SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1997

              |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                 For the transition period from ______ to ______

                           Commission File No. 0-24532
                           FLAG FINANCIAL CORPORATION
             (Exact name of Registrant as specified in its charter)
                               Georgia 58-2094179
                (State or other jurisdiction of (I.R.S. Employer
               incorporation or organization) Identification No.)

               101 North Greenwood Street, LaGrange, Georgia 30240
                    (Address of principal executive offices)

                                 (706) 845-5000
                         (Registrant's telephone number)


        Securities registered pursuant to Section 12(b) of the Act: None

Securities  registered pursuant to Section 12(g) of the Act: Common Stock, $1.00
par value


Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best  of  the  Registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. X

The aggregate market value of the Registrant's  outstanding Common Stock held by
non-affiliates of the Registrant on March 25, 1998, was $34,165,600.  There were
2,036,990 shares of Common Stock outstanding as of March 25, 1998.

Transitional Small Business Disclosure Format. Yes X No

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's 1997 Annual Report are incorporated by reference in
Part II hereof. Portions of the Registrant's Proxy Statement for the 1998 Annual
Meeting of Shareholders to be held on May 13, 1998 are incorporated by reference
in Part III hereof.



<PAGE>


                           FLAG FINANCIAL CORPORATION
                           Annual Report on Form 10-K
                   For the Fiscal Year Ended December 31, 1997

                                Table of Contents
Item                                                                       Page
Number                                                                    Number
                                     Part I
 1.   Business..............................................................  1

 2.   Properties............................................................ 13

 3.   Legal Proceedings..................................................... 14

 4.   Submission of Matters to a Vote of Security Holders................... 14

                                     Part II

 5.   Market for Registrant's Common Stock and Related Shareholder Matters.. 15

 6.   Selected Financial Data............................................... 15

 7.   Management's Discussion and Analysis of Financial Condition and
      Results of Operations................................................. 15

 8.   Financial Statements and Supplementary Data .......................... 15

 9.   Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosures ...............................................  15
                                    Part III

10.   Directors and Executive Officers of the Registrant ................... 16

11.   Executive Compensation................................................ 16

12.   Security Ownership of Certain Beneficial Owners and Management........ 16

13.   Certain Relationships and Related Transactions........................ 16

                                     PART IV

14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K....... 17

                                                  Signatures................ 20

                                              Index of Exhibits ............ 22



<PAGE>


                                     PART I

ITEM 1.  BUSINESS

         SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

         Certain of the matters  discussed  in this  document  and in  documents
incorporated by reference herein,  including matters discussed under the caption
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations,"  may  constitute  forward-looking  statements  for  purposes of the
Securities Act of 1933, as amended,  and the Securities Exchange Act of 1934, as
amended,  and as such may involve  known and unknown  risks,  uncertainties  and
other factors which may cause the actual results, performance or achievements of
the Company to be  materially  different  from future  results,  performance  or
achievements expressed or implied by such forward-looking  statements. The words
"expect,"  "anticipate,"  "intend," "plan," "believe,"  "seek,"  "estimate," and
similar  expressions are intended to identify such  forward-looking  statements.
The Company's actual results may differ materially from the results  anticipated
in these  forward-looking  statements  due to a variety of  factors,  including,
without  limitation:  the effects of future  economic  conditions;  governmental
monetary and fiscal policies, as well as legislative and regulatory changes; the
risks of changes in interest  rates on the level and  composition  of  deposits,
loan demand,  and the values of loan  collateral,  securities  and interest rate
protection  agreements,   as  well  as  interest  rate  risks;  the  effects  of
competition  from other  commercial  banks,  thrifts,  mortgage  banking  firms,
consumer finance companies, credit unions, securities brokerage firms, insurance
companies,  money market and other mutual funds and other financial institutions
operating in the Company's  market area and  elsewhere,  including  institutions
operating locally,  regionally,  nationally and  internationally,  together with
such competitors offering banking products and services by mail, telephone,  and
computer  and the  Internet;  and the  failure  of  assumptions  underlying  the
establishment  of reserves for possible loan losses and estimations of values of
collateral and various  financial  assets and  liabilities.  All written or oral
forward-looking  statements  attributable to the Company are expressly qualified
in their entirety by these cautionary statements.

The Company
-----------

     FLAG Financial Corporation (the "Company") is the holding company for First
Federal  Savings Bank of LaGrange  (the  "Bank").  The Company was  incorporated
under the laws of the State of Georgia on February 9, 1993 at the  direction  of
the Bank for the purpose of becoming the holding  company for the Bank. On March
1, 1994,  FLAG Interim  Corporation,  a  wholly-owned  subsidiary of the Company
organized for the purpose of effecting the  Reorganization,  was merged with and
into the Bank, and the Company issued shares of its common stock to shareholders
of the Bank in exchange for all of the outstanding common stock of the Bank (the
"Reorganization").  As a result, shareholders of the Bank became shareholders of
the  Company,  with the  same  proportional  interests  in the  Company  as they
previously  held in the Bank  (excluding the nominal  effect on their  ownership
interest of the exercise of dissenters'  rights by certain  shareholders  of the
Bank).

     Following the Reorganization, the Bank continued its business operations as
a  federally-chartered  stock  savings  bank  under the same name,  charter  and
bylaws.  The  directors,  officers  and  employees  of the Bank  were  unchanged
following  the  Reorganization.  The  directors  of the Bank  also  serve as the
directors of the Company,  and the  Chairman of the Board,  President  and Chief
Executive Officer of the Bank serves as the Chairman of the Board, President and
Chief Executive Officer of the Company.

     As a unitary thrift holding company,  the Company is intended to facilitate
the Bank's ability to serve its customers'  requirements for financial services.
The holding  company  structure  permits  diversification  by the Company into a
broader range of financial services and other business activities than currently
are permitted to the Bank under  applicable law. The holding  company  structure
also provides greater  financial and operating  flexibility than is permitted to
the Bank. Additionally,  the Articles of Incorporation and Bylaws of the Company
contain terms that provide a degree of  anti-takeover  protection to the Company
that is currently unavailable to the Bank and its shareholders under regulations
of the  Office of Thrift  Supervision  (the  "OTS") but is  permissible  for the
Company under Georgia law. See "Supervision and Regulation" below. The Bank

     On October 28, 1997,  the Company  entered  into an  Agreement  and Plan of
Merger with Middle Georgia  Bankshares,  Inc.,  parent company of Citizens Bank,
Vienna, Georgia ("MGB"),  purusant to which MGB will be merged with and into the
Company (the  "Merger")  and  shareholders  of MGB will receive  15.75 shares of

                                       1
<PAGE>

Company  common stock for each share of MGB common stock.  The Merger is subject
to regulatory approval and approval by the shareholders of both corporations and
will be  accounted  for as a pooling  of  interests.  Upon  consummation  of the
Merger, subject to the approval of the Board of Governors of the Federal Reserve
System (the "Federal  Reserve") the Company would become a bank holding company,
and the Federal Reserve would replace the OTS as the Company's  primarly federal
regulator.  The combination is projected to be completed at the end of the first
quarter of 1998. See "Supervision and Regulation" below.

     The Bank is a federally  chartered  stock  savings  bank  headquartered  in
LaGrange,  Troup County, Georgia. The Bank was originally chartered by the State
of Georgia in January 1927 under the name "Home Building and Loan  Association."
The Bank  received  its federal  charter  and changed its name to First  Federal
Savings and Loan  Association of LaGrange in 1955, and at that time its deposits
became  insured by the  Federal  Savings  and Loan  Insurance  Corporation  (the
"FSLIC"). In December 1986, the Bank converted from a federal mutual savings and
loan  association  to a federal  stock savings and loan  association  by selling
805,000  shares of Common Stock to the public  pursuant to a plan of  conversion
approved by the members of the  institution.  In June 1989,  the Bank  converted
from a federal  stock  savings and loan  association  to a federal stock savings
bank and changed its name to "First Federal Savings Bank of LaGrange."  Based on
total assets of approximately $248 million at December 31, 1997, the Bank is the
7th largest of 34 thrift  institutions  headquartered in Georgia and the largest
financial institution headquartered in Troup County.

     The Bank's  deposits  are now  insured  by the  Federal  Deposit  Insurance
Corporation  (the  "FDIC"),  as the  successor to the FSLIC.  Primarily  for the
protection  of  depositors,  the Bank is subject to  comprehensive  examination,
supervision and regulation by the OTS and the FDIC.

     The Bank's  business  consists  primarily of  attracting  deposits from the
general  public and,  with these and other funds,  making  residential  mortgage
loans and, to a lesser extent, consumer loans, commercial loans, commercial real
estate loans,  residential  construction  loans and securities  investments.  In
addition  to  deposits,  sources  of  funds  for  the  Bank's  loans  and  other
investments  include  amortization and prepayment of loans, loan origination and
commitment fees, sales of loans or  participations  in loans,  fees received for
servicing  loans sold to others and advances  from the Federal Home Loan Bank of
Atlanta ("FHLBA"). The principal sources of income for the Bank are interest and
fees  collected on loans,  including fees received for  originating  and selling
loans and for servicing loans sold to others, and, to a lesser extent,  interest
and  dividends  collected on other  investments  and service  charges on deposit
accounts. In addition,  the Bank's wholly owned service corporation  subsidiary,
Piedmont Mortgage Service,  Inc., operates a full-service appraisal office under
the name of Piedmont Appraisal Service and offers certain  securities  brokerage
services under the name of Piedmont Investment  Service.  The principal expenses
of the Bank are interest  paid on  deposits,  interest  paid on FHLBA  advances,
employee compensation,  federal deposit insurance premiums,  office expenses and
other overhead expenses.

