SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-K/A
                                Ammendment No.1

                |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1996

              |_| 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 15, 1997 was $20,310,939.  There were
2,036,990 shares of Common Stock outstanding as of March 15, 1997.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's 1996 Annual Report are incorporated by reference in
Part II hereof. Portions of the Registrant's Proxy Statement for the 1997 Annual
Meeting  of  Shareholders  to be held on  April  16,  1997 are  incorporated  by
reference in Part III hereof.


<PAGE>



                           FLAG FINANCIAL CORPORATION


                           Annual Report on Form 10-K/A
                   For the Fiscal Year Ended December 31, 1996

                                Table of Contents
                                -----------------
Item                                                                      Page
Number                                                                   Number
------                                                                   ------
                                     Part I

1.    Business .........................................................    3

                                     Part II

7.    Management's Discussion and Analysis of Financial
         Condition and Results of Operations ...........................   41

8.    Financial Statements and Supplementary Data ......................   41

                                    Part III

                                      None

                                     PART IV

14.   Exhibits, Financial Statement Schedules and Reports
         on Form 8-K ...................................................   43

                               Signatures...............................   47

                               Index of Exhibits .......................   49



                                       2
<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 bank 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.

                                       3
<PAGE>

The Bank

    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 $222 million at December 31, 1996, the Bank is the
10th largest of 38 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 (the "FHLB of Atlanta").  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
FHLB of Atlanta  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, 1995 and 1996 and for the three years in the period ended December 31, 1996,
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  1996 Annual Report
(the "1996  Annual  Report").  The 1996 Annual  Report is filed as Exhibit 13 to
this report. All average balances presented in this report were derived based on
monthly averages.

    As used herein, the term "Company" includes FLAG Financial Corporation,  the
Bank and Piedmont Mortgage Service, Inc. unless the context indicates otherwise.
References to, or  information  with respect to, the "Company" or the "Bank" for
periods ended prior to the Reorganization (March 1, 1994) refer to First Federal
Savings Bank of LaGrange and Piedmont Mortgage Service,  Inc. unless the context
indicates otherwise.

                                       4
<PAGE>

    The table below sets forth certain measures of the Company's performance for
the periods indicated.

                                                Years Ended December 31,
                                              1996         1995        1994
                                              ----         ----        ----

Net Interest Margin (net interest
 income divided by average
 interest-earning assets) ................    3.98%         3.39%       3.25%

Return on Average Assets
 (Net income divided by average
 total assets) ...........................   -0.08%         0.87%        .79%

Return on Average Equity
 (Net income divided by
 average equity) .........................   -0.88%         9.78%       9.00%

Equity-to-Assets (Average equity
 divided by average total assets) ........    8.96%         8.94%       8.76%

Dividend Payout Ratio (Dividends
 declared divided by net income) ......... -377.18%        29.56%      34.15%

                                       5
<PAGE>

Net Interest Income

    The Bank's (and, therefore,  the Company's) earnings depend primarily on its
"net interest  income," which is the difference  between the interest  income it
receives from its assets  (primarily  its loans and other  investments)  and the
interest  expense  (or  "cost  of  funds")  which  it  pays  on its  liabilities
(primarily its deposits and  borrowings).  The Bank's net interest income before
provision  for loan losses has increased in each of the last three fiscal years.
Such net interest income was $8,172,716 for 1996, an increase of 12.22% over the
1995 amount of $7,282,756,  and the 1995 amount represented an increase of 6.52%
over the 1994 amount of $6,836,718.

    Net interest  income is a function of (i) the  difference  between  rates of
interest earned on the Bank's interest-earning assets and rates of interest paid
on its interest-bearing liabilities (the "interest rate spread" or "net interest
spread")  and (ii) the  relative  amounts  of its  interest-earning  assets  and
interest-bearing liabilities. When interest-earning assets approximate or exceed
interest-bearing  liabilities,  any positive  interest rate spread will generate
net  interest  income.  The Bank  adheres to an asset and  liability  management
strategy  which is intended to control the impact of interest rate  fluctuations
upon the Bank's  earnings and to make the yields on its loan portfolio and other
investments  more  responsive  to its  cost of  funds,  in part by more  closely
matching the  maturities  and repricing of its  interest-earning  assets and its
interest-bearing  liabilities,  while  still  maximizing  net  interest  income.
Nevertheless,  the Bank is and will  continue  to be  affected by changes in the
levels of interest  rates and other factors  beyond its control.  See "Asset and
Liability Management" below.


    The  following  table sets forth average  balances of various  categories of
interest-earning  assets and  interest-bearing  liabilities,  interest income on
interest-earning   assets  and  related  average  yields,  interest  expense  on
interest-bearing  liabilities  and related average rates paid, the interest rate
spread (the difference  between  interest rates earned and interest rates paid),
the net interest margin (net interest income divided by average interest-earning
assets) and the ratio of interest-earning assets to interest-bearing liabilities
for the periods indicated.

