<PAGE>

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington D.C. 25049

                                    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, 1999
                                    -----------------------------------

  [_] 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
                                 --------------
                           (Issuer'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 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 August 13, 1999 there were issued and outstanding 3,787,852 shares of the
Registrant's common stock, no par value.
<PAGE>

                   SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

                                      INDEX
<TABLE>
<CAPTION>

PART I.    FINANCIAL INFORMATION                                                    Page
                                                                                    ----
<S>                                                                                 <C>
   Item 1.   Financial Statements

   Consolidated Statements of Financial Condition at June 30, 1999 (Unaudited)
      and September 30, 1998                                                           1

   Consolidated Statements of Income and Comprehensive Income for the Three
      Months Ended June 30, 1999 and 1998 (Unaudited)                                  2

   Consolidated Statements of Income and Comprehensive Income for the Nine
      Months Ended June 30, 1999 and 1998 (Unaudited)                                  3

   Consolidated Statements of Cash Flows for the Nine Months Ended
      June 30, 1999 and 1998 (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 - 14

   Item 3.   Quantitative and Qualitative Disclosures about Market Risk               15

PART II.    OTHER INFORMATION

   Item 1.   Legal Proceedings                                                        16

   Item 2.   Changes in Securities and Use of Proceeds                                16

   Item 3.   Defaults upon Senior Securities                                          16

   Item 4.   Submission of Matters to a Vote of Security Holders                      16

   Item 5.   Other Information                                                        16

   Item 6.  Exhibits and Reports on Form 8-K                                          16

   Signatures                                                                    17 - 18
</TABLE>
<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1999 and September 30, 1998

<TABLE>
<CAPTION>
                                                                               June 30,      September 30,
ASSETS                                                                           1999            1998
-----------------------------------------------------------------------------------------------------------
                                                                               (Unaudited)       (Note)
<S>                                                                          <C>            <C>
Cash and cash equivalents:
   Noninterest-bearing deposits                                              $    2,506,000 $    2,891,000
   Interest-bearing deposits                                                     15,176,000     26,895,000
   Federal Funds sold                                                               820,000      3,010,000
Securities held to maturity                                                       9,682,000     13,340,000
Securities available for sale                                                    26,909,000     39,158,000
Federal Home Loan Bank stock                                                      1,153,000      1,707,000
Loans receivable, net                                                           116,538,000    110,550,000
Real estate acquired in settlement of loans                                          60,000         68,000
Real estate held for investment                                                   1,134,000        960,000
Accrued interest receivable                                                         947,000      1,302,000
Office properties and equipment, net                                              1,246,000      1,106,000
Prepaid expenses and other assets                                                 1,228,000        958,000
                                                                             ------------------------------
              Total assets                                                   $  177,399,000 $  201,945,000
                                                                             ==============================

LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------
Liabilities:
   Deposits                                                                  $  146,361,000 $  148,444,000
   Note payable                                                                                 18,000,000
   Advance payments by borrowers for taxes and insurance                            418,000        125,000
   Accounts payable and other liabilities                                         2,592,000      3,250,000
   Minority interest in Park Ridge Associates, LLC                                   10,000         10,000
   Checks outstanding on disbursement account                                       995,000        561,000
                                                                             ------------------------------
              Total liabilities                                                 150,376,000    170,390,000
                                                                             ------------------------------
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 3,825,624 shares at June 30, 1999 and 4,351,060
      shares at September 30, 1998                                                        -              -
   Additional paid-in capital                                                    13,606,000     17,930,000
   Deferred management recognition plan                                            (998,000)    (1,596,000)
    Accumulated other comprehensive income, unrealized gain
      (loss) on securities available for sale, net of tax                          (429,000)        26,000
   Unearned compensation                                                         (1,882,000)    (1,990,000)
   Unearned ESOP                                                                 (3,725,000)    (4,080,000)
   Retained earnings, substantially restricted                                   20,451,000     21,265,000
                                                                             ------------------------------
              Total stockholders' equity                                         27,023,000     31,555,000
                                                                             ------------------------------
              Total liabilities and stockholders' equity                     $  177,399,000 $  201,945,000
                                                                             ==============================
</TABLE>

NOTE: The Consolidated Statement of Financial Condition as of September 30, 1998
      has been taken from the audited financial statements of South Street
      Financial Corp. and Subsidiary at that date.