     The Company's  financial  performance has been determined  primarily by the
results of operations of the Bank because the Company's only  significant  asset
is the common stock of the Bank.  For  information  regarding  the  consolidated
financial  condition and results of operations of the Company,  the Bank and the
Bank's wholly owned subsidiary,  Piedmont Mortgage Service, Inc., as of December
31, 1997 and 1996 and for the three years in the period ended December 31, 1997,
see "Management's  Discussion and Analysis of Financial Condition and Results of
Operations"  and the  Consolidated  Financial  Statements of the Company and the
related notes  thereto  which are contained in the Company's  1997 Annual Report
(the "1997  Annual  Report").  The 1997 Annual  Report is filed as Exhibit 13 to
this report. All average balances presented in this report were derived based on
monthly averages.

Employees
---------

     As of  December  31,  1997,  the Bank had 116  full-time  and 16  part-time
employees.  The employees are not represented by any collective bargaining unit,
and the Bank considers its relationship with its employees to be good.

Competition
-----------

         The banking  business is highly  competitive.  The Bank  competes  with
several other banking organizations in Troup and surrounding counties.  The Bank
also  competes  with other  financial  service  organizations  including  credit
unions, finance companies, and certain governmental agencies. To the extent that

                                       2
<PAGE>

the Bank must maintain non interest earning reserves  against  deposits,  it may
have be at a competitive disadvantage when compared with other financial service
organizations  that are not required to maintain reserves against  substantially
equivalent sources of funds.  Also, other financial  institutions with which the
Bank competes may have substantially  greater resources and lending capabilities
due to the size of the organization.

Supervision and Regulation

General
-------

     As a federal  savings  bank,  the Bank is subject to extensive  regulation,
examination and supervision by the OTS, as its primary regulator,  and the FDIC,
as its deposit insurer.  The Bank is a member of the FDIC's Savings  Association
Insurance Fund ("SAIF"),  and its deposit  accounts are insured up to applicable
limits by the FDIC. The deposit  premiums paid by the Bank to the FDIC currently
paid to the  SAIF.  The Bank is also a member of the  FHLBA.  The Bank must file
reports  with the OTS and the  FDIC  concerning  its  activities  and  financial
condition,  and it must  obtain  regulatory  approvals  prior to  entering  into
certain transactions, such as mergers with, or acquisitions of, other depository
institutions.  The OTS and the FDIC conduct periodic  examinations to assess the
Bank's  compliance  with various  regulatory  requirements.  This regulation and
supervision  establishes  a  comprehensive  framework of  activities  in which a
savings  association can engage and is intended  primarily for the protection of
the insurance  fund and  depositors.  The Company,  as a unitary  thrift holding
company is subject to the regulation, examination and supervision of the OTS and
files  certain  reports  with,  and  otherwise  complies  with,  the  rules  and
regulations  of the OTS and the  Securities  and Exchange  Commission  under the
federal securities laws.

     The OTS and the FDIC have  significant  discretion in connection with their
supervisory  and  enforcement  activities and  examination  policies,  including
policies with respect to the  classification  of assets and the establishment of
adequate allowance for loan losses for regulatory  purposes.  Any change in such
policies, whether by the OTS, the FDIC or the United States Congress, could have
a material adverse impact on the Company, the Bank, and the operations of both.

     Upon  consummation  of the Merger,  subject to the  approval of the Federal
Reserve,  the  Company  would  become a bank  holding  company,  and the Federal
Reserve would replace the OTS as the Company's primary federal  regulator.  This
change in primary  regulators  will  likely  result in an  increased  regulatory
burden for the  Company.  For example,  the Company  would be subject to certain
minimum capital  requirements  administered by the Federal  Reserve.  Failure to
meet the minimum  capital  requirements  can  initiate  certain  mandatory,  and
possibly  additional  discretionary,  actions by the Federal  Reserve  that,  if
undertaken,  could have a direct  material  effect on the financial  position or
results of operations of the Company.  The Company  anticipates that it would be
able to satisfy such minimum capital requirements.

     The  following  discussion  is  intended  to be a summary  of the  material
statutes and regulations  applicable to savings  associations  and their holding
companies  generally and does not purport to be a  comprehensive  description of
all such statutes and regulations.

Regulation of Unitary Thrift Holding Companies
----------------------------------------------

     As a  unitary  thrift  holding  company,  the  Company  is  subject  to OTS
regulations,  examinations, supervision and reporting requirements. In addition,
the  OTS  has  enforcement  authority  over  the  Company  and  its  non-savings
association subsidiaries.  Among other things, this authority permits the OTS to
restrict or prohibit  activities that are determined to be a serious risk to the
financial safety, soundness or stability of a subsidiary savings association.

     The Home Owners' Loan Act, as amended  ("HOLA")  prohibits a unitary thrift
holding company,  directly or indirectly,  or through one or more  subsidiaries,
from acquiring another savings  association or holding company thereof,  without
prior  written  approval  of the  OTS;  acquiring  or  retaining,  with  certain
exceptions,   more  than  5.0%  of  a  non-subsidiary  savings  association,   a
non-subsidiary holding company or a non-subsidiary company engaged in activities
other than those  permitted by HOLA;  or  acquiring  or  retaining  control of a
depository  institution  that is not  insured  by the  FDIC.  In  evaluating  an
application by a holding company to acquire a savings association,  the OTS must

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consider the financial  and  managerial  resources  and future  prospects of the
company and savings association  involved,  the effect of the acquisition on the
risk to the FDIC's  insurance  funds, the convenience and needs of the community
and competitive factors.

     As  a  unitary  thrift  holding  company,  the  Company  generally  is  not
restricted  under existing laws as to the types of business  activities in which
it may engage,  provided that the Bank continues to satisfy the qualified thrift
lender ("QTL") test.  See  "Regulation of Federal  Savings  Associations  -- QTL
Test"  for a  discussion  of the  QTL  requirements.  Upon  any  non-supervisory
acquisition by the Company of another  savings  association or savings bank that
meets the QTL test, is deemed to be a savings association by the OTS and will be
held as a separate  subsidiary,  the  Company  would  become a  multiple  thrift
holding  company  and would be subject to  limitations  on the types of business
activities  in which it could engage.  HOLA limits the  activities of a multiple
thrift holding company and its non-insured association subsidiaries primarily to
activities  permissible for bank holding  companies under Section 4(c)(8) of the
Bank Holding  Company Act of 1956,  as amended  (the "BHC Act"),  subject to the
prior approval of the OTS, and to other activities authorized by OTS regulation.

     The OTS is prohibited from approving any acquisition that would result in a
multiple thrift holding company  controlling  savings  associations in more than
one state, subject to two exceptions: an acquisition of a savings association in
another state (i) in a supervisory  transaction,  and (ii) pursuant to authority
under the laws of the state of the association to be acquired that  specifically
permit such acquisitions. The conditions imposed upon interstate acquisitions by
those states that have enacted authorizing  legislation vary. Some states impose
conditions of  reciprocity,  which have the effect of requiring that the laws of
both the state in which the acquiring  holding company is located (as determined
by the location of its subsidiary  savings  association)  and the state in which
the  association  to be  acquired  is  located,  have each  enacted  legislation
allowing  its  savings  associations  to be  acquired  by  out-of-state  holding
companies  on the  condition  that the laws of the other  state  authorize  such
transactions on terms no more  restrictive than those imposed on the acquirer by
the state of the target  association.  Some of these states also impose regional
limitations,  which  restrict  such  acquisitions  to  states  within a  defined
geographic  region.  Other  states  allow full  nationwide  banking  without any
condition of reciprocity.  Some states do not authorize interstate  acquisitions
of savings associations.

     Transactions  between the Bank and the  Company and its other  subsidiaries
are also subject to various  conditions  and  limitations.  See  "Regulation  of
Federal Savings  Associations -- Transactions with Related Parties." The Bank is
required to give 30-days  written notice to the OTS prior to any  declaration of
the payment of any dividends or other capital  distributions to the Company. See
"Regulation   of  Federal   Savings   Associations   --  Limitation  on  Capital
Distributions."

     Congress has recently entertained various industry restructuring  proposals
that would  require  all federal  savings  banks to convert to national or state
bank charters and to be subject to regulation  as commercial  banks.  Under such
proposals all thrift holding  companies,  in turn, would be required to register
as bank holding  companies  under the BHC Act, and those holding  companies that
were not unitary  thrift  holding  companies  on a specified  date would  become
subject to the activities  restrictions  set forth in the BHC Act as well as the
restrictions  on  affiliations  with  entities  primarily  engaged in securities
underwriting  contained  in the  Glass-Steagall  Act.  While the  outcome of the
ongoing  efforts to merge the thrift  industry into the banking  industry and to
reorganize and  consolidate  the federal  regulatory  structure are uncertain at
this time,  the foregoing  proposal,  if enacted,  would cause the Company to be
regulated as a bank holding  company.  As such,  the Company would be subject to
examination,   regulation  and  periodic   reporting   under  the  BHC  Act,  as
administered by the Federal Reserve. The end result of such initiatives, and the
resulting impact on the Company's  business and operations,  are unclear at this
time.