                                       6
<PAGE>
                                 
                                                Years Ended December 31,       
                                                        1996               
                                          --------------------------------- 
                                                       Interest    Weighted  
                                          Average       Income/     Average  
                                          Balance       Expense      Rate    
                                          -------       -------    --------  
ASSETS                                      

Interest-earning assets:
  Loans ............................   $ 151,084,092   $14,039,683    9.29%
  Mortgage-backed securities .......      40,000,629     2,458,011    6.14
  Investment securities ............      11,254,754       698,079    6.20
  Interest-bearing deposits
    in other Banks .................       1,692,240        90,599    5.35
  Federal funds sold ...............       1,342,879        76,988    5.73
  Repurchase Agreements ............            --            --      --   
  Other short-term investments .....            --            --      --   
                                       -------------   -----------   -----

    Total interest-
     earning assets ................   $ 205,374,594   $17,363,360    8.45%
    Other assets ...................      19,978,721         
    Total assets ...................   $ 225,353,315         
LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-bearing liabilities:
  Savings deposits .................   $  55,508,307    $1,485,966    2.68%
  Other time deposits ..............     114,371,184     6,525,050    5.71
  Federal Funds Purchased ..........         206,710        11,665    5.64
  FHLB advances ....................      21,530,738     1,167,963    5.42
                                       -------------   -----------   -----
     Total interest-
      bearing liabilities ..........   $ 191,616,939    $9,190,644    4.80%
Other liabilities ..................      13,553,489         
Shareholders' equity ...............      20,182,887         
     Total liabilities and
      shareholders' equity .........   $ 225,353,315         

Interest rate spread................                                  3.65%
Net interest margin.................                                  3.98%
Interest-earning assets/ 
 interest-bearing liabilities ......                                   107%

                                               Years Ended December 31,
                                                        1995              
                                         ----------------------------------
                                                      Interest     Weighted  
                                          Average      Income/      Average  
                                          Balance      Expense       Rate    
                                          -------       -------      ----    
ASSETS

Interest-earning assets:
  Loans ............................   $ 146,143,602   $12,745,773    8.72%
  Mortgage-backed securities .......      46,239,347     3,018,244    6.53
  Investment securities ............      19,006,528     1,247,822    6.57
  Interest-bearing deposits
    in other Banks .................       2,959,588       138,372    4.68
  Federal funds sold ...............         333,088        18,238    5.48
  Repurchase Agreements ............            --            --      --   
  Other short-term investments .....            --            --      --   
                                       -------------   -----------   -----

    Total interest-
     earning assets ................   $ 214,682,153   $17,168,449    8.00%
    Other assets ...................      17,012,997        
    Total assets ...................   $ 231,695,150        

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-bearing liabilities:
  Savings deposits .................   $  49,777,172   $ 1,473,125    2.96%
  Other time deposits ..............     114,793,340     6,551,062    5.71
  Federal Funds Purchased ..........            --            --      --  
  FHLB advances ....................      31,961,667     1,861,506    5.82
                                       -------------   -----------   -----
     Total interest-
      bearing liabilities ..........   $ 196,532,179   $ 9,885,693    5.03%
Other liabilities ..................      14,445,623       
Shareholders' equity ...............      20,717,348       
     Total liabilities and
      shareholders' equity .........   $ 231,695,150       

Interest rate spread................                                  2.97%
Net interest margin.................                                  3.39%
Interest-earning assets/                                 
 interest-bearing liabilities ......                                   109%

                                              Years Ended December 31,
                                                        1994              
                                         ----------------------------------- 
                                                       Interest     Weighted 
                                          Average       Income/      Average 
                                          Balance       Expense       Rate   
                                          -------       -------       ----   
ASSETS

Interest-earning assets:
  Loans ............................   $ 140,610,236   $11,273,849    8.02%
  Mortgage-backed securities .......      47,673,253     2,550,982    5.35
  Investment securities ............      19,065,624     1,125,221    5.90
  Interest-bearing deposits
    in other Banks .................       3,226,604       108,438    3.36
  Federal funds sold ...............            --            --      --   
  Repurchase Agreements ............            --            --      --   
  Other short-term investments .....            --            --      --   
                                       -------------   -----------   -----

    Total interest-
     earning assets ................   $ 210,575,717   $15,058,490    7.15%
    Other assets ...................      13,454,295         
    Total assets ...................   $ 224,030,012         

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-bearing liabilities:
  Savings deposits .................   $  50,608,968   $ 1,469,691    2.90%
  Other time deposits ..............     104,059,715     5,059,436    4.86
  Federal Funds Purchased ..........            --            --      --  
  FHLB advances ....................      36,000,834     1,692,645    4.70
                                       -------------   -----------   -----
     Total interest-
      bearing liabilities ..........   $ 190,669,517   $ 8,221,772    4.31%
Other liabilities ..................      13,720,050         
Shareholders' equity ...............      19,640,445         
     Total liabilities and
      shareholders' equity .........   $ 224,030,012         

Interest rate spread................                                  2.84%
Net interest margin.................                                  3.25%
Interest-earning assets/
 interest-bearing liabilities ......                                   110%