See Notes to Consolidated Financial Statements.

                                       1
<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended June 30, 1999 and 1998

<TABLE>
<CAPTION>
                                                                                   1999          1998
-----------------------------------------------------------------------------------------------------------
                                                                                       (Unaudited)
<S>                                                                          <C>            <C>
Interest income:
   Loans                                                                     $    2,258,000 $    2,330,000
   Mortgage-backed securities                                                       287,000        444,000
   Investment securities                                                            246,000        632,000
   Other interest-bearing deposits                                                  262,000        458,000
                                                                             ------------------------------
        Total interest income                                                     3,053,000      3,864,000
Interest expense on deposits and borrowed funds                                   1,727,000      2,401,000
                                                                             ------------------------------
              Net interest income                                                 1,326,000      1,463,000
Provision for loan losses                                                                 -              -
                                                                             ------------------------------
              Net interest income after provision for loan losses                 1,326,000      1,463,000
                                                                             ------------------------------
Noninterest income, net                                                              28,000         35,000
                                                                             ------------------------------

Noninterest expenses:
   Compensation and benefits                                                        922,000        796,000
   Net occupancy                                                                     75,000         77,000
   Federal insurance premium expenses                                                21,000         22,000
   Data processing                                                                   51,000         55,000
   Other                                                                            154,000        133,000
                                                                             ------------------------------
                                                                                  1,223,000      1,083,000
                                                                             ------------------------------
              Income before income taxes                                            131,000        415,000
Provision for income taxes                                                           71,000        182,000
                                                                             ------------------------------
              Net income                                                             60,000        233,000
                                                                             ------------------------------

Other comprehensive loss, net of tax:
   Unrealized holding losses arising during period, net of tax                     (235,000)       (30,000)
   Less reclassification adjustment for gains included in net
      income, net of tax                                                                  -              -
                                                                             ------------------------------
           Other comprehensive loss                                                (235,000)       (30,000)
                                                                             ------------------------------

              Comprehensive income (loss)                                    $     (175,000)$      203,000
                                                                             ==============================

Basic earnings per share                                                     $         0.02 $         0.06
                                                                             ==============================
Diluted earning per share                                                    $         0.02 $         0.06
                                                                             ==============================

Dividends declared per share                                                 $         0.10 $         0.10
                                                                             ==============================

Average number of basic shares outstanding                                        3,346,165      4,055,878

Average number of diluted shares outstanding                                      3,346,165      4,055,878
</TABLE>

See Notes to Consolidated Financial Statements.

                                       2
<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Nine Months Ended June 30, 1999 and 1998

<TABLE>
<CAPTION>
                                                                                  1999           1998
-----------------------------------------------------------------------------------------------------------
                                                                                      (Unaudited)
<S>                                                                          <C>            <C>
Interest income:
   Loans                                                                     $    6,776,000 $    7,109,000
   Mortgage-backed securities                                                       950,000      1,427,000
   Investment securities                                                            978,000      2,613,000
   Other interest-bearing deposits                                                  745,000      1,051,000
                                                                             ------------------------------
        Total interest income                                                     9,449,000     12,200,000
Interest expense on deposits and borrowed funds                                   5,268,000      7,147,000
                                                                             ------------------------------
              Net interest income                                                 4,181,000      5,053,000
Provision for loan losses
                                                                             ------------------------------
              Net interest income after provision for loan losses                 4,181,000      5,053,000
                                                                             ------------------------------
Noninterest income, net                                                              89,000        119,000
                                                                             ------------------------------

Noninterest expenses:
   Compensation and benefits                                                      2,782,000      3,364,000
   Net occupancy                                                                    232,000        200,000
   Federal insurance premium expenses                                                66,000         66,000
   Data processing                                                                  163,000        162,000
   Other                                                                            561,000        527,000
                                                                             ------------------------------
                                                                                  3,804,000      4,319,000
                                                                             ------------------------------
              Income before income taxes                                            466,000        853,000
Provision for income taxes                                                          180,000        361,000
                                                                             ------------------------------
              Net income                                                            286,000        492,000
                                                                             ------------------------------