Regulation of Federal Savings Associations

     Business Activities
     -------------------

     The Bank derives its lending and  investment  powers from the HOLA, and the
regulations of the OTS thereunder.  Under these laws and  regulations,  the Bank
may invest in mortgage loans secured by residential  and commercial real estate,
commercial and consumer  loans,  certain types of debt  securities,  and certain
other assets.  The Bank may also establish service  corporations that may engage
in activities not otherwise  permissible  for the Bank,  including  certain real
estate  equity  investments  and  securities  and  insurance  brokerage.   These
investment  powers  are  subject  to  various  limitations,   including:  (i)  a
prohibition  against the  acquisition of any corporate debt security that is not


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rated in one of the four highest rating  categories;  (ii) a limit of 400% of an
association's capital on the aggregate amount of loans secured by nonresidential
real  estate  property;  (iii)  a limit  of 20% of an  association's  assets  on
commercial loans provided that amounts in excess of 10% of total assets are used
only for small business loans; (iv) a limit of 35% of an association's assets on
the  aggregate  amount  of  consumer  loans and  acquisitions  of  certain  debt
securities;  (v) a limit of 5.0% of assets  on  non-conforming  loans  (loans in
excess of the specific  limitations of HOLA); and (vi) a limit of the greater of
5.0% of assets or an association's  capital on certain  construction  loans made
for the  purpose  of  financing  what is or is  expected  to become  residential
property.

     Loans to One Borrower
     ---------------------

     Under HOLA,  savings  associations are generally subject to the same limits
on loans to one  borrower  as are imposed on national  banks.  Generally,  under
these limits,  a savings  association  may not make a loan or extend credit to a
single or  related  group of  borrowers  in  excess of 15% of the  association's
unimpaired  capital and surplus.  An additional amount may be lent, equal to 10%
of unimpaired capital and surplus,  if such loan or extension of credit is fully
secured by readily-marketable  collateral. Such collateral is defined to include
certain debt and equity  securities and bullion,  but generally does not include
real estate.


     QTL Test
     --------

     Under the QTL test, a savings  association is required to maintain at least
65% of its "portfolio  assets" in certain  "qualified thrift  investments" in at
least 9 months of the most recent 12-month period.  "Portfolio  assets" mean, in
general,  an  association's  total assets less the sum of (i)  specified  liquid
assets up to 20% of total assets, (ii) certain  intangibles,  including goodwill
and credit card and purchased  mortgage servicing rights, and (iii) the value of
property  used  to  conduct  the  association's   business.   "Qualified  thrift
investments"  include  various types of loans made for  residential  and housing
purposes,    investments   related   to   such   purposes,   including   certain
mortgage-backed  and related  securities,  and  consumer  loans up to 10% of the
association's portfolio assets. At December 31, 1997, the Bank maintained 69.02%
of its portfolio assets in qualified thrift investments.

     A savings  association  that fails the QTL test must either  operate  under
certain restrictions on its activities or convert to a bank charter. The initial
restrictions  include  prohibitions against (i) engaging in any new activity not
permissible  for a national bank, (ii) paying  dividends not  permissible  under
national bank regulations,  (iii) obtaining new advances from any FHLB, and (iv)
establishing  any new branch office in a location not permissible for a national
bank in the association's home state. In addition, within one year of the date a
savings  association  ceases to meet the QTL test, any company  controlling  the
association would have to register under, and become subject to the requirements
of, the BHC Act. If the savings  association  does not  requalify  under the QTL
test  within the  three-year  period  after it failed the QTL test,  it would be
required  to  terminate  any  activity  and to  dispose  of any  investment  not
permissible  for a national bank and would have to repay as promptly as possible
any outstanding advances from an FHLB. A savings association that has failed the
QTL test may requalify under the QTL test and be free of such  limitations,  but
it may do so only once.

     Capital Requirements
     --------------------

     The OTS  regulations  require  savings  associations  to meet three minimum
capital standards:  a tangible capital ratio requirement of 1.5% of total assets
as adjusted under the OTS regulations,  a leverage ratio  requirement of 4.0% of
core capital to such  adjusted  total  assets,  and a risk-based  capital  ratio
requirement  of 8.0% of core  and  supplementary  capital  to  total  risk-based
assets.  In determining the amount of  risk-weighted  assets for purposes of the
risk-based  capital   requirement,   a  savings  association  must  compute  its
risk-based assets by multiplying its assets and certain  off-balance sheet items
by  risk-weights,  which  range from 0% for cash and  obligations  issued by the
United  States  Government  or its agencies to 100% for consumer and  commercial
loans,  as assigned by the OTS based on the risks the OTS  believes are inherent
in the type of asset.

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     Tangible  capital  is  defined  generally  as common  stockholders'  equity
(including retained earnings),  certain noncumulative  perpetual preferred stock
and  related  earnings  and  minority  interests  in  equity  accounts  of fully
consolidated  subsidiaries,   less  intangibles  other  than  certain  purchased
mortgage  servicing rights and investments in and loans to subsidiaries  engaged
in  activities  not  permissible  for a national  bank.  Core capital is defined
similarly to tangible capital,  but core capital also includes  purchased credit
card   relationships.   Supplementary   capital  currently  includes  cumulative
preferred stock,  long-term  perpetual  preferred stock,  mandatory  convertible
securities, subordinated debt and intermediate preferred stock and the allowance
for loan and lease losses. The allowance for loan and lease losses includable in
supplementary  capital is limited to a maximum of 1.25% of risk-weighted assets,
and the amount of  supplementary  capital that may be included as total  capital
cannot exceed the amount of core capital.

     When determining its compliance with the risk-based capital requirement,  a
savings association with "above normal" interest rate risk is required to deduct
a portion of such  capital  from its total  capital  to  account  for the "above
normal"  interest  rate  risk.  A savings  association's  interest  rate risk is
measured  by the decline in the net  portfolio  value of its assets  (i.e.,  the
difference  between  incoming  and outgoing  discounted  cash flows from assets,
liabilities and off-balance sheet contracts)  resulting from a hypothetical 2.0%
increase or  decrease  in market  rates of  interest,  divided by the  estimated
economic value of the  association's  assets,  as calculated in accordance  with
guidelines  set forth by the OTS.  At the times when the 3-month  Treasury  bond
equivalent  yield falls below 4.0%, an association may compute its interest rate
risk on the basis of a decrease  equal to one-half of that  Treasury rate rather
than on the basis of 2.0%. A savings  association  whose measured  interest rate
risk exposure  exceeds 2.0% would be considered to have "above normal" risk. The
interest  rate risk  component is an amount equal to one-half of the  difference
between the association's  measured  interest rate risk and 2.0%,  multiplied by
the estimated economic value of the association's  assets. That dollar amount is
deducted from an  association's  total  capital in  calculating  its  risk-based
capital . Any required deduction for interest rate risk becomes effective on the
last day of the third quarter  following the reporting date of the association's
financial  data on which the interest  rate risk was computed.  The  regulations
authorize  the Director of the OTS to waive or defer an  association's  interest
rate risk component on a case-by-case  basis. At December 31, 1997, the Bank was
not required to maintain any additional risk-based capital under this rule.


     At December 31, 1997, the Company met each of the OTS capital requirements,
in each case on a fully phased-in  basis. The table below presents the Company's
regulatory  capital as compared to the OTS regulatory  capital  requirements  at
December 31, 1997:
                                              December 31,
                              Actual            Required             Excess
                         Amount     %       Amount      %        Amount     %
                         ------     -       ------      -        ------     -
                                          (dollars in thousands)
Tier 1 capital......... $22,130    8.90%    $6,471     4.00%     $15,659   4.90%
Tangible capital.......  22,130    8.90      3,856     1.50       18,274   7.40
Risk-based capital.....  24,127   13.70     12,941     8.00       11,186   5.70

     The  OTS  has  adopted  the  Federal  Financial  Institutions   Examination
Council's  ("FFIEC")  updated  statement of policy entitled  "Uniform  Financial
Institutions  Rating System"  ("UFIRS")  effective  January 1, 1997. UFIRS is an
internal  rating system used by the federal and state  regulators  for assessing
the soundness of financial  institutions  on a uniform basis and for identifying
those institutions requiring special supervisory  attention.  Under the previous
UFIRS, each financial  institution was assigned a confidential  composite rating
based  on  an  evaluation  and  rating  of  five  essential   components  of  an
institution's  financial  condition and operations  including  Capital adequacy,
Asset quality,  Management,  Earnings,  and Liquidity (the "CAMEL  Rating").  In
updating  UFIRS,  the  FFIEC  increased  its  emphasis  on the  quality  of risk
management practices and added a sixth component for sensitivity to market risk.
For most  institutions,  the FDIC  has  indicated  that  market  risk  primarily
reflects  exposures to changes in interest rates. When regulators  evaluate this
component,  consideration  is expected to be given to:  management's  ability to
identify, measure, monitor, and control market risk; the institution's size; the
nature and complexity of its  activities and its risk profile;  and the adequacy
of its  capital and  earnings in relation to its level of market risk  exposure.
Market  risk is rated  based upon,  but not  limited  to: an  assessment  of the
sensitivity of the financial institution's earnings or the economic value of its
capital to adverse changes in interest rates, foreign exchange rates,  commodity
prices, or equity prices;  management's ability to identify,  measure,  monitor,
and control  exposure to market risk;  and the nature and complexity of interest
rate risk exposure arising from nontrading positions.