                                             At December 31,
                                                 1996       
                                        ----------------------
                                                      Weighted
                                         Actual       Average 
ASSETS                                   Balance        Rate  
                                         -------        ----  
Interest-earning assets:
  Loans ............................   $ 150,394,436    9.34%
  Mortgage-backed securities .......      37,458,698    6.56
  Investment securities ............       8,953,394    7.80
  Interest-bearing deposits
    in other Banks .................       3,557,138    2.55
  Federal funds sold ...............            --      --
  Repurchase Agreements ............            --      --
  Other short-term investments .....            --      --
                                       -------------   -----
    Total interest-
     earning assets ................   $ 200,363,666    8.67%
    Other assets ...................      21,594,215   
    Total assets ...................   $ 221,957,881   

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-bearing liabilities:
  Savings deposits .................   $  53,500,777    2.78%
  Other time deposits ..............     116,128,638    5.62
  Federal Funds Purchased ..........       2,210,000    0.53
  FHLB advances ....................      17,370,833    6.72
                                       -------------   -----
     Total interest-
      bearing liabilities ..........   $ 189,210,248    4.86%
Other liabilities ..................      12,229,341   
Shareholders' equity ...............      20,518,292   
     Total liabilities and
      shareholders' equity .........   $ 221,957,881   

Interest rate spread................                   3.81%
Net interest margin.................                   4.08%
Interest-earning assets/
 interest-bearing liabilities ......                    106%


                                       7
<PAGE>

     Changes in interest income and interest  expense are  attributable to three
factors:  (i) a change in volume  or  amount  of an asset or  liability;  (ii) a
change in interest rates; or (iii) a change caused by the combination of changes
in volume and interest rates.  The following table describes the extent to which
changes in interest rates and changes in volume of  interest-earning  assets and
interest-bearing  liabilities  have  affected  the  Bank's  interest  income and
expense  during the periods  indicated.  For each  category of  interest-earning
asset and  interest-bearing  liability,  information  is  provided as to changes
attributable  to change in volume  (change  in volume  multiplied  by old rate),
change  in  rates  (change  in  rate  multiplied  by old  volume),  and  changes
attributable to changes in both rate and volume. The net change  attributable to
changes in both volume and rate has been allocated proportionately to the change
due to volume and the change due to rate.

<TABLE>
<CAPTION>

                                                     Years Ended December 31,
                                       1996 Compared to 1995                 1995 Compared to 1994
                                 ----------------------------------   --------------------------------
                                                 Rate/       Net                        Rate/     Net
                                 Volume   Rate   Volume     Change     Volume    Rate   Volume   Change
                                 ------   ----   ------     ------     ------    ----   ------   ------
                                                         (dollars in thousands)

Interest income:
<S>    <C>                       <C>      <C>      <C>     <C>         <C>      <C>      <C>     <C>   
  Loans(1) ...................   $ 432    $ 834    $ 28    $ 1,294     $ 445    $  986   $ 41    $1,472
  Mortgage-backed securities .    (406)    (179)     25       (560)      (77)      562    (18)      467
  Investment securities(2) ...    (509)     (70)     29       (550)       (3)      127     (1)      123
  Interest-bearing deposits in
    other banks ..............     (59)      20      (9)       (48)       (9)       43     (4)       30
  Federal funds sold .........      55        1       3         59         -         -     18        18
                                 -----    -----    ----    -------     -----    ------   ----    ------
     Total interest income ...   $(487)   $ 606    $ 76    $   195     $ 356    $1,718   $ 36    $2,110
                                 -----    -----    ----    -------     -----    ------   ----    ------
Interest expense:
  Savings deposits ...........   $ 168    $(140)   $(17)   $    11     $ (24)   $   29   $ (1)   $    4
  Other time deposits ........     (24)       -       -        (24)      520       882     89     1,491
  Federal funds purchased ....       -        -      12          -         -         -      -         -
FHLB advances ................    (607)    (128)     41       (694)     (189)      403    (45)      169
                                 -----    -----    ----    -------     -----    ------   ----    ------
     Total interest expense ..   $(463)   $(268)   $ 36    $  (695)    $ 307    $1,314   $ 43    $1,664
                                 -----    -----    ----    -------     -----    ------   ----    ------
Net interest income ..........   $ (24)   $ 874    $ 40    $   890     $  49    $  404   $ (7)   $  446
                                 =====    =====    ====    =======     =====    ======   ====    ======
</TABLE>

(1)       Interest income  generally is not accrued on loans  delinquent 90 days
          or more. These figures do not include interest accrued but not paid on
          certain  loans which were  delinquent  90 days or more at December 31,
          1996, 1995 and 1994.  Interest  accrued on loans delinquent 90 days or
          more has shown no significant  variances from 1994 through 1996.  Loan
          commitment and  origination  fees and certain direct loan  origination
          costs are  deferred,  and the net amount is amortized as an adjustment
          of the related loan's yield in accordance  with  Financial  Accounting
          Standards Board Statement No. 91. The  amortization of these fees into
          income was not material in the years ended December 31, 1996, 1995 and
          1994.