Other comprehensive loss, net of tax:
   Unrealized holding losses arising during the period, net of tax                 (453,000)       (84,000)
   Less reclassification adjustment for gains included in net
      income, net of tax                                                             (2,000)
                                                                             ------------------------------
           Other comprehensive loss                                                (455,000)       (84,000)
                                                                             ------------------------------

              Comprehensive income (loss)                                    $     (169,000) $     408,000
                                                                             ==============================

Basic earnings per share                                                     $         0.08 $         0.12
                                                                             ==============================
Diluted earning per share                                                    $         0.08 $         0.12
                                                                             ==============================

Dividends declared per share                                                 $         0.30 $         0.30
                                                                             ==============================

Average number of basic shares outstanding                                        3,541,055      4,139,487

Average number of diluted shares outstanding                                      3,541,055      4,139,487
</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, 1999 and 1998

<TABLE>
<CAPTION>
                                                                                  1999           1998
-----------------------------------------------------------------------------------------------------------
                                                                                      (Unaudited)
<S>                                                                          <C>            <C>
Cash Flows From Operating Activities
   Net income                                                                $      286,000 $      492,000
   Adjustments to reconcile net income to cash used in
      operating activities:
      Net accretion of premiums and discounts on securities                           5,000        125,000
      Amortization of deferred loan fees                                           (240,000)      (217,000)
      Provision for depreciation                                                    109,000         84,000
      ESOP contribution                                                             (59,000)       258,000
      Vesting of deferred management recognition plan                               598,000      1,397,000
      Amortization of unearned compensation                                         108,000              -
      Gain on sale of investments                                                    (4,000)             -
      (Increase) decrease in assets:
        Accrued interest receivable                                                 355,000        685,000
        Prepaid expenses and other assets                                          (270,000)    (1,808,000)
      Increase in other liabilities:                                                 82,000         42,000
                                                                             ------------------------------
              Net cash provided by operating activities                             970,000      1,058,000
                                                                             ------------------------------
Cash Flows From Investing Activities
   Purchases of securities available for sale                                   (17,999,000)   (12,570,000)
   Redemption of FHLB stock                                                         554,000        543,000
   Proceeds from maturities and recalls of securities available
      for sale                                                                   29,544,000     46,229,000
   Principal collected on securities held to maturity                             3,614,000      6,567,000
   Loan originations and principal payments on loans, net                        (5,790,000)     4,825,000
   Purchase of office properties and equipment                                     (249,000)        (2,000)
   Increase in real estate held for investment                                     (174,000)             -
   Proceeds from sale of foreclosed real estate                                      50,000              -
                                                                             ------------------------------
              Net cash provided by investing activities                           9,550,000     45,592,000
                                                                             ------------------------------
</TABLE>

                                   (Continued)

                                       4
<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine Months Ended June 30, 1999 and 1998

<TABLE>
<CAPTION>
                                                                                  1999           1998
-----------------------------------------------------------------------------------------------------------
                                                                                      (Unaudited)
<S>                                                                          <C>            <C>
Cash Flows from Financing Activities
   Net increase (decrease) in deposits                                       $  (2,083,000) $    6,494,000
   Net increase in advance payments by borrowers for taxes
      and insurance                                                                293,000         296,000
   Principal payment received on ESOP note                                         355,000         125,000
   Repayment of note payable                                                   (18,000,000)
   Dividends paid to stockholders                                               (1,114,000)    (29,461,000)
   Retirement of stock purchased                                                (4,265,000)
   Proceeds form issuance of short-term debt                                             -      18,000,000
   Repayment of Federal Home Loan Bank borrowings                                        -     (35,000,000)
                                                                             ------------------------------
              Net cash used in financing activities                            (24,814,000)    (39,546,000)
                                                                             ------------------------------
              Net increase (decrease) in cash and cash equivalents             (14,294,000)      7,104,000
Cash and cash equivalents:
   Beginning                                                                    32,796,000      27,644,000
                                                                             ------------------------------
   Ending                                                                    $  18,502,000 $    34,748,000
                                                                             ==============================