                                       6
<PAGE>

     Limitation on Capital Distributions
     -----------------------------------

     OTS regulations  currently impose limitations upon capital distributions by
savings  associations,  such  as  cash  dividends,  payments  to  repurchase  or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger,  and other  distributions  charged against capital.  At least
30-days  written  notice  must  be  given  to  the  OTS  of a  proposed  capital
distribution by a savings  association,  and capital  distributions in excess of
specified  earnings  or by certain  institutions  are subject to approval by the
OTS. An association that has capital in excess of all fully phased-in regulatory
capital  requirements before and after a proposed capital  distribution and that
is not otherwise restricted in making capital distributions,  could, after prior
notice but without the approval of the OTS, make capital  distributions during a
calendar  year  equal to the  greater  of (i) 100% of its net  earnings  to date
during the  calendar  year plus the amount  that would  reduce by  one-half  its
"surplus  capital  ratio" (the excess capital over its fully  phased-in  capital
requirements)  at the  beginning  of the calendar  year,  or (ii) 75% of its net
earnings for the previous four quarters.  Any additional  capital  distributions
would require prior OTS approval.  In addition,  the OTS can prohibit a proposed
capital distribution, otherwise permissible under the regulation, if the OTS has
determined that the association is in need of more than normal supervision or if
it determines that a proposed distribution by an association would constitute an
unsafe or unsound practice.  Furthermore, under the OTS prompt corrective action
regulations,  the Bank would be prohibited from making any capital  distribution
if,  after  the  distribution,  the  Bank  failed  to meet its  minimum  capital
requirements, as described above. See "Prompt Corrective Regulatory Action."

     The  OTS  has  proposed   regulations  that  would  simplify  the  existing
procedures governing capital  distributions by savings  associations.  Under the
proposed  regulations,  the  approval of the OTS would be  required  only for an
association   that  is  deemed  to  be  in   troubled   condition   or  that  is
undercapitalized or would be undercapitalized after the capital distribution.  A
savings association would be able to make a capital  distribution without notice
to or approval of the OTS if it is not held by a thrift holding company,  is not
deemed to be in  troubled  condition,  has  received  either of the two  highest
composite  supervisory  ratings and would continue to be adequately  capitalized
after  such  distribution.  Notice  would  have  to be  given  to the OTS by any
association  that is held by a  savings  and loan  holding  company  or that had
received  a  composite  supervisory  rating  below  the  highest  two  composite
supervisory  ratings. An association's  capital rating would be determined under
the prompt  corrective action  regulations.  See "Prompt  Corrective  Regulatory
Action."

     Liquidity
     ---------

     The Bank is required to maintain an average  daily balance of liquid assets
(cash,  certain time deposits,  bankers'  acceptances,  specified  United States
Government, state or federal agency obligations,  shares of certain mutual funds
and certain  corporate debt securities and commercial  paper) equal to a monthly
average of not less than a specified  percentage of its net withdrawable deposit
accounts plus short-term  borrowings.  This liquidity requirement may be changed
from  time to time by the OTS to any  amount  within  the range of 4.0% to 10.0%
depending upon economic conditions and the savings flows of member institutions,
and is currently 5.0%. OTS regulations also require each savings  association to
maintain an average  daily  balance of  short-term  liquid assets at a specified
percentage  (currently  1.0%)  of the  total  of its  net  withdrawable  deposit
accounts and borrowings  payable in one year or less.  Monetary penalties may be
imposed for failure to meet these liquidity  requirements.  The Bank's liquidity
ratio at December 31, 1997 was 9.68%,  and its  short-term  liquidity  ratio was
6.71%, which exceeded the applicable requirements.

     Assessments
     -----------

     Savings  associations  are required by OTS regulation to pay assessments to
the OTS to fund the  operations  of the OTS. The general  assessment,  paid on a
semi-annual  basis,  is computed  upon the savings  association's  total assets,
including  consolidated  subsidiaries,  as reported in the association's  latest
quarterly Thrift Financial Report.

     Branching
     ---------

     Subject  to  certain  limitations,  HOLA  and  the OTS  regulations  permit
federally  chartered savings  associations to establish branches in any state of
the United States.  The authority to establish such a branch is available (i) in
states that  expressly  authorize  branches of savings  associations  located in

                                       7
<PAGE>

another state and (ii) to an association that qualifies as a "domestic  building
and loan  association"  under the Code of  Federal  Regulations,  which  imposes
qualification  requirements  similar to those for a  "qualified  thrift  lender"
under HOLA. See "QTL Test." The authority for a federal  savings  association to
establish  an  interstate   branch   network   would   facilitate  a  geographic
diversification of the association's  activities.  This authority under HOLA and
the OTS regulations  preempts any state law purporting to regulate  branching by
federal savings associations.

     Community Reinvestment
     ----------------------

     Under  the  Community  Reinvestment  Act  ("CRA"),  as  implemented  by OTS
regulations,  a savings association has a continuing and affirmative  obligation
consistent  with its safe and sound  operation  to help meet the credit needs of
its entire community,  including low and moderate income neighborhoods.  The CRA
does not  establish  specific  lending  requirements  or programs for  financial
institutions, nor does it limit an institution's discretion to develop the types
of products  and  services  that it believes  are best suited to its  particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
its examination of a savings association,  to assess the association's record of
meeting the credit needs of its  community  and to take such record into account
in its  evaluation of certain  applications  by such  association.  The CRA also
requires all institutions to make public disclosure of their CRA ratings.

     In April  1995,  the OTS and the other  federal  banking  agencies  adopted
amendments  revising their CRA regulations.  Among other things, the amended CRA
regulations  substitute  for the prior  process-based  assessment  factors a new
evaluation system that would rate an institution based on its actual performance
in meeting  community  needs. In particular,  the proposed system would focus on
three tests: (i) a lending test, to evaluate the institution's  record of making
loans  in  its  service  areas;   (ii)  an  investment  test,  to  evaluate  the
institution's record of investing in community development projects,  affordable
housing  and  programs   benefiting  low  or  moderate  income  individuals  and
businesses;  and (iii) a service test, to evaluate the institution's delivery of
services through its branches, ATMs and other offices.

     The joint  agency CRA  regulations  provide that an  institution  evaluated
under a given test receive one of five ratings for that test: outstanding;  high
satisfactory; low satisfactory; needs to improve; or substantial non-compliance.
The  ratings  for each test are then  combined  to produce an overall  composite
rating  of  either  outstanding,  satisfactory  (including  both  high  and  low
satisfactory,) needs to improve, or substantial non-compliance. In the case of a
retail-oriented  institution,  its lending  test rating  forms the basis for its
composite rating.  That rating is then increased by up to two levels in the case
of outstanding or high  satisfactory  investment  performance,  increased by one
level in the case of outstanding service, and decreased by one level in the case
of substantial  non-compliance in service.  An institution found to have engaged
in  illegal   lending   discrimination   is   rebuttably   presumed  to  have  a
less-than-satisfactory  composite CRA rating. The Bank received an "outstanding"
CRA rating in its most recent examination.

     Small  savings  associations  are to be assessed  pursuant to a streamlined
approach  focusing on a lesser range of information and  performance  standards.
The term "small savings  association" is defined as including  associations with
less than $250  million  in assets or an  affiliate  of a holding  company  with
banking and thrift  assets of less than $1.0  billion,  which would  include the
Bank.  An  institution's  CRA  performance   record  is  considered  in  certain
regulatory applications and may be used as a basis for denying an application.

     Transactions with Related Parties
     ---------------------------------

     The Bank's  authority to engage in  transactions  with its  "affiliates" is
limited  by the OTS  regulations  and by  Sections  23A  and 23B of the  Federal
Reserve Act  ("FRA").  In general,  an affiliate of the Bank is any company that
controls  the Bank or any other  company  that is  controlled  by a company that
controls the Bank,  excluding the Bank's  subsidiaries other than those that are
insured  depository  institutions.   The  OTS  regulations  prohibit  a  savings
association  (i) from  lending  to any of its  affiliates  that are  engaged  in
activities  that are not  permissible  for bank holding  companies under Section
4(c) of the BHC Act and (ii) from  purchasing  the  securities  of any affiliate
other than a subsidiary. Section 23A limits the aggregate amount of transactions

                                       8
<PAGE>

with any  individual  affiliate to 10% of the capital and surplus of the savings
association  and also  limits  the  aggregate  amount of  transactions  with all
affiliates to 20% of the savings association's  capital and surplus.  Extensions
of credit to  affiliates  are required to be secured by  collateral in an amount
and of a type  described in Section 23A, and the purchase of low quality  assets
from  affiliates  is generally  prohibited.  Section 23B  provides  that certain
transactions  with affiliates,  including loans and asset purchases,  must be on
terms  and  under   circumstances,   including   credit   standards,   that  are
substantially  the same or at least as  favorable  to the  association  as those
prevailing at the time for comparable transactions with nonaffiliated companies.
In the absence of  comparable  transactions,  such  transactions  may only occur
under terms and  circumstances,  including credit standards,  that in good faith
would be offered to or would apply to nonaffiliated companies.

     The Bank's authority to extend credit to its directors,  executive officers
and 10%  stockholders,  as well as to entities  controlled by such  persons,  is
currently  governed by the  requirements  of Sections 22(g) and 22(h) of the FRA
and Regulation O of the Federal Reserve  thereunder.  Among other things,  these
provisions  require that  extensions  of credit to insiders (i) be made on terms
that are  substantially the same as, and follow credit  underwriting  procedures
that are not less stringent than, those  prevailing for comparable  transactions
with  unaffiliated  persons and that do not involve more than the normal risk of
repayment or present other  unfavorable  features with the exceptions of (1) the
benefit  compensation  must be widely available to employees of the bank and (2)
the benefit or  compensation  does not give preference to any insider over other
employees of the bank and (ii) not exceed  certain  limitations on the amount of
credit extended to such persons, individually and in the aggregate, which limits
are based,  in part, on the amount of the  association's  capital.  In addition,
extensions  of credit  in  excess of  certain  limits  must be  approved  by the
association's board of directors.