(2)        Stock  dividends  on Federal  Home Loan Bank  stock are  exempt  from
           federal  and  state  income  taxes.  A  certain  percentage  of  cash
           dividends  received  on stock  owned by the  Bank  qualified  for the
           dividends  received  deduction  for state and federal  tax  purposes.
           These figures are not calculated on a tax equivalent basis.


                                       8
<PAGE>

Asset and Liability Management

    As  noted  above,  the  Bank's  earnings  are  largely  dependent  upon  the
difference   between  the  interest  it  receives   from  its  loans  and  other
interest-earning  assets  and the  interest  it pays on its  deposits  and other
interest-bearing  liabilities.  Like  the  deposit  base  of many  other  thrift
institutions,  a significant portion of the Bank's deposit base historically has
consisted  of  relatively  short-term  deposits  which  bear  interest  at rates
determined by current market conditions.  By contrast,  a significant portion of
the Bank's loan portfolio  historically has consisted of longer-term  loans and,
to a lesser extent,  fixed rate loans having yields which do not vary as rapidly
or to the same  extent as the  Bank's  cost of funds.  The Bank's  deposit  base
therefore  historically  has been  more  sensitive  than its loan  portfolio  to
changes in interest  rates so that when interest  rates rose, the Bank's cost of
funds increased more rapidly than the yield on its loan portfolio.

     A primary long-term  financial objective of the Bank has been to reduce the
sensitivity of its earnings to interest rate  fluctuations  while maximizing net
interest income. To counter interest rate volatility and the historical mismatch
between its relatively  short-term rate sensitive liabilities and its relatively
long-term rate  insensitive  assets,  the Bank,  through its Asset and Liability
Management  Committee,  has implemented  certain asset and liability  management
strategies  designed to reduce its exposure to changes in interest rates by more
closely matching the maturities and pricing  characteristics  of its liabilities
with those of its assets.  These strategies include (i) acquiring or originating
more residential  mortgage loans with adjustable interest rates, (ii) increasing
lending activities  involving the origination of commercial,  consumer and other
installment  loans,  which typically bear higher interest rates than residential
mortgage  loans and offer greater  interest  rate  sensitivity  through  shorter
maturities,  (iii) selling  long-term fixed rate mortgage loans in the secondary
market and participating in the "Swap" program of the Federal Home Loan Mortgage
Corporation ("FHLMC") and the mortgage-backed securities or "MBS" program of the
Federal National Mortgage  Association  ("FNMA") to convert these whole loans to
more  liquid   mortgage-backed   securities,   (iv)  maintaining  a  significant
percentage of  short-term  liquid  assets,  such as  interest-bearing  deposits,
investment  securities  maturing  within  one year  and  cash,  (v)  significant
investments in adjustable  rate  mortgage-backed  securities and  collateralized
mortgage  obligations,  (vi)  developing  marketing  policies  designed  to give
priority to longer-term and  non-interest  sensitive  deposits,  and (vii) using
computer  software to facilitate the  implementation  of the asset and liability
management  program to monitor the Bank's repricing  opportunities.  At December
31,  1996,  the  Bank's   adjustable  rate  mortgage   loans,   adjustable  rate
mortgage-backed  securities  ("MBSs") and  collateralized  mortgage  obligations
("CMOs")  which  mature or  interest  rate  adjust  in one year or less  totaled
approximately  $81  million or 51% of gross  loans  receivable.  Commercial  and
consumer loans which mature or interest rate adjust in one year or less totalled
approximately $20 million or 12.6% of gross loans receivable. The combination of
these  adjustable  rate and short-term  loans and adjustable  rate MBSs and CMOs
help  insulate  the  Bank to the  effect  of  adverse  long-term  interest  rate
fluctuations.

    The  difference  between the amounts of interest rate  sensitive  assets and
interest rate sensitive liabilities to be repriced during a specific time period
is referred to as the "interest rate sensitivity  gap." A positive interest rate
sensitivity gap indicates an excess of rate sensitive assets over rate sensitive
liabilities,  while a  negative  gap  indicates  an  excess  of  rate  sensitive
liabilities  over rate sensitive  assets.  While management of the interest rate
sensitivity  gap is affected by many factors not within the control of the Bank,
including  federal  regulatory  policies and depositor and customer  reaction to
changes in deposit and loan  interest  rates,  it  generally is the case that in
periods of rising interest rates,  the gap will move toward a negative  position
and  that  in  periods  of  falling  interest  rates,  the gap  will  tend to be
increasingly   positive.   Historically,   the  Bank,  like  most  other  thrift
institutions,  typically had an excess of  interest-sensitive  liabilities which
mature or reprice within one year over interest-sensitive assets which mature or
reprice within one year (a negative  "one-year  gap").  A financial  institution
with a negative one year gap ordinarily will experience an adverse impact on net
interest income during a period of rising  interest rates,  while an institution
with a positive one year gap will tend to experience an increase in such income.