Supplemental Disclosures of Cash Flow Information
   Cash and cash equivalents:
      Noninterest-bearing                                                    $   2,506,000       3,411,000
      Interest-bearing                                                          15,176,000      26,197,000
      Federal funds sold                                                           820,000       5,140,000
                                                                             ------------------------------
                                                                             $  18,502,000 $    34,748,000
                                                                             ==============================

Supplemental Disclosures of Noncash Transactions
   Net change in unrealized (gain) loss on securities available for
      sale, net of deferred taxes                                            $    (455,000) $      (84,000)
   Change in dividends accrued                                                     (14,000)        (18,000)
   Transfer from loans receivable to real estate acquired in
      settlement of loans                                                           42,000               -
</TABLE>

See Notes to Consolidated Financial Statements.

                                       5
<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Note 1. Nature of Business

Prior to October 2, 1996, Home Savings Bank of Albemarle, Inc., S.S.B. (the
"Bank") operated as a mutual North Carolina-chartered savings bank. On October
2, 1996, the Bank converted from a North Carolina-chartered mutual savings bank
to a North Carolina-chartered savings bank (the "Conversion"). In connection
with the Conversion, all of the issued and outstanding capital stock of the Bank
was acquired by South Street Financial Corp., a North Carolina corporation (the
"Company") which was organized to become the holding company for the Bank. At
that time, the Company had an initial public offering of its common stock, no
par value.

The Company is a bank holding company registered with the Board of Governors of
the Federal Reserve System (the "Federal Reserve") under the Bank Holding
Company Act of 1956, as amended (the "BHCA") and the savings bank holding
company laws of North Carolina. The Company's office is located at 155 West
South Street, Albemarle, North Carolina. The Company's activities consist of
investing the proceeds of its initial public offering which half of proceeds
were retained at the holding company level, holding the indebtedness outstanding
from the Home Savings Bank of Albemarle, Inc., SSB Employee Stock Ownership Plan
(the "ESOP") and owning the Bank. The Company's principal sources of income are
earnings on its investments and interest payments received from the ESOP with
respect to the ESOP loan. In addition, the Company will receive any dividends,
which are declared and paid by the Bank on its capital stock.

The Bank was originally chartered in 1911. It has been a member of the Federal
Home Loan Bank ("FHLB") system since 1954 and its deposits are federally insured
up to allowable limits. The Bank is engaged primarily in the business of
attracting retail deposits from the general public and using such deposits to
make mortgage loans secured by real estate. The Bank makes mortgage loans
secured by residential real property, including one-to-four family residential
real estate loans, home equity line of credit loans and other subordinate lien
loans, loans secured by improved nonresidential real property, loans secured by
undeveloped real property and construction loans. The Bank also makes a limited
number of loans, which are not secured by real property, such as loans secured
by savings accounts. The Bank's primary source of revenue is interest income
from its lending activities. The Bank's other major sources of revenue are
interest and dividend income from investments and mortgage-backed securities,
interest income from its interest-bearing deposit balances in other depository
institutions and fee income from its lending and deposit activities. The major
expenses of the Bank are interest on deposits and noninterest expenses such as
compensation and fringe benefits, federal deposit insurance premiums, data
processing expenses and branch occupancy and related expenses.

                                       6
<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Note 2.  Basis of Presentation

The accompanying unaudited consolidated financial statements (except for the
statement of financial condition at September 30, 1998, 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 the Bank. The results of
operations for the three and nine month periods ended June 30, 1999 are not
necessarily indicative of the results of operations that may be expected for the
year ended September 30, 1999.

The accounting policies of the Company followed are as set forth in Note 1 of
the Notes to Consolidated Financial Statements in the 1998 annual report of the
Company.

Note 3.  Earnings Per Share

The Company's basic earnings per share for the three and nine month periods
ended June 30, 1999 and 1998 are 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 the
conversion, exercise or issuance of all potential common stock instruments, if
they have a dilutive effect. For purposes of this computation, the number of
shares of common stock purchased by the ESOP which have not been allocated to
participant accounts are not assumed to be outstanding.