     Enforcement
     -----------

     Under the Federal  Deposit  Insurance Act, as amended (the "FDI Act"),  the
OTS has primary enforcement responsibility over savings associations and has the
authority  to  bring  enforcement  action  against  all  "institution-affiliated
parties,"  including any controlling  stockholder or any stockholder,  attorney,
appraiser  and  accountant  who  knowingly  or  recklessly  participates  in any
violation of applicable law or regulation or breach of fiduciary duty or certain
other  wrongful  actions that causes or is likely to cause a more than a minimal
loss or other  significant  adverse  effect on an insured  savings  association.
Civil  penalties  cover a wide range of  violations  and  actions and range from
$5,000 for each day during  which  violations  of law,  regulations,  orders and
certain written agreements and conditions continue, up to $1,000,000 per day for
such violations if the person obtained a substantial  pecuniary gain as a result
of such  violation or knowingly or recklessly  caused a substantial  loss to the
institution. Criminal penalties for certain financial institution crimes include
fines of up to $10 million and  imprisonment  for up to 30 years.  In  addition,
regulators have  substantial  discretion to take  enforcement  action against an
institution that fails to comply with its regulatory requirements,  particularly
with respect to its capital  requirements.  Possible  enforcement  actions range
from the  imposition  of a capital plan and capital  directive to  receivership,
conservatorship or the termination of deposit insurance.  Under the FDI Act, the
FDIC has the  authority to  recommend  to the  Director of OTS that  enforcement
action be taken with respect to a particular savings  association.  If action is
not taken by the Director of the OTS, the FDIC has authority to take such action
under certain circumstances.

     Standards for Safety and Soundness
     ----------------------------------

     The FDI Act,  as  amended  by the  Federal  Deposit  Insurance  Corporation
Improvement  Act of  1991,  as  amended  ("FDICIA")  and  the  Riegle  Community
Development  and  Regulatory  Improvement  Act of 1994  ("Community  Development
Act"),  requires  the OTS,  together  with the  other  federal  bank  regulatory
agencies,  to prescribe  standards,  by regulations  or guidelines,  relating to
internal  controls,   information  systems  and  internal  audit  systems,  loan
documentation,  credit underwriting,  interest rate risk exposure, asset growth,
asset quality, earnings, stock valuation and compensation, fees and benefits and
such  other   operational   and  managerial   standards  as  the  agencies  deem
appropriate.  The OTS and the federal bank  regulatory  agencies  have  adopted,
effective August 9, 1995, a set of guidelines  prescribing  safety and soundness
standards  pursuant  to  FDICIA.  The  guidelines  establish  general  standards
relating to internal controls and information  systems,  internal audit systems,
loan documentation,  credit underwriting,  interest rate exposure,  asset growth
and compensation,  fees and benefits. In general, the guidelines require,  among
other things, appropriate systems and practices to identify and manage the risks
and exposures  specified in the guidelines.  The guidelines  prohibit  excessive
compensation  as an unsafe and unsound  practice  and describe  compensation  as
excessive  when the amounts paid are  unreasonable  or  disproportionate  to the
services  performed by an  executive  officer,  employee,  director or principal
stockholder.  The OTS and the other  agencies  determined  that stock  valuation
standards were not appropriate.  In addition,  the OTS adopted  regulations that
authorize,  but do not require,  the OTS to order an  institution  that has been
given  notice  by the OTS  that it is not  satisfying  any of  such  safety  and
soundness standards to submit a compliance plan. If, after being so notified, an

                                       9
<PAGE>

institution  fails  to  submit  an  acceptable  compliance  plan or fails in any
material respect to implement an accepted compliance plan, the OTS must issue an
order  directing  action  to  correct  the  deficiency  and may  issue  an order
directing other actions of the types to which an undercapitalized association is
subject under the "prompt  corrective  action" provisions of FDICIA. See "Prompt
Corrective  Regulatory  Action." If an institution  fails to comply with such an
order,  the OTS may seek to enforce  such order in judicial  proceedings  and to
impose civil money penalties.

     Real Estate Lending Standards
     -----------------------------

     The OTS and the other  federal  banking  agencies  adopted  regulations  to
prescribe standards for extensions of credit that (i) are secured by real estate
or (ii) are made for the purpose of financing the  construction  of improvements
on  real  estate.  The OTS  regulations  require  each  savings  association  to
establish and maintain written  internal real estate lending  standards that are
consistent with safe and sound banking  practices and appropriate to the size of
the association and the nature and scope of its real estate lending  activities.
The standards also must be consistent with  accompanying  OTS guidelines,  which
include  loan-to-value  ratios for the  different  types of real  estate  loans.
Associations  are also  permitted to make a limited  amount of loans that do not
conform to the proposed loan-to-value limitations so long as such exceptions are
reviewed  and  justified  appropriately.  The  guidelines  also list a number of
lending  situations  in which  exceptions  to the  loan-to-value  standards  are
justified.

     Prompt Corrective Regulatory Action
     -----------------------------------

     Under the OTS prompt corrective action regulations,  the OTS is required to
take  certain,  and is  authorized to take other,  supervisory  actions  against
undercapitalized  savings associations.  For this purpose, a savings association
would be placed in one of five categories  based on the  association's  capital.
Generally,  a savings  association is treated as "well capitalized" if its ratio
of total capital to risk-weighted  assets is at least 10.0%, its ratio of Tier 1
(core)  capital to  risk-weighted  assets is at least 6.0%,  its ratio of Tier 1
(core)  capital to total  assets is at least 5.0%,  and it is not subject to any
order or  directive  by the OTS to meet a  specific  capital  level.  A  savings
association  will be treated as "adequately  capitalized"  if its ratio of total
capital to  risk-weighted  assets is at least  8.0%,  its ratio of Tier 1 (core)
capital to risk-weighted assets is at least 4.0%, and its ratio of Tier 1 (core)
capital to total assets is at least 4.0% (3.0% if the  association  receives the
highest rating on the CAMEL financial institutions rating system).

     A savings  association  that has a total  risk-based  capital ratio of less
than 8.0% or a leverage ratio or a Tier 1 (core) capital ratio that is less than
4.0% (3.0% leverage ratio if the association  receives the highest rating on the
CAMEL   financial    institutions   rating   system)   is   considered   to   be
"undercapitalized."  A savings  association that has a total risk-based  capital
ratio  of less  than  6.0% or a Tier 1  (core)  risk-based  capital  ratio  or a
leverage   ratio  of  less  than  3.0%  is  considered   to  be   "significantly
undercapitalized."  A savings  association that has a tangible capital to assets
ratio equal to or less than 2.0% is deemed to be "critically  undercapitalized."
The elements of an association's  capital for purposes of the prompt  corrective
action  regulations are defined  generally as they are under the regulations for
minimum capital requirements. See "Capital Requirements."

     The  severity  of the action  authorized  or required to be taken under the
prompt  corrective  action  regulations  increases as an  association's  capital
deteriorates within the three undercapitalized  categories. All associations are
prohibited  from  paying  dividends  or other  capital  distributions  or paying
management fees to any controlling person if, following such  distribution,  the
association  would  be  undercapitalized.  An  undercapitalized  association  is
required  to file a  capital  restoration  plan  within  45 days of the date the
association receives notice that it is within any of the three  undercapitalized
categories.  The  OTS  is  required  to  monitor  closely  the  condition  of an
undercapitalized  association  and to restrict the asset  growth,  acquisitions,
branching  and new  lines  of  business  of such an  association.  Significantly
undercapitalized  associations  are subject to  restrictions  on compensation of
senior executive officers; such an association may not, without OTS consent, pay
any bonus or  provide  compensation  to any senior  executive  officer at a rate
exceeding the officer's average rate of compensation  (excluding bonuses,  stock
options and  profit-sharing)  during the 12 months  preceding the month when the
association   became   undercapitalized.    A   significantly   undercapitalized
association  may also be subject,  among other things,  to forced changes in the
composition  of  its  board  of  directors  or  senior  management,   additional
restrictions  on  transactions  with  affiliates,  restrictions on acceptance of
deposits from correspondent associations,  further restrictions on asset growth,

                                       10
<PAGE>

restrictions  on rates paid on  deposits,  forced  termination  or  reduction of
activities  deemed  risky  and  any  further  operational   restrictions  deemed
necessary by the OTS.

     If one or more grounds exist for  appointing a conservator  or receiver for
an association,  the OTS may require the association to issue additional debt or
stock, sell assets, be acquired by a depository  association  holding company or
combine with another depository  association.  The OTS and the FDIC have a broad
range of grounds under which they may appoint a receiver or  conservator  for an
insured depository  association.  Under FDICIA, the OTS is required to appoint a
receiver (or with the  concurrence of the FDIC, a conservator)  for a critically
undercapitalized  association  within  90 days  after  the  association  becomes
critically  undercapitalized  or, with the concurrence of the FDIC, to take such
other  action that would better  achieve the  purposes of the prompt  corrective
action provisions.  Such alternative action can be renewed for successive 90-day
periods. However, if the association continues to be critically undercapitalized
on  average  during the  quarter  that  begins  270 days  after it first  became
critically undercapitalized,  a receiver must be appointed, unless the OTS makes
certain findings with which the FDIC concurs and the Director of the OTS and the
Chairman of the FDIC certify that the  association  is viable.  In addition,  an
association  that is  critically  undercapitalized  is  subject  to more  severe
restrictions on its activities, and is prohibited, without prior approval of the
FDIC from, among other things,  entering into certain  material  transactions or
paying interest on new or renewed liabilities at a rate that would significantly
increase the association's weighted average cost of funds.