    The Bank's asset liability  strategies have limited the Bank's interest rate
sensitivity  and exposure to interest rate risk. At December 31, 1996,  the Bank
had a positive  one-year  interest  rate  sensitivity  gap of  approximately  $4
million or 1.84% of total  assets.  The Bank's  ratio of total  interest-earning
assets compared to  interest-bearing  liabilities was 106% at December 31, 1996.
The Bank's  liabilities,  due to their  generally  longer  term to  maturity  or
repricing,  are now less  sensitive  than the  Bank's  assets to  interest  rate

                                       9
<PAGE>

changes.  Management  believes that the Bank's net interest income will increase
during a period of rising  interest  rates and will decrease  during a period of
falling interest rates.

    The following table  summarizes the amounts of  interest-earning  assets and
interest-bearing  liabilities  outstanding  as of  December  31,  1996 which are
expected to mature,  prepay or reprice in each of the future time periods  shown
(i.e.,  the interest rate  sensitivity).  Except as stated below, the amounts of
assets or liabilities  shown which mature or reprice during a particular  period
were  determined  in  accordance  with the  contractual  terms  of the  asset or
liability.  Adjustable  rate loans and securities are primarily  included in the
period in which  interest  rates are next scheduled to adjust rather than in the
period  in  which  they  are due,  and  fixed  rate  loans  and  mortgage-backed
securities  are  included  in the  periods in which they are  anticipated  to be
repaid based on scheduled maturities and estimated projected repayments of loans
and  mortgage-backed  securities  with  specified  characteristics.  The  Bank's
passbook accounts,  interest-bearing  checking accounts and money market deposit
accounts,  which generally are subject to immediate withdrawal,  are included in
the various categories based upon decay rate assumptions.
<TABLE>
<CAPTION>

                                                      Maturing or Repricing in
                                                      Over 1 Year  Over 3 Years
                                           One Year     Through      Through      Over
                                           or Less      3 Years      5 Years     5 Years      Total
                                          ----------   ---------   ----------    -------      -----
                                                         (dollars in thousands)
Interest-earning assets:

<S>                                        <C>         <C>          <C>         <C>         <C>     
 Adjustable rate mortgages and 
  mortgage-backed securities ...........   $ 80,852    $  8,160     $      -    $      -    $ 89,012
 Fixed rate mortgages and
  mortgage-backed securities ...........     28,114       8,325        6,411      25,235      68,085
 Other loans ...........................     20,082       4,105        2,370       4,200      30,757
 Investment securities .................      4,858       1,982            -       2,113       8,953
 Interest-bearing deposits
   in other banks ......................      3,557           -            -           -       3,557
                                           --------    --------     --------    --------    --------
   Total interest-earning assets .......   $137,463    $ 22,572     $  8,781    $ 31,548    $200,364
                                           --------    --------     --------    --------    --------

Interest-bearing liabilities:
 Fixed maturity deposits................  $  84,679    $ 18,059     $ 10,496    $  2,895    $116,129
 NOW and money market demand
    accounts ...........................     20,949       5,256        3,384       7,397      36,986
 Passbook accounts .....................      9,585         690          537       5,702      16,514
 Federal funds purchased ...............      2,210           -            -           -       2,210
 FHLB advances .........................     15,950         400            -       1,021      17,371
                                           --------    --------     --------    --------    --------
     Total interest-bearing
       liabilities..............           $133,373    $ 24,405     $ 14,417    $ 17,015    $189,210
                                           --------    --------     --------    --------    --------

Interest rate sensitivity gap...........   $  4,090    $ (1,833)    $ (5,636)   $ 14,533    $ 11,154
Cumulative interest rate
  sensitivity gap.......................   $  4,090    $  2,257     $ (3,379)   $ 11,154        --
Cumulative interest rate
  sensitivity gap to total assets ......       1.84%       1.02%       -1.52%       5.03%       --
</TABLE>

    Certain shortcomings are inherent in the method of analysis presented in the
foregoing table.  For example,  although certain assets and liabilities may have
similar maturities or periods of repricing,  they may react in different degrees
to changes in market interest rates. Additionally, the interest rates on certain
types of assets and  liabilities  may  fluctuate in advance of changes in market

                                       10
<PAGE>

interest  rates while  interest  rates on other types may lag behind  changes in
market  rates.  Further,  certain  assets,  such as  adjustable  rate  mortgages
("ARMs"),  MBSs and  collateralized  mortgage  obligations  have features  which
restrict  changes in interest rates both on a short-term basis and over the life
of the  asset.  Moreover,  prepayment  rates,  early  withdrawal  levels and the
ability of  borrowers to service  their debt,  among other  factors,  may change
significantly from the assumptions used in the table in the event of a change in
interest rates.

Lending Activities

    Federal laws and regulations  prescribe the types and amounts of loans which
may be made by  federal  savings  institutions  such as the Bank  and  generally
permit such institutions to make residential real estate loans,  commercial real
estate loans, consumer loans, commercial loans and agricultural loans.

