                                                      |  |                          |        
|Purchase of securities available for sale                                                 |  |                          |       
|Proceeds from maturities, calls and principal repayments of securities available for sale |  |                          | 4,152  
|Proceeds from maturities, calls and principal repayments of securities held to maturity   |  |                          | 758    
|Loan originations and principal payments on loans, net                                    |  |                          | 14,268 
|Purchase of property and equipment                                                        |  |                          | (436   
|Proceeds from sale of real estate held for investment                                     |  |                          | 90     
|Investment in real estate held for investment                                             |  |                          | (9     
|Purchase of bank owned life insurance                                                     |  |                          | (5,670 
|Purchase of FHLB stock                                                                    |  |                          |       
|Proceeds from redemption of FHLB stock                                                    |  |                          | 17     
|                                                                                          |  |                          |        
|NET CASH PROVIDEDBY INVESTING ACTIVITIES                                                  |  |                          | 13,170 
|                                                                                          |  |                          |        
|CASH FLOWS FROM FINANCING ACTIVITIES                                                      |  |                          |        
|Net decrease in deposits                                                                  |  |                          | (135   
|Payment of dividends                                                                      |  |                          | (521   
|Purchases and retirement of common stock                                                  |  |                          |       
|Repayments on borrowings, net                                                             |  |                          | (11,000
|Principal payment received on ESOP note                                                   |  |                          | 96     
|                                                                                          |  |                          |        
|                                                                                          |  |                          |        
|NET CASH USED BYFINANCING ACTIVITIES                                                      |  |                          | (11,560
|                                                                                          |  |                          |        
|NET INCREASE IN CASHAND CASH EQUIVALENTS                                                  |  |                          | 2,634  
|CASH AND CASH EQUIVALENTS, BEGINNING                                                      |  |                          | 31,715 
|                                                                                          |  |                          |        
|CASH AND CASH EQUIVALENTS, ENDING                                                         |  | $                        | 34,349 
|                                                                                          |  |                          |        



See accompanying notes.





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##### Table of Contents

South Street Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements

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NOTE ABASIS OF PRESENTATION



In managements opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a
fair presentation of the financial information as of and for the three and six month periods ended June 30, 2003 and 2002, in conformity with accounting principles generally accepted in the United States of America. The consolidated financial
statements include the accounts of South Street Financial Corp. (the Company) and its wholly-owned subsidiary, Home Savings Bank of Albemarle, S.S.B., (Home Savings or the Bank), the Banks wholly-owned
subsidiary, South Street Development Corporation (SSDC), and SSDCs wholly-owned subsidiary, Park Ridge Associates, LLC (Park Ridge). All significant intercompany transactions and balances have been eliminated in
consolidation. Operating results for the three and six month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2003.



The organization and business of the Company, accounting policies followed by the Company and
other information are contained in the notes to the consolidated financial statements filed as part of the Companys 2003 annual report on Form 10-KSB. This quarterly report should be read in conjunction with such annual report.



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



NOTE BEARNINGS PER SHARE



The Companys basic earnings per share for the three and six month periods ended June 30, 2003 is based on net income earned divided by the weighted average number
of shares outstanding from the beginning of the period to the end of the period. Diluted earnings per share is adjusted for all potential common stock instruments having a dilutive effect. For purposes of this computation, the number of shares of
common stock purchased by the ESOP that have not been allocated to participant accounts are not assumed to be outstanding.



At June 30, 2003 and 2002, there were 449,650 exercisable options outstanding which had no dilutive effect.



NOTE CBORROWINGS



Borrowings, which consisted solely of one advance from the FHLB, totaled $10,000,000 at June 30, 2003. The interest rate of this advance was 2.45%. This advance matures
in February 2004.



NOTE DCOMPREHENSIVE INCOME



For the quarters ended June 30, 2003 and 2002, total comprehensive income, consisting of net
income and unrealized securities gains and losses, net of taxes, was $376,000 and $445,000, respectively.



For the six months ended June 30, 2003 and 2002, total comprehensive income, consisting of net income and unrealized securities gains and losses, net of taxes, was $684,000 and $735,000, respectively.



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



This Quarterly Report on Form 10-QSB 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

June 30, 2003 and December 31, 2002



The Companys total consolidated assets decreased $10.5 million during the six months
ended June 30, 2003 from $224.8 million at December 31, 2002 to $214.3 million. During the first six months of 2003, our liquid assets, consisting of cash and cash equivalents and investment securities decreased $2.4 million to $44.4 million and our
loan portfolio decreased $14.1 million to $158.1 million. The liquidity provided by these decreases in our liquid assets and our loans was utilized to fund our $5.7 million investment in bank owned life insurance and to reduce the level of the
Companys borrowings. During the six months ended June 30, 2003, the Company reduced its borrowings, which consist solely of advances from the Federal Home Loan Bank, from $21.0 million to $10.0 million.