     Where appropriate, the OTS can impose corrective action by a thrift holding
company under the "prompt corrective action" provisions of FDICIA.

     Insurance of Deposit Accounts
     -----------------------------

         Pursuant to FDICIA,  the FDIC  established a new risk-based  assessment
system for determining the deposit  insurance  assessments to be paid by insured
depository  institutions.  Under the new assessment system, which began in 1993,
the FDIC assigns an institution to one of three capital  categories based on the
institution's  financial  information  as of the  reporting  period ending seven
months before the assessment period. The three capital categories consist of (i)
well capitalized,  (ii) adequately  capitalized or (iii)  undercapitalized.  The
FDIC also  assigns  an  institution  to one of three  supervisory  subcategories
within each capital group.  The supervisory  subgroup to which an institution is
assigned  is  based  on a  supervisory  evaluation  provided  to the FDIC by the
institution's primary federal regulator and information that the FDIC determines
to be relevant to the  institution's  financial  condition and the risk posed to
the deposit  insurance  funds. An  institution's  assessment rate depends on the
capital  category and  supervisory  category to which it is assigned.  Under the
regulation,  there are nine assessment risk classifications (i.e.,  combinations
of capital groups and supervisory subgroups) to which different assessment rates
are  applied.  Assessment  rates  originally  ranged  from  0.04%  (for the Bank
Insurance Fund (the "BIF"),  which primarily insures  commercial banks) or 0.23%
(for the SAIF) of deposits for an  institution  in the highest  category  (i.e.,
well-capitalized   and  financially  sound,  with  no  more  than  a  few  minor
weaknesses)  to 0.31% of  deposits  for an  institution  in the lowest  category
(i.e.,  undercapitalized and substantial supervisory concern).  These rates were
established for both funds to achieve a designated  ratio of reserves to insured
deposits (i.e., 1.25%) within a specified period of time.

      Once the  designated  ratio for the BIF was reached in May 1995,  the FDIC
reduced the assessment rate  applicable to BIF deposits in two stages,  so that,
beginning in 1996, the deposit insurance  premiums for 92% of all BIF members in
the highest  capital  and  supervisory  categories  were set at $2,000 per year,
regardless of deposit size. The FDIC elected to retain the assessment rate range
of 23 to 31 basis points for SAIF members given the  undercapitalized  nature of
that insurance fund.

      Recognizing that the disparity between the SAIF and BIF premium rates have
adverse  consequences  for  SAIF-insured  institutions and other banks with SAIF
assessed  deposits,  including reduced earnings and an impaired ability to raise
funds in capital  markets and to attract  deposits,  in July 1995, the FDIC, the
Treasury  Department,  and the OTS released statements outlining a proposed plan
to recapitalize the SAIF, the principal  feature of which was a special one-time
assessment on depository  institutions holding SAIF-insured deposits,  which was
intended to  recapitalize  the SAIF at a reserve  ratio of 1.25%.  This proposal
contemplated  elimination of the disparity  between the assessment  rates on BIF
and SAIF deposits following recapitalization of the SAIF.

                                       11
<PAGE>

     A variation of this proposal  designated the Deposit Insurance Funds Act of
1996 (the  "Funds  Act") was  enacted  by  Congress  as part of  omnibus  budget
legislation  and signed into law on September 30, 1996. As directed by the Funds
Act, the FDIC has  implemented a special  one-time  assessment of  approximately
65.7 basis points (0.657%) on a depository  institution's  SAIF-insured deposits
held as of March 31, 1995, (or approximately  52.6 basis points on SAIF deposits
acquired by banks in certain qualifying transactions). The Bank recorded charges
against  earnings for the special  assessment in the quarter ended September 30,
1996 in the amount of approximately $1,156,000.

      In addition,  on December 24, 1996, in order to avoid collecting more than
needed to maintain the SAIF's  capitalization  rate at 1.25 percent of aggregate
insured  deposits,  the FDIC adopted in final a revision in the SAIF  assessment
rate  schedule  which  retroactively  effected,  as of December 11, 1996,  (i) a
widening in the  assessment  rate spread  among  institutions  in the  different
capital  and  risk  assessment  categories,  (ii) an  overall  reduction  of the
assessment rate range  assessable on SAIF deposits of from 0 to 27 basis points,
and (iii) a special  interim  assessment rate range for the last quarter of 1996
of from 18 to 27 basis  points  on  institutions  subject  to  assessments  with
respect to certain bonds issued in the late 1980s by the  Financing  Corporation
("FICO") to recapitalize the now-defunct FSLIC.  Effective January 1, 1997, FICO
assessments are imposed on both BIF- and SAIF-insured deposits in annual amounts
presently  estimated at 1.29 basis points and 6.44 basis  points,  respectively.
The  Bank  anticipates  that  the net  effect  of the  decrease  in the  premium
assessment  rate on SAIF  deposits  will  result in a  reduction  in their total
deposit insurance premium assessments,  assuming no further changes in announced
premium assessment rates. During 1997, SAIF assessments  totalled  approximately
$186,000 for the Bank.

       Accounting for Bad Debt Reserves
       --------------------------------

      The Small  Business Job Protection Act of 1996 repealed the reserve method
of accounting for bad debts by thrift institutions,  effective for taxable years
beginning after 1995. As a result, large thrift institutions with more than $500
million in assets are no longer  able to deduct  additions  to a reserve for bad
debts but are permitted to deduct bad debts only as they occur.  In addition,  a
large thrift  institution  generally is required to recapture  (i.e.,  take into
income) its post-1987 additions to its bad debt reserve,  that is, the amount by
which its bad debt reserve  exceeds the balance of such reserve as of the end of
its last taxable year ending before 1988.

       Small thrift institutions with not more than $500 million in assets, such
as the  Bank,  are no  longer  permitted  to make  additions  to their  bad debt
reserves based upon a percentage of the Bank's taxable income (the "PTI Method")
but may make  additions to their bad debt reserves  based upon the Bank's actual
loss experience (the "Experience Method") in lieu of deducting bad debts only as
they  occur.  In the  case of a  small  thrift  institution,  the  recapture  of
post-1987  additions  to its bad  debt  reserve  is  limited  to the  amount  of
recapture  that  reduces  the  reserve  to the  balance it would have had if the
institution  had always  computed its additions to reserves under the Experience
Method.

       The excess  reserves  are  recaptured  into  income  over a period of six
years,  which may be  extended  to seven or eight  years if the  thrift  meets a
residential loan requirement.  The Bank had no excess reserves. Thus, it was not
subject to any recapture.

       The  remainder  of the Bank's  pre-1988  bad debt  reserves is subject to
recapture  if the Bank  ceases  to  qualify  as a bank for  federal  income  tax
purposes, or if the Bank makes certain distributions to the Company in excess of
the Bank's  current and  accumulated  earnings  and  profits,  distributions  in
redemption of stock, or distributions in partial or complete liquidation. In the
event of a distribution  considered to be made from its bad debt  reserves,  the
amount restored to income would be the amount which,  when reduced by the amount
of tax on such income, is equal to the amount of the distribution. The Bank does
not  intend to make any  distribution  that  would  result in  recapture  of any
portion of its pre-1988 bad debt reserves.

     Federal Home Loan Bank System
     -----------------------------

     The Bank is a member  of the  FHLBA,  which  is one of the  regional  FHLBs
composing  the FHLB  System.  Each  FHLB  provides  a  central  credit  facility
primarily for its member  institutions.  The Bank, as a member of the FHLBA,  is
required to acquire  and hold shares of capital  stock in the FHLBA in an amount
at least equal to the greater of 1.0% of the aggregate  principal  amount of its
unpaid  residential  mortgage loans and similar  obligations at the beginning of
each year or 1/20 of its advances  (borrowings)  from the FHLBA. The Bank was in
compliance  with this  requirement  at December 31, 1997,  with an investment in
FHLBA stock of $2,081,900. Any advances from a FHLB must be secured by specified
types of  collateral,  and all  long-term  advances may be obtained only for the
purpose of providing funds for residential housing finance.

                                       12
<PAGE>

     The FHLBs are  required to provide  funds for the  resolution  of insolvent
thrifts  and  to  contribute  funds  for  affordable  housing  programs.   These
requirements  could  reduce  the  amount of  earnings  that the FHLBs can pay as
dividends to their members and could also result in the FHLBs  imposing a higher
rate of interest on advances to their  members.  If dividends  were reduced,  or
interest on future FHLB advances increased, the Bank's net interest income would
likely also be reduced.