    The Bank's principal  lending activity has been the origination of permanent
residential mortgage loans. The Bank also makes consumer loans, commercial loans
and leases,  commercial real estate loans and residential construction loans. At
December 31, 1996,  the Bank's loan  portfolio  (including  loans held for sale)
constituted approximately 68.92% of the Bank's total assets. The following table
sets forth the composition of the Bank's loan portfolio at the indicated dates.

<TABLE>
<CAPTION>

                                                             December 31,
                                            1996      1995      1994      1993     1992
                                           ---------------------------------------------
                                                        (dollars in thousands)

<S>                                       <C>      <C>        <C>       <C>       <C>   
Commercial/financial/agricultural.......  $10,209  $10,262    $5,707    $2,497    $9,713
Real estate construction................   11,812    9,665     9,032     5,140     3,996
Real estate mortgage....................  112,107  112,694   116,362   114,871   114,269
Installment loans to individuals........   18,166   14,732     8,066     7,914     8,153
Lease financings........................    7,571    6,654     8,354     6,553     4,002
                                           ------   ------   -------   -------   -------
     Total..............................  159,865  154,007   147,521   136,975    140,133
                                           ------   ------   -------   -------   -------
Less:
Undisbursed proceeds on
     loans in process...................    2,663    4,978     4,869     1,254     1,681
Deferrred loan fees and discounts.......      219      287       309       330       401
Allowance for loan losses...............    4,339    1,339     1,244       882       683
                                          --------  ------   -------   -------    ------
Total net loans......................... $152,644  147,403   141,099   134,509   137,368
                                          ========  ======   =======   =======   =======
</TABLE>


    Prior to 1984,  the Bank's  lending  activities,  like those of other thrift
institutions,  consisted  primarily of the origination of long-term,  fixed-rate
permanent residential mortgage loans for its own portfolio. Since then, the Bank
has expanded its consumer,  business and other short-term lending.  Although the
Bank continues originating long-term residential mortgage loans, generally these
loans are either sold directly in the secondary  mortgage  market or pooled into
MBSs for sale in the secondary market.  See  "Origination,  Purchase and Sale of
Loans"  below.  In  addition,  the  Bank  has  purchased  ARMs  and MBSs for its
portfolio.  These  policies,  together  with certain  other asset and  liability
management  strategies,  have been  implemented  to make the Bank's  assets more
sensitive  to changes in interest  rates,  thereby  better  matching  the Bank's
interest-sensitive  short-term liabilities and reducing the Bank's interest rate
risk.  See "Asset and Liability  Management"  above and  "Permanent  Residential
Mortgage Loans" below. The following table sets forth certain  information as of
December 31, 1996  regarding  loans in the Bank's loan  portfolio  which are due
after one year and which have fixed  interest  rates or floating  or  adjustable
interest  rates.  All loans with floating or adjustable  interest  rates reprice
either at stated  intervals or upon changes in a "prime"  interest rate or other
specified index.

                                       11
<PAGE>

                                                      December 31,

                                            Fixed Rate         Adjustable Rate  
                                            ----------         ---------------  
                                                 Percent of          Percent of
                                         Amount  Portfolio   Amount   Portfolio
                                         ------  ---------   ------   ---------
                                                (dollars in thousands)

Residential mortgage................... $29,739    25.41%     $41,067     35.09%
Commercial real estate.................  14,247    12.17        9,901      8.46
Consumer ..............................   8,565     7.32            -         -
Commercial loans/leases ...............   6,589     5.63        6,568      5.61
Residential construction...............       -        -          347      0.30
                                        -------    -----      -------    ------
   Total............................... $59,140    50.54%     $57,883     49.46%
                                        =======    =====      =======     =====


    The following table sets forth the scheduled  maturities of the loans in the
Bank's loan portfolio as of December 31, 1996 based on their  contractual  terms
of maturity.  Demand  loans,  loans having no stated  repayment  schedule and no
stated maturity, and overdrafts are reported as due in less than one year. Loans
unpaid at maturity are renegotiated based on current market rates and terms.
<TABLE>
<CAPTION>

                                                    Maturing in
                        ----------------------------------------------------------------------
                        Less Than   1-2     2-3      3-5     5-10     10-15   After
                         1 Year    Years   Years    Years   Years     Years  15 Years    Total
                         -------   -----   -----    -----   -----     -----  --------    -----
                                               (dollars in thousands)

<S>                      <C>      <C>     <C>      <C>      <C>      <C>      <C>       <C>     
Residential mortgage...  $ 7,457  $1,936  $ 2,825  $ 7,437  $12,435  $ 7,581  $38,592   $ 78,263
Commercial real estate.    9,696   3,828    2,359    6,024    4,212    5,099    2,626     33,844
Consumer ..............    9,601   2,658    2,641    3,253        2        9        2     18,166
Commercial loans/leases    4,624   1,167    1,839    3,680    2,101      513    3,856     17,780
Residential construction  11,465     347      -        -        -          -       -      11,812
                          ------  ------   ------  -------  -------  -------  -------   --------
   Total...............  $42,843  $9,936   $9,664  $20,394  $18,750  $13,202  $45,076   $159,865
                         =======  ======   ======  =======  =======  =======  =======   ========
</TABLE>