Note 4.  Dividends Declared

On June 14, 1999, the Company's Board of Directors declared a dividend of $.10 a
share for shareholders of record as of June 30, 1999 and payable on July 14,
1999. In addition, on June 14, 1999, the Board of Directors of the Bank declared
an upstream dividend of $150,000 to the Company.

Note 5.  Notes Payable and Advances from Federal Home Loan Bank

The note payable to Bankers' Bank in the amount of $18,000,000 was repaid on
October 1, 1998 and as of June 30, 1999 there are no outstanding notes or
advances from the FHLB.

                                       7
<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Note 6.  Stock Option Plan and the Bank's Management Recognition Plan

The Company's stockholders approved the Company's Stock Option Plan and the
Bank's Management Recognition Plan and Trust (the "MRP") on October 15, 1997.
The Stock Option Plan reserves for issuance up to 449,650 stock options to all
officers, directors, and employees at the time of the adoption either in the
form of incentive stock options or non-incentive stock options. The exercise
price of the stock options may not be less than the fair value of the Company's
common stock at date of grant. The options awarded to employees vest at the rate
of 25% annually beginning at the date of grant. Options granted to non-employee
directors vested immediately on the date of grant. All options were granted in
1998 and expire in 2008. As permitted under the generally accepted accounting
principles, grants under the plan will be accounted for following the provisions
of APB Opinion No. 25 and its related interpretations. Accordingly, no
compensation cost will be recognized on the grant date of any options.

On December 4, 1998 the FASB issued an exposure draft during the first quarter
of 1999 which will include interpretations of APB Opinion No. 25 which are
anticipated to be effective in September, 1999 and if adopted will cover events
that occur after December 15, 1998. Under the interpretations certain
transactions should they occur would cause an entity to adopt fair value
accounting for stock.

The MRP reserved for issuance 179,860 shares of common stock to all officers,
directors, and employees at the time of adoption. The Bank issued shares to fund
the MRP in October of 1997. The restricted common stock under the MRP vests at
the rate of 25% annually beginning at the date of grant.


                                       8
<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

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

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

This Form 10-Q contains certain forward-looking statements consisting of
estimates with respect to the financial condition, results of operations and
other business of the Company 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.

Comparison of Financial Condition at June 30, 1999 and September 30, 1998:

Total assets decreased by $24.5 million or 12.2%, to $177.4 million at June 30,
1999 from $201.9 million at September 30, 1998. The decrease in assets was
primarily attributable to a decrease in liquidity and investment securities,
which were used for repayment of the note payable to Bankers' Bank in the amount
of $18.0 million. The Company also repurchased 525,436 shares of the outstanding
common stock of the Company in the amount of $4.3 million.

Net loans receivable increased by $6.0 million or 5.4% to $116.5 million at June
30, 1999 from $110.6 million at September 30, 1998. Investment securities held
to maturity decreased $3.7 million or 27.4%, to $9.7 million at June 30, 1999
from $13.3 million at September 30, 1998. Likewise, investment securities
classified as available for sale decreased $12.2 million or 31.3%, to $26.9
million at June 30, 1999 from $39.2 million at September 30, 1998. The decrease
was primarily due to the repayment of $18.0 million in borrowings from Bankers'
Bank and funding of net loan originations of $5.7 million. The Bank had
borrowings of $18.0 million outstanding at the end of September 30, 1998. 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 $3.7
million, net of $355,000 principal repayment made during the nine months ended
June 30, 1999, is reported as a reduction of stockholders' equity. Retained
earnings decreased by $814,000 to $20.5 million at June 30, 1999, which is
attributable to the Company's dividends accrued for the nine months ended June
30, 1999 in the amount of $1.1 million and net of $286,000 of net income.
Additional paid-in capital, deferred MRP and unearned compensation decreased by
$3.6 million to $10.7 million at June 30, 1999 from $14.3 million at September
30, 1998. The decrease was primarily attributable to the repurchase of 525,436
shares of outstanding common stock in the amount of $4.3 million.

As a North Carolina chartered stock savings bank, the Bank is required to meet
various capital standards established by federal and state banking agencies. At
June 30, 1999 the Company's stockholders' equity amounted to $27.0 million, or
15.1% of total assets and exceeds all regulatory capital requirements.