The Companys stockholders equity increased $326,000 from $24.9 million at December 31,
2002 to $25.2 million at June 30, 2003. This increase resulted primarily from the Companys net income of $748,000 net of dividends to stockholders during the period of $512,000.



Comparison of Operating Results for the

Three Months Ended June 30, 2003 and 2002



General.    Net income for the three month period ended June 30, 2003 was $398,000, or $18,000 more than the $380,000 earned during the same period in 2002. This improvement resulted
principally from the increase in non-interest income of $154,000 during the quarter, which is explained below.



Interest income.    Interest income decreased by $505,000 from $3.5 million for the three months ended June 30, 2002 to $3.0 million for the three months ended June 30, 2003. While the level
of our average interest earning assets increased from approximately $204.1 million during the second quarter of 2002 to approximately $204.9 million during the second quarter of 2003, the yield on our average interest earning assets dropped
approximately 101 basis points. This decrease in yield resulted from the industry wide rate reductions, and offset the increase in the volume of our interest earning assets.



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Interest expense.Interest expense on deposits and borrowed funds decreased by $438,000
from $1.8 million for the three months ended June 30, 2002 to $1.3 million for the three months ended June 30, 2003. As with our interest earning assets, the volume of our average interest bearing liabilities increased from approximately $183.8
million in the second quarter of 2002, to $189.4 million in the second quarter of 2003. The average rates for our interest bearing liabilities dropped approximately 104 basis points In comparison to the second quarter of 2002.



Net interest income.    Net interest income decreased by $67,000
from $1.8 million for the three months ended June 30, 2002 to $1.7 million for the three months ended June 30, 2003. This decrease was primarily the result of the increased volume in our interest bearing liabilities, which outpaced the growth
in interest earning assets. The net yield on our average interest earning assets increased approximately 3 basis points during the quarter ended June 30, 2003 as compared to the same period in 2002.



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



At June 30, 2003 the Banks allowance for loan losses amounted to
$581,000, which management believes is adequate to absorb losses inherent in its loan portfolio.



Non-interest income.    The Company earned non-interest income of $214,000 during the three months ended June 30, 2003 compared to the $60,000 that was earned during the same period in 2002.
This increase in non-interest income of $154,000 was primarily attributable to income from bank owned life insurance during the quarter of $66,000, plus income of $15,000 from mortgage originations and the gain of $35,000 from the sale of real
estate held for investment.



Non-interest
expense.    Non-interest expense increased by $19,000 for the three months ended June 30, 2003 compared to the three months ended June 30, 2002. This increase resulted primarily from an increase in compensation expense of
$68,000 due largely to expense associated with normal and expected compensation adjustments, additional personnel, and increases in the cost of employee benefits such as health insurance.



Comparison of Operating Results for the

Six Months Ended June 30, 2003 and 2002



General.Net income for the six month period ended June 30, 2003 was $748,000, or $7,000 more than the $741,000 earned during the same period in 2002. As was the case for the quarter
ended June 30, 2003, this improvement resulted principally from the increase in non-interest income of $160,000 during the period, which is explained below.



Interest income.    Interest income decreased by $919,000 from $7.1 million for the six months ended June 30, 2002 to $6.2 million for the six
months ended June 30, 2003. While the level of our average interest earning assets increased from approximately $204.3 million during the first half of 2002 to approximately $208.9 million during the same period in 2003, the yield on our
average interest earning assets dropped approximately 103 basis points. This decrease in yield resulted from the industry wide rate reductions and offset the increase in the volume of our interest earning assets.



Interest expense.Interest expense on deposits and borrowed
funds decreased by $899,000 from $3.6 million for the six months ended June 30, 2002 to $2.7 million for the six months



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##### Table of Contents

ended June 30, 2003. As with our interest earning assets, the volume of our average interest bearing liabilities
increased from approximately $184.1 million in the first half of 2002, to $191.9 million in the first half of 2003. However, the decrease in the rates we pay on these liabilities decreased more significantly than did the rates on our earning assets.
The average rates for our interest bearing liabilities dropped approximately 110 basis points In comparison to the first six months of 2002. Again, as with our earning assets, the decrease in interest rates had a more significant impact than did the
increase in volume.



Net interest income.    Net
interest income decreased by $20,000 for the six months ended June 30, 2003 compared to the six months ended June 30, 2002. This decrease was the result of increased volume in our interest bearing liabilities which outpaced the growth in our
interest earning assets, combined with the drop in interest rates discussed in the interest income and interest expense captions. The net yield on our average interest earning assets increased approximately 7 basis points during the six months ended
June 30, 2003 as compared to the same period in 2002.