Types of Loans

    Permanent Residential Mortgage Loans

    The origination of one-to-four family permanent  residential  mortgage loans
traditionally  has been,  and  continues  to be,  the Bank's  principal  lending
operation, with such loans totaling approximately $77.2 million or 50.55% of the
net  outstanding  loan portfolio at December 31, 1996. The Bank offers both ARMs
and fixed rate  mortgage  loans.  The  interest  rates on the  Bank's  currently
available ARMs are subject to adjustment,  primarily at one year  intervals,  in
accordance with a rate yielding a predetermined  margin over the "weekly average
yield of U.S. Treasury  Securities  adjusted to a constant maturity of one year"
(the "One-year Treasury Security Index"), a statistic  published by the Board of
Governors of the Federal Reserve System and verifiable by the borrower. Interest
rates on ARMs have limitations on upward  adjustments  equal generally to 2% per
year and 6% over the life of the loan.

    Depending on market  conditions,  the Bank offers  various  types of ARMs to
meet  customer  demand and its  investment  needs.  The volume and types of ARMs
originated by the Bank are affected by such market  factors as interest rates on
various types of loans,  competition,  consumer preferences and the availability
of funds. In periods of relatively low interest rates, the Bank's customers have

                                       12
<PAGE>

a preference for fixed-rate  loans for single family  residences.  In periods of
higher rates,  customers have a preference for ARMs.  When qualifying a borrower
with a loan to value ratio greater than 70% for an ARM, the Bank adheres to FNMA
requirements   that  the  interest  rate  used  to  calculate   the   borrower's
debt-to-income ratio is the maximum rate that could be in effect after the first
year.

    The interest rate, maturity, loan-to-value ratio and other provisions of the
Bank's  residential  mortgage loans  generally  reflect the policy of making the
maximum  loan  permissible  consistent  with  applicable   regulations,   market
conditions and the Bank's lending practices and underwriting standards. Interest
rates and points  charged on residential  mortgage loans  originated by the Bank
are competitive with those of other financial institutions in the general market
area. Such interest rates are affected  principally by the demand for such loans
and the supply of money available for lending purposes.

    Permanent  residential  mortgage  loans  made  by  the  Bank  are  generally
long-term loans,  amortized on a monthly basis,  with principal and interest due
each  month.  The  initial  contractual  loan  payment  period  for  fixed  rate
residential  mortgage  loans  typically  ranges  from 15 to 30 years,  while the
Bank's  ARMs  generally  have  terms of 20 to 30 years.  The  Bank's  experience
indicates that permanent  residential mortgage loans normally remain outstanding
for much shorter  periods  (seven years on average)  than their stated  maturity
because  the  borrowers  repay the  loans in full upon the sale of the  security
property or upon refinancing the original loan.

    Since December 1988, the Bank has offered a biweekly mortgage  product.  The
Bank's biweekly  mortgage loans provide for payments and loan  amortization on a
biweekly (i.e.,  every 14 days) basis,  which results in an increased  number of
collections annually and,  accordingly,  a shorter term of maturity and a faster
equity build-up than monthly  mortgage loans.  The Bank had  approximately  $4.3
million in biweekly mortgage loans outstanding as of December 31, 1996.

    In  the  case  of  owner-occupied   single  family   residences,   permanent
residential  mortgage loans are made for up to 95% of the appraised value of the
property securing the loan. When the loan is secured by real estate containing a
non-owner  occupied dwelling of not more than four family units, loans generally
are made at up to 80% of the  appraised  value.  All  conventional  loans with a
loan-to-value  ratio in  excess  of 80% must  have  private  mortgage  insurance
covering that portion of the loan in excess of 75% of the appraised  value.  The
cost of this insurance is included in the borrower's monthly payments.  The Bank
also  requires  title  insurance to insure the priority of the property  lien on
most of its mortgage  loans and requires  fire and casualty  insurance on all of
its loans.  The borrower also must pay monthly into an escrow  account an amount
equal to 1/12 of the annual hazard  insurance  premium and property taxes on the
security property.

    The permanent  residential  mortgage loans  originated by the Bank contain a
"due-on-sale"  clause which  provides that the unpaid balance of the loan may be
declared  immediately  due and payable upon the sale of the mortgaged  property.
Such  clauses  are an  important  means of reducing  the  average  loan life and
increasing the yield on existing fixed-rate mortgage loans, and it is the Bank's
policy to enforce due-on-sale clauses with respect to fixed-rate loans. ARMs are
assumable,  subject  to  payment  of an  assumption  fee,  to the  extent of the
creditworthiness of the purchaser,  but due-on-sale clauses on ARMs are enforced
if the Bank is not satisfied with such credit.