The Bank's level of nonperforming loans, defined as loans past due 90 days or
more was $165,000 and $248,000 at June 30, 1999 and September 30, 1998,
respectively. During the nine month period ended June 30, 1999 and 1998, 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. Based on their analysis, management determined that no loan
loss provisions were necessary during the nine months ended June 30, 1999.


                                       9
<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

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

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

Comparison of Operating Results for the Three and Nine Months Ended June 30,
1999 and 1998:

General. Net income for the three month and nine month periods ended June 30,
1999 was $60,000 and $286,000, respectively or $173,000 and $206,000 less than
the $233,000 and $492,000 earned during the same period in 1998. As discussed
below, the decrease in net income was primarily attributable to a decrease in
net interest income caused by a lower level of interest-earning assets.

Interest income. Interest income decreased by $811,000 from $3.9 million for the
three months ended June 30, 1998 to $3.1 million for the three months ended June
30, 1999. Total interest income decreased by $2.8 million from $12.2 million for
the nine months ended June 30, 1998 to $9.4 million for the nine months ended
June 30, 1999. These decreases were attributable to the decrease in the volume
of interest-earning assets outstanding and the rates earned on loans receivable.

Interest expense. Interest expense on deposits and borrowed funds decreased by
$674,000 from $2.4 million for the three months ended June 30, 1998 to $1.7
million for the three months ended June 30, 1999. Interest expense on deposits
and borrowed funds decreased by $1.9 million from $7.1 million for the nine
months ended June 30, 1998 to $5.3 million for the nine months ended June 30,
1999. The decrease is primarily due to a lower level of interest-bearing
liabilities outstanding.

Net interest income. Net interest income decreased by $137,000 from $1.5 million
for the three months ended June 30, 1998 to $1.3 million for the three months
ended June 30, 1999. Net interest income decreased by $872,000 from $5.1 million
for the nine months ended June 30, 1998 to $4.2 million for the nine months
ended June 30, 1999. This decrease resulted from the decrease in the volume of
interest-earning assets outstanding offset somewhat by lower outstanding average
debt. The Bank's interest rate spread decreased primarily because its deposits
were more rate sensitive than its interest-earning assets.

Provision for loan losses. There were no provisions for loan losses charged to
income during the nine months ended June 30, 1999. Provisions, which are charged
to operations, and the resulting loan loss allowances are amounts the Bank's
management believes will be adequate to absorb losses on existing loans that may
become uncollectible.

Loans are charged off against the allowance when management believes that
collectibility is unlikely. The decision to increase or decrease the provision
and resulting allowances is based upon an evaluation of both prior loan loss
experience and other factors, such as changes in the nature and volume of the
loan portfolio, overall portfolio quality, and current economic conditions. The
Bank's level of nonperforming loans has remained consistently low in relation to
prior periods and total loans outstanding, and the Bank's charge-offs of loans
during the nine month periods ended June 30, 1999 and 1998 was minimal.

At June 30, 1999, the Bank's level of general valuation allowances for loan
losses amounted to $429,000, which management believes is adequate to absorb
potential losses in its loan portfolio.


                                      10
<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

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

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

Noninterest income. Noninterest income decreased by $7,000 from $35,000 for the
three month period ended June 30, 1998 to $28,000 for the three month period
ended June 30, 1999. Noninterest income decreased by $30,000 from $119,000 for
the nine month period ended June 30, 1998 to $89,000 for the nine month period
ended June 30, 1999.

Noninterest expense. Noninterest expense increased by $140,000 from $1.1 million
for the three month period ended June 30, 1998 to $1.2 million for the three
month period ended June 30, 1999. The increase in noninterest expense is
primarily due to the amortization of the unearned compensation, which was
recorded for the amount of the special return of capital dividend that was used
to acquire unallocated ESOP shares. The original amount of the return of capital
dividend received by the ESOP of $2.0 million is being amortized as compensation
expense as ESOP shares are allocated to participants. Noninterest expense
decreased by $515,000 from $4.3 million for the nine month period ended June 30,
1998 to $3.8 million for the nine month period ended June 30, 1999. The decrease
is principally due to the expense associated with the immediate vestiture of MRP
shares, discussed below, in the first quarter of fiscal year 1998 in the amount
of $798,000.