     Federal Reserve System
     ----------------------

     The Bank is  subject to  provisions  of the FRA and the  Federal  Reserve's
regulations  pursuant  to  which  depository  institutions  may be  required  to
maintain  non-interest-earning  reserves  against  their  deposit  accounts  and
certain  other  liabilities.  Currently,  reserves  must be  maintained  against
transaction accounts (primarily NOW and regular checking accounts).  The Federal
Reserve regulations  generally require that reserves be maintained in the amount
of 3.0% of the aggregate of transaction accounts up to $52.0 million. The amount
of  aggregate  transaction  accounts in excess of $52.0  million  are  currently
subject to a reserve ratio of 10.0%,  which ratio the Federal Reserve may adjust
between 8.0% and 12.0%.  The Federal Reserve  regulations  currently exempt $4.3
million of otherwise  reservable balances from the reserve  requirements,  which
exemption is adjusted by the Federal  Reserve at the end of each year.  The Bank
is in  compliance  with the foregoing  reserve  requirements.  Because  required
reserves   must  be   maintained   in  the  form  of  either   vault   cash,   a
non-interest-bearing  account  at a  Federal  Reserve  Bank,  or a  pass-through
account  as  defined  by  the  Federal  Reserve,  the  effect  of  this  reserve
requirement  is to reduce  the  Bank's  interest-earning  assets.  The  balances
maintained to meet the reserve  requirements  imposed by the Federal Reserve may
be used to  satisfy  liquidity  requirements  imposed  by the OTS.  FHLB  System
members are also authorized to borrow from the Federal Reserve  discount window,
but Federal Reserve  regulations  require such  institutions to exhaust all FHLB
sources before borrowing from a Federal Reserve Bank.

ITEM 2.  PROPERTIES

         The Company and the Bank  operate  from a main  office  which  contains
approximately  28,400  square  feet of usable  office  space and is  located  on
approximately  two  acres  of  land at 101  North  Greenwood  Street,  LaGrange,
Georgia. The Bank owns both the building and the land.

         The Bank  also  operates  three  full-service  branch  offices  and one
drive-through  facility in LaGrange.  One of the full-service  branches contains
approximately  360 square  feet of office  space in the  Winn-Dixie  Marketplace
grocery store at 908 Hogansville Road in LaGrange.  This office is leased by the
Bank for $3,000 per month  pursuant to a lease that  expires in August  2001.  A
second  full-service  branch  office is located at 1795 West Point Road at Lee's
Crossing in LaGrange.  This office contains  approximately  2,700 square feet of
office  space on one acre of land,  and both the land and the building are owned
by the Bank. The third  full-service  branch office is located at 1417 LaFayette
Parkway in LaGrange.  This office  contains  approximately  2,300 square feet of
office space on 1.2 acres of land,  and it has three drive through  lanes.  Both
the building and the land are owned by the Bank. The  drive-through  facility is
located at 306 Vernon Street in LaGrange.  This facility contains  approximately
1,800 square feet of space,  and both the building and the land are owned by the
Bank.

         The Bank leases approximately 2,760 square feet of office space at 5669
Whitesville Road, Suite A, Columbus,  Georgia,  where its loan production office
is located. The monthly lease payments are $3,133 for 1998, $3,251 for 1999, and
$3,329 for the 2000. The lease expires on December 31, 2000.

         The Bank leases  approximately  600 square feet of office  space at 200
Broad Street,  Suite D, LaGrange,  Georgia.  This office space is where Piedmont
Mortgage Service,  Inc.,  operating under the name "Piedmont Appraisal Service,"
is located.  The lease requires  monthly lease payments of $1,000 and expires on
March 15, 1999.

         The Bank leases  approximately 2,500 square feet of office space at 205
North Lewis Street, Suites 2 and 3, LaGrange,  Georgia. This office space is the
location for the Bank's  Deposit  Operations and Leasing  department.  The lease
requires monthly lease payments of $1,939 and expires in December 2001.

     The  net  book  value  of  the  Company's  investment  in  land,  premises,
furniture,  fixtures  and  equipment,  totaled  approximately  $6.4  million  at
December  31, 1997.  See Note 4 of Notes to  Consolidated  Financial  Statements

                                       13
<PAGE>

contained in the Company's 1997 Annual Report, which information is incorporated
by reference in Item 8 hereof.  Most of the Bank's data processing  equipment is
held by the Bank  under  capitalized  leases,  and the Bank uses an  independent
service bureau for most of its data processing needs.

         All of the Company's and the Bank's  offices are in good  condition and
are adequate for the Company's and the Bank's current and foreseeable needs.

         The Bank is unaware of any potential  environmental  liability  that it
may incur in connection with any properties or other assets owned by it.



                                       14
<PAGE>



ITEM 3.  LEGAL PROCEEDINGS

         The Bank is periodically  involved as plaintiff or defendant in various
legal actions in the ordinary course of its business. During August 1992 through
October  1995,  the Bank entered into a series of leases and secured  loans with
Bennett Funding Group, Inc. and certain of its affiliates  ("Bennett  Funding").
Bennett  Funding  allegedly  operated  in a  fraudulent  manner  and are now the
subject of bankruptcy  proceedings,  In re Bennett  Funding Group,  Inc., et al,
Case No.  96-61376 et seq.,  which are pending in the United  States  Bankruptcy
Court for the  Northern  District  of New York.  These  leases and loans have an
aggregate principal balance of $2.05 million.

         After a series of negotiations,  the Bank has settled its disputes with
the bankruptcy trustee under the terms of a Settlement Agreement. The Settlement
Agreement has been approved by the Bankruptcy Court and executed by the Bank and
the trustee.  The  settlement  provides  for a "split"  between the Bank and the
trustee  on all cash  collections  on leases  which  collateralize  the loans at
issue.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matter was  submitted  by the Company to a vote of its  shareholders
during the fourth quarter of 1997.


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

         Information  relating to the market for,  holders of and dividends paid
on the  Company's  Common  Stock  is set  forth  under  the  caption  "Corporate
Information-Stock  Prices and Dividends" on page 40 of the Company's 1997 Annual
Report.  Such information is incorporated  herein by reference.  The 1997 Annual
Report is filed as Exhibit 13 to this report.

ITEM 6.  SELECTED FINANCIAL DATA

         Selected   consolidated   financial   data  for  the  Company  and  its
subsidiaries  for each year of the five-year  period ended  December 31, 1997 is
set forth under the caption "Financial  Highlights" on page 4 of the 1997 Annual
Report. Such financial data is incorporated herein by reference.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

     A  discussion  of the  consolidated  financial  condition  and  results  of
operations of the Company and its  subsidiaries at and for the dates and periods
covered by the financial  statements  set forth in the 1997 Annual Report is set
forth under the  caption  "Management's  Discussion  and  Analysis of  Financial
Condition  and Results of  Operations"  on pages 5 through 13 of the 1997 Annual
Report. Such discussion is incorporated herein by reference.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The following  consolidated financial statements of the Company and its
subsidiaries,   together  with  the  Report  of  Independent   Certified  Public
Accountants  thereon,  which  are set forth on pages 14  through  37 of the 1997
Annual Report, are incorporated herein by reference:

         Consolidated Balance Sheets at December 31, 1997 and 1996

         Consolidated  Statements of Operations  for each of the three years in
         the period ended December 31, 1997

                                       15
<PAGE>

         Consolidated  Statements of Changes in Stockholders' Equity for each of
         the three years in the period ended December 31, 1997

         Consolidated  Statements  of Cash Flows for each of the three  years in
         the period ended December 31, 1997

         Notes to Consolidated Financial Statements
         The  Company is not  required to furnish  the  supplementary  financial
information specified by Item 302 of Regulation S-K.


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

     On February 20, 1997,  the Company  engaged  Porter  Keadle  Moore,  LLP as
independent  accountants  to audit the Company's  financial  statements  for the
fiscal year ending December 31, 1997, and elected not to renew the engagement of
the Company's previous independent accountants, Robinson, Grimes & Company, P.C.
No adverse  opinions or disclaimers of opinion were given by Robinson,  Grimes &
Company,  P.C.  during the fiscal years ended  December 31, 1995,  and 1996, nor
were  any of  their  opinions  qualified  as to  uncertainty,  audit  scope,  or
accounting  principle,  during the time Robinson,  Grimes & Company, P.C. during
the fiscal years ended  December  31, 1995,  1996,  and the  subsequent  interim
period through  February 20, 1997, as described in Items 304(a) (1) (iv) and (v)
of Regulation  S-K. The decision was approved by the Company's  Audit  Committee
and Board of Directors.

<PAGE>


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information relating to the directors of the Company is set forth under
the captions  "Proposal 1 - Election of  Directors-Nominees"  and  "Proposal 1 -
Election of  Directors-Information  Regarding Nominees and Continuing Directors"
in the Company's  Proxy Statement for its 1998 Annual Meeting of Shareholders to
be held on May 13, 1998. Such  information is incorporated  herein by reference.
Pursuant  to  Instruction  3 to  Item  401(b)  of  Regulation  S-K  and  General
Instruction G(3) to Form 10-K, information relating to the executive officers of
the  Company  and the Bank is set  forth in Item 4(A) of this  report  under the
caption "Executive Officers of the Registrant." Information regarding compliance
with  Section  16(a) of the  Securities  Exchange  Act of 1934,  as amended,  by
directors and executive  officers of the Company and the Bank is set forth under
the caption  "Compliance  with Section 16(a) of the  Securities  Exchange Act of
1934" in the Proxy Statement  referred to in Item 10 above.  Such information is
incorporated herein by reference.  To the Company's knowledge, no person was the
beneficial owner of more than 10% of the Company's common stock during 1997.