Provision for loan
losses.    The provision for loan losses charged to income during the six months ended June 30, 2003 was $60,000 while there was no provision for loan losses made during the same period ended 2002. Provisions, which are
charged to operations, and the resulting loan loss allowance are amounts the Banks management believes will be adequate to absorb losses inherent in our loan portfolio. Loans are charged off against the allowance when management believes that
collectibility is unlikely. The decision to increase or decrease the provision and resulting allowance is based upon an evaluation of both prior loan loss experience and other factors, such as changes in the nature and volume of the loan portfolio,
overall portfolio quality, and current economic conditions.



Non-interest
income.    The Company earned non-interest income of $305,000 during the six months ended June 30, 2003 compared to $145,000 that was earned during the same period in 2002. This increase in non-interest income of $160,000 was
primarily attributable to income from bank owned life insurance during the six months of $88,000, plus income of $15,000 from mortgage originations and the gain of $35,000 from the sale of real estate held for investment.



Non-interest expense.    Non-interest expense increased by $62,000
from $2.4 million for the six months ended June 30, 2002 to $2.5 million for the six months ended June 30, 2003. This increase resulted primarily from an increase in compensation expense of $107,000 due largely to expense associated with normal
and expected compensation adjustments, additional personnel, and increases in the cost of employee benefits such as health insurance.



Liquidity and Capital Resources



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



As a state chartered stock savings bank, the Bank must meet certain liquidity requirements that are established by the North Carolina Commissioner of Banks. The Banks liquidity ratio at June 30, 2003, as computed under such
regulations, was considerably in excess of such requirements. Given its excess liquidity and its ability to borrow from the FHLB of Atlanta, the Bank believes that it will have sufficient funds available to meet anticipated future loan commitments,
unexpected deposit withdrawals, or other cash requirements.





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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 Administrator at June 30, 2003.



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.



Part II.    OTHER INFORMATION



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



The Annual Meeting of Stockholders was held on May 19, 2003. Of 3,079,867 shares entitled to vote at the meeting, 2,822,977 voted. The following matters were voted on at the Meeting:



Proposal 1:    To elect six members of the Board of Directors for a
one-year term until the Annual Meeting of Shareholders in 2004. Votes for each nominee were as follows:



|Name                      |  | For       |  | Withheld
|------------------------- |  | --------- |  | --------
|J. Banks Garrison, Jr.    |  | 2,815,652 |  | 7,325   
|Caldwell A. Holbrook, Jr. |  | 2,815,849 |  | 7,128   
|Joel A. Huneycutt         |  | 2,816,202 |  | 6,775   
|Douglas Stokes            |  | 2,817,202 |  | 5,775   
|R. Ronald Swanner         |  | 2,816,149 |  | 6,828   
|Greg E. Underwood         |  | 2,816,149 |  | 6,828   



Proposal 2:    To
ratify the appointment of Dixon Odom PLLC as the Banks independent accountants for the year ending December 31, 2003.



|For       |  | Against |  | Withhld
|--------- |  | ------- |  | -------
|2,819,380 |  | 1,722   |  | 1,875  



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##### Table of Contents

Item 6.    
Exhibits and Reports on Form 8-K



6(a)    Exhibits



|                   | 
|------------------ | 
|Exhibit (3)(i)     | 
|                   | 
|Exhibit (3)(ii)    | 
|                   | 
|Exhibit (4)        | 
|                   | 
|Exhibit (10)(i)    | 
|                   | 
|Exhibit (10)(ii)   | 
|                   | 
|Exhibit (10)(iii)  | 
|                   | 
|Exhibit (10)(iv)   | 
|                   | 
|Exhibit (10)(v)    | 
|                   | 
|Exhibit (10)(vi)   | 
|                   | 
|Exhibit (10)(vii)  | 
|                   | 
|Exhibit (10)(viii) | 
|                   | 
|Exhibit (10)(ix)   | 
|                   | 
|Exhibit (10)(x)    | 
|                   | 
|Exhibit (10)(xi)   | 
|                   | 
|Exhibit (10)(xii)  | 
|                   | 
|Exhibit (10)(xiii) | 
|                   | 
|Exhibit (10)(xiv)  | 
|                   | 
|Exhibit (10)(xv)   | 
|                   | 
|Exhibit (11)       | 
|                   | 
|Exhibit (31.1)     | 
|                   | 
|Exhibit (31.2)     | 
|                   | 
|Exhibit (32)       | 



6(b)    Reports on
Form 8-K



None were filed during the quarter ended June 30, 2003



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##### Table of Contents

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.





|                         | 
|------------------------ | 
|                         | 
|                         | 
|Date:    August 12, 2003 | 
|                         | 
|                         | 
|                         | 
|Date:    August 12, 2003 | 
|                         | 
|                         | 









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