As a part of the Conversion, the Bank 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.

The MRP reserved for issuance 179,860 shares of common stock to all officers,
directors and employees on the adoption date of October 15, 1997. The Bank
issued shares to fund the MRP in October of 1997. The restricted common stock
under the MRP vests at the rate of 25% annually. The expense recorded in the
nine months ended June 30, 1999 represents nine months accrual of the yearly 25%
vesting amount, while the expense for the nine months ended June 30, 1998
represents immediate vesting of 25% of the MRP shares and nine months accrual of
the next 25% amount.

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.


                                      11
<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

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

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

During the nine month period ended June 30, 1999, cash and cash equivalents, a
significant source of liquidity, decreased by $14.3 million. This decrease is a
direct result of the Company's repayment of $18.0 million in borrowings and the
repurchase of the Company's common stock as mentioned previously. Cash flow
resulting from internal operating activities provided for an increase of
$970,000 in cash during the nine month period ended June 30, 1999. Financing
activities, principally the repayment of short-term debt in the amount of $18.0
million provided for a decrease of $24.8 million in cash. Investing activities,
principally proceeds from maturities and sales of securities netted by the
purchase of securities provided an additional $9.6 million.

As a state chartered stock savings bank, the Bank must meet certain liquidity
requirements that are established by the NC Administrator of the Savings
Institutions Division. The Bank's liquidity ratio at June 30, 1999, as computed
under such regulations, was considerably in excess of such requirements. Given
its excess liquidity and its ability to borrow from the FHLB of Atlanta, the
Bank believes that it will have sufficient funds available to meet anticipated
future loan commitments, unexpected deposit withdrawals, or other cash
requirements.

The FDIC requires the Bank to have a minimum leverage ratio of Tier I Capital
(principally consisting of retained earnings and any common stockholders'
equity, less any intangible assets) to all assets of at least 3%, provided that
it receives the highest rating during the examination process. For institutions
that receive less than the highest rating, the Tier I capital requirement is 1%
to 2% above the stated minimum. The FDIC also requires the Bank to have a ratio
of total capital to risk-weighted assets of 8%, of which at least 4% must be in
the form of Tier I capital. The Administrator 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, 1999.

Inflation and Changing Prices:

The 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 market interest rates have a greater
impact on the Company's performance than do the effects of inflation.

Year 2000:

A lot of attention has been given to the impact that the year 2000 date change
will have on businesses, utilities and other organizations that rely on
computerized systems to help run their operations. The year 2000 date change can
affect any system that uses computer software or computer chips including
automated equipment and machinery. For example, many computer programs and
computer chips store the calendar year portion of the date as two digits rather
than four digits. These software programs and chips record the year 1999 as
"99". This approach works until the year 2000 when the "00" may be interpreted
as the year 1900 instead of the year 2000.


                                      12
<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

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

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

Banks use computer systems to perform financial calculations, transfer funds,
record deposits and loan payments, run financial security systems and vaults and
a myriad of other functions. Because banks rely heavily on their computer
systems, the Federal Financial Institutions Examination Council ("FFIEC") has
placed significant emphasis on the problems surrounding the year 2000 issues and
has required financial institutions to document the assessment, testing and
corrections made to ready their computer systems and programs for the year 2000
date change. The FFIEC has strict regulations, guidelines, and milestones in
place that each FDIC insured financial institution must follow in order to
remain operational. The Company's board of directors has remained informed of
the Company's position and progress in its year 2000 project.

The Company's year 2000 project remains on schedule according to the guidelines
set forth by the FFIEC. The Company's most critical external exposure to year
2000 system problems is with its data processing provider, Fiserv. Fiserv
renovated its systems in June 1998 and is currently testing its remediation
efforts. Fiserv has responded to the Company that renovation of its program is
virtually complete. In the event that Fiserv is unable to make the necessary
corrections to its programs to accommodate the year 2000, the Company will
convert its data to one of the other Fiserv programs that is able to operate in
the 2000 environment.