ITEM 11.  EXECUTIVE COMPENSATION

         Information relating to executive compensation and the sale of stock to
certain  directors  is set forth  under the  captions  "Proposal 1 - Election of
Directors - Director  Compensation"  and "Executive  Compensation"  in the Proxy
Statement  referred  to  above.  Such  information  is  incorporated  herein  by
reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information  regarding  ownership of the  Company's  common stock as of
December 31, 1997, by certain persons is set forth under the captions  "Voting -
Stock Ownership" and "Proposal 1 - Election of Directors - Information Regarding
Nominees and Continuing Directors" in the Proxy Statement referred to in Item 10
above. Such information is incorporated herein by reference.

                                       16
<PAGE>

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information   regarding  certain  transactions  between  the  Bank  and
affiliates of the Company and the Bank is set forth under the caption "Executive
Compensation - Loans to Management" in the Proxy  Statement  referred to in Item
10 above. Such information is incorporated herein by reference.


                                     PART IV
Exhibit No.                       Description
----------                        -----------

        2      Agreement  and Plan of Merger,  dated  October 28,  1997,  by and
               between the Company and Middle Georgia Bankshares,  Inc. (Annex A
               to the Joint Proxy Statement/Prospectus included in the Company's
               Registration   Statement  on  Form  S-4,  as  amended  (File  No.
               333-44011)

        3.1   (i) Articles of Incorporation of the Company,  as amended through
              October 15, 1993 (Exhibit  3.1(i) to the Company's  Annual Report
              on Form 10-K for the fiscal year ended December 31, 1993)

              (ii) Bylaws of the Company,  as amended through September 16, 1993
              (Exhibit  3.1(ii) to the Company's  Annual Report on Form 10-K for
              the fiscal year ended December 31, 1993)

              Tax Sharing Agreement dated March 1, 1994, among the Company,  the
              Bank and Piedmont  Mortgage  Service,  Inc.  (Exhibit  10.1 to the
              Company's  Annual  Report on Form 10-K for the  fiscal  year ended
              December 31, 1993)

       10.2   Management Contracts and Compensatory Plans:

         a.       Employment  Agreement  between  John S.  Holle  and the Bank
                  dated as of January 1, 1993  (Exhibit  10.4 to the Company's
                  Registration   Statement  on  Form  S-4,   Registration  No.
                  33-58392)

         b.       Employment  Agreement  between  Ellison C. Rudd and the Bank
                  dated  as of  January  1,  1995  -  (Exhibit  10.3b  to  the
                  Company's 10-K for the fiscal year ended December 31, 1995)

         c.       1986 Stock Option and  Incentive  Plan  (Exhibit 10.1 to the
                  Company's  Registration  Statement on Form S-4, Registration
                  No. 33-58392)

         d.       FLAG Financial Corporation 1994 Employees Stock Incentive Plan
                  (Exhibit 10.6 to the Company's  Annual Report on Form 10-K for
                  the fiscal year ended December 31, 1993)

         e.       FLAG Financial Corporation 1994 Directors Stock Incentive Plan
                  (Exhibit 10.7 to the Company's  Annual Report on Form 10-K for
                  the fiscal year ended December 31, 1993)

         f.       Profit Sharing Thrift Plan, as amended  through  November 1,
                  1992 (Exhibit 10.2 to the Company's  Registration  Statement
                  on Form S-4, Registration No. 33-58392)

         g.       Pension  Retirement  Plan  (Exhibit  10.3  to the  Company's
                  Registration   Statement  on  Form  S-4,   Registration  No.
                  33-58392)

       11     Statement regarding computation of per share earnings

       13     1997 Annual Report

       21     Subsidiaries  (Exhibit 21 to the Company's  Annual Report on
              Form 10-K for the fiscal year ended December 31, 1994)

                                       17
<PAGE>

       (b)    Reports on Form 8-K.

               A Current Report on Form 8-K dated October 28, 1997 regarding the
               merger  with Middle  Georgia  Bankshares,  Inc.  was filed in the
               fourth quarter, 1997.

       (c) See Item 14(a)(3) above.

       (d) See Item 14(a)(2) above.

------------------
+ All or portions of page 4 and pages 5 through 40 of the Company's  1997 Annual
Report, as indicated in this report, are incorporated herein by reference. Other
than as noted  herein,  the  Company's  1997 Annual  Report is  furnished to the
Securities and Exchange  Commission solely for its information and is not deemed
to be "filed"  with the  Securities  and Exchange  Commission  or subject to the
liabilities of Section 18 of the Securities Exchange Act of 1934, as amended.


<PAGE>



SIGNATURES

       Pursuant  to the  requirements  of Section 13 or 15(d) 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.

                                               FLAG FINANCIAL CORPORATION
                                                       (Registrant)


Date:  March 30, 1998                       By:       /S/ John S. Holle
                                               --------------------------------
                                                        John S. Holle
                                              Chairman of the Board, President
                                                and Chief Executive Officer

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities indicated on March 30, 1998.


     Signature                                    Title


/s/ John S. Holle
-------------------                 Chairman of the Board, President and
John S. Holle                       Chief Executive Officer


/s/ Ellison C. Rudd                 Executive Vice President, Chief Financial
-------------------                 Officer, Treasurer and Director
Ellison C. Rudd                     (Principal Financial and Accounting Officer)

/s/ Dr. Albert Glenn Bailey
---------------------------
Dr. Albert Glenn Bailey             Director


/s/ H. Speer Burdette, III
---------------------------
H. Speer Burdette, III              Director

/s/ Fred A. Durand, III
---------------------------
Fred A. Durand, III                 Director

/s/ Kelly R. Linch
---------------------------
Kelly R. Linch                      Director

/s/ Gordon M. Smith
---------------------------
Gordon M. Smith                     Director


                                       18
<PAGE>


/s/ John W. Stewart, Jr.
---------------------------
John W. Stewart, Jr.                Director

/s/ Dr. Steven P. Teaver
---------------------------
Dr. Steven P. Teaver                Director

/s/ Robert W. Walters
---------------------------
Robert W. Walters                   Director



                                       19
<PAGE>



                           FLAG FINANCIAL CORPORATION

                                Index of Exhibits

     The following exhibits are filed as part of or incorporated by reference in
this  report.  Where such  filing is made by  incorporation  by  reference  to a
previously filed registration  statement or report, such registration  statement
or report is identified in parentheses.

     Exhibit No.                        Description

     3.1            (i) Articles of  Incorporation  of the  Company,  as amended
                    through  October 15, 1993  (Exhibit  3.1(i) to the Company's
                    Annual  Report  on Form  10-K  for  the  fiscal  year  ended
                    December 31, 1993)

                    (ii) Bylaws of the Company,  as amended  through  September
                    16, 1993 (Exhibit 3.1(ii) to the Company's Annual Report on
                    Form 10-K for the fiscal year ended December 31, 1993)

     10.1           Agreement  and  Plan  of  Merger  and  Reorganization  dated
                    February  28,  1994  among the Bank,  the  Company  and FLAG
                    Interim  Savings Bank (Exhibit 2.1 to the  Company's  Annual
                    Report on Form 10-K for the fiscal year ended  December  31,
                    1993)

     10.2           Tax  Sharing  Agreement  dated  March  1,  1994,  among  the
                    Company,  the  Bank  and  Piedmont  Mortgage  Service,  Inc.
                    (Exhibit  10.1 of the  Company's  Annual Report on Form 10-K
                    for the fiscal year ended December 31, 1993)

     10.3           Management Contracts and Compensatory Plans:


                a.  Employment  Agreement  between  John S.  Holle  and the Bank
                    dated as of January 1, 1993  (Exhibit  10.4 to the Company's
                    Registration   Statement  on  Form  S-4,   Registration  No.
                    33-58392)

                b.  Employment  Agreement  between  Ellison C. Rudd and the Bank
                    dated  as of  January  1,  1995  -  (Exhibit  10.3  b to the
                    Company's 10-K for the fiscal year ended December 31, 1995)

                c.  1986 Stock Option and  Incentive  Plan  (Exhibit 10.1 to the
                    Company's  Registration  Statement on Form S-4, Registration
                    No. 33-58392)

                d.  FLAG Financial  Corporation  1994 Employees  Stock Incentive
                    Plan (Exhibit  10.6 to the  Company's  Annual Report on Form
                    10-K for the fiscal year ended December 31, 1993)



                                       20
<PAGE>

                e.  FLAG Financial  Corporation  1994 Directors  Stock Incentive
                    Plan (Exhibit  10.7 to the  Company's  Annual Report on Form
                    10-K for the fiscal year ended December 31, 1993)

                f.  Profit Sharing Thrift Plan, as amended  through  November 1,
                    1992 (Exhibit 10.2 to the Company's  Registration  Statement
                    on Form S-4, Registration No. 33-58392)

                g.  Pension  Retirement  Plan  (Exhibit  10.3  to the  Company's
                    Registration   Statement  on  Form  S-4,   Registration  No.
                    33-58392)


     11          Statement regarding computation of per share earnings -

     13          1997 Annual Report

     21          Subsidiaries  (Exhibit 21 to the Company's  Annual Report on
                 Form 10-K for the fiscal year ended December 31, 1994)
---------------
+ All or portions of page 4 and pages 5 through 40 of the Company's  1997 Annual
Report, as indicated in this report, are incorporated herein by reference. Other
than as noted  herein,  the  Company's  1996 Annual  Report is  furnished to the
Securities and Exchange  Commission solely for its information and is not deemed
to be "filed"  with the  Securities  and Exchange  Commission  or subject to the
liabilities of Section 18 of the Securities Exchange Act of 1934, as amended.



                                       21
<PAGE>