In addition, the Company has contacted its major customers and vendors to
inquire about their progress in addressing the year 2000 problem and does not
believe that the problems of such customers and vendors will have a material
adverse effect on the Company or its operations. The Company will continue to
monitor the progress of these parties in addressing the year 2000 problem as the
new millennium approaches. Management replaced the computer hardware and
software with year 2000 compliant equipment during the first three quarters of
fiscal 1999 at a total cost of approximately $250,000.

The year 2000 problems can affect the Company's operation in a number of ways
but the mission critical issue is maintaining customers' account information
including tracking deposits, interest accruals and loan payments. The Company is
dependent upon electricity, telephone lines, computer hardware and Fiserv's date
processing capability.

The Company is in contact with its electric utility and phone company, and
assurances have been given that no major problems exist and that both companies
will have all year 2000 problems addressed well before December 31, 1999. A new
telephone system was also installed in the second quarter of fiscal 1999. If the
electric utility is unable to certify that its renovation is completed, the
Company will acquire portable generators with sufficient capacity to run the
system servers and at least one work station in each branch office.

To prevent difficulties in the event there is an unforeseen interruption in
either telephone or electrical service when the year changes, the Company will
print hard copies of all account information. In addition, the Company will
download all account information into programs on the Company's hardware that
will allow bank personnel to extract customer information without regard to
outside sources.


                                      13
<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

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

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

The Company's loan portfolio consists primarily of residential mortgage loans to
individuals. These individuals generally are not affected by Year 2000 failures.
A limited number of the Company's commercial borrowers are being contacted to
assure that timely payments will be made in January 2000. The Company intends to
amend its underwriting policies to address loan payment problems associated with
a borrower as a result of a disruption in income or a commercial borrower's
inability to make a timely payment.


                                      14
<PAGE>

SOUTH STREET FINANCIAL CORP. AND SUBSIDIARY

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

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

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk. One of the principal risks for the Bank is interest rate
risk. One of the Bank's principal financial objectives is to achieve long-term
profitability while reducing its exposure to fluctuations in interest rates.
Historically, the Bank has been a mortgage lender so the loan portfolio
continues to have a large number of mortgage loans with maturities that are
considerably longer than for the deposits that fund those loans. Thus, an upward
movement in the market rate of interest would result in the cost of deposits
increasing at a faster rate than the rate on loans. The principal strategy of
the Bank over the past several years has been to emphasize the investment of
excess cash in short or intermediate term interest-earning assets and the
solicitation of transaction deposits accounts which are less sensitive to
changes in interest rates and can be repriced rapidly. The Company has not
experienced any substantial changes in its portfolio risk during the nine month
period ended June 30, 1999. See disclosures in the September 30, 1998 Form 10-K.
However, the Bank's interest rate spread has decreased slightly during the nine
months ended June 30, 1999 due to a general economic decline in the Bank's
market area.


During 1998, the Bank formed a wholly owned subsidiary, South Street Development
Corporation ("SSDC") with a $1.8 million cash investment, SSDC then invested
$10,000 for a 50% interest in Park Ridge Associates, LLC ("Park Ridge"). An
outside individual owns the other 50% interest in Park Ridge. In June, 1998,
Park Ridge Associates acquired 25.6 acres of prime real estate located within
the city limits of Albemarle, North Carolina. The joint venture was created to
acquire and develop the property into a premier residential subdivision. The
upscale subdivision consists of 30 building lots of which nine have been
presold. As of June 30, 1999, the development of the infrastructure was
virtually complete and the property is beginning to be marketed. There can be no
assurances that the Bank will be successful in recovering its investment in the
joint venture.


                                      15
<PAGE>

Part II.  OTHER INFORMATION

        Item 1.   Legal Proceedings

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

        Item 2.   Changes in Securities and Use of Proceeds

                  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

                           Not applicable

                                      16
<PAGE>

SIGNATURES

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

                                          South Street Financial Corp.


         Dated                       By:  /s/ Carl M. Hill
              --------------------        ------------------------------
                                          Carl M. Hill
                                          President and Chief Executive Officer



         Dated                       By:  /s/ Christopher F. Cranford
              --------------------        ------------------------------
                                          Christopher F. Cranford
                                          Treasurer and Controller


                                      17