    There are, in connection  with ARMs,  certain risks resulting from increased
costs to the borrower as a result of periodic repricing. Despite the benefits of
ARMs  to the  Bank's  asset  and  liability  management  program,  they  do pose
potential  additional  risks,  primarily  because as interest  rates  rise,  the
underlying  payment by the borrower rises,  thereby increasing the potential for
default.  At the same time, the marketability of the underlying  property may be
adversely affected by higher interest rates.

    Commercial Real Estate Loans

    Current  regulations permit federal thrifts such as the Bank to invest up to
400% of their capital in  commercial  real estate  loans.  The Bank's  permanent
commercial real estate loans,  including loans secured by multi-family apartment
projects  with more than four units,  amounted to  approximately  $34 million or
22.17% of the Bank's loan portfolio at December 31, 1996.  The Bank's  permanent
commercial real estate loans are typically  secured by improved  commercial real
estate  located in the Bank's  primary  lending  areas,  including  small office

                                       13
<PAGE>

buildings,  apartments,  warehouses and shopping centers.  Permanent  commercial
real estate loans are generally made in amounts up to 75% of the appraised value
of the property and generally have an initial contractual loan payment period of
from 10 to 20 years.  Many of these loans have interest rates that adjust either
daily  based on The Wall  Street  Journal  prime rate or  annually  based on the
One-year  Treasury  Security  Index.  Some of the Bank's  commercial real estate
loans have fixed interest rates with  contractual  payment periods of from three
to five years.  Monthly payments of these loans are computed based on an assumed
amortization period of 10 to 15 years, with balloon payments becoming due at the
end of the  contractual  loan  term  for  the  remaining  outstanding  principal
balance.

    Permanent  commercial  real estate loans usually have higher  interest rates
than  residential  mortgage loans, in part because real estate lending on income
producing  property entails certain  significant  risks.  Commercial real estate
loans typically  involve  relatively  large loan balances to single borrowers or
groups of related  borrowers.  The payment experience on such loans is typically
dependent on the successful  operation of the real estate  project.  These risks
can be significantly  impacted by supply and demand conditions in the market for
commercial  space and,  as such,  may be subject to a greater  extent to adverse
conditions in the economy  generally.  In dealing with these risk  factors,  the
Bank  generally  limits  itself to the real  estate  market in the Bank's  Troup
County market area and/or to borrowers with which it has  substantial  knowledge
and experience.  In setting interest rates and origination fees on new loans and
loan  extensions,  management  analyzes the risk  associated with the particular
project  to  ensure  that a  project's  cash flow  will be  sufficient  to cover
operating expenses and debt service payments.

    Consumer Loans

    The Bank is authorized to make both secured and unsecured consumer loans for
any personal or household  purposes in amounts up to 35% of its total assets. In
addition,  federal thrifts such as the Bank have lending authority above the 30%
limit for certain  consumer  loans,  such as home equity loans (loans secured by
the equity in the borrower's  residence but not  necessarily  for the purpose of
home  improvement),  property  improvement  loans,  mobile home  loans,  deposit
account secured loans and education  loans.  The Bank also is authorized to make
secured and  unsecured  loans for business  purposes in amounts up to 10% of its
total assets. At December 31, 1996,  consumer loans totaled  approximately $18.2
million or 11.90% of the total loan portfolio.

     Most of the Bank's  consumer  loans are automobile  loans and leases,  boat
loans, home equity loans, property improvement loans, student loans and loans to
depositors  on the security of their savings  accounts.  These loans are made at
fixed  interest rates for terms of up to 10 years.  The Bank considers  consumer
loans to involve a relatively high credit risk compared to permanent residential
mortgage  loans.  Consumer loans  therefore  generally  yield a relatively  high
return to the Bank and provide a relatively  short  maturity.  The Bank believes
that the  generally  higher  yields and the shorter  terms  available on various
types of  consumer  loans  contribute  to a positive  spread  between the Bank's
average yield on earning assets and the Bank's cost of funds.

     Consumer loans,  particularly  automobile  loans and secured savings loans,
have   constituted  an  increasing  area  of  emphasis  in  the  Bank's  lending
activities.  The Bank  intends  to  continue  to  expand  its  consumer  lending
activities,  subject to market conditions, as part of its plan to provide a wide
range of personal financial services to its customers.

                                       14
<PAGE>

    Commercial Loans/Leases

     The Bank is authorized  to make secured and  unsecured  loans to commercial
businesses up to a limit of 20% of total assets. The Bank makes various types of
commercial  loans and  leases  to  creditworthy  borrowers  for the  purpose  of
financing  equipment,  capital  projects,  working capital and other  legitimate
business needs requiring financing. The terms of these loans range from three to
five  years,  with the  longer  maturities  sometimes  being  subject to balloon
payments.  Commercial  loans  normally  carry interest rates indexed to The Wall
Street Journal prime rate. Interest rates on leases are in the 10% to 14% range.
At December 31, 1996,  commercial  loans and leases  outstanding  totaled  $17.8
million.

    At December 31, 1996,  the Bank had a lease  portfolio  with an  outstanding
balance of  approximately  $4.5 million that was purchased from Bennett  Funding
Group,  Inc.  (Bennett  funding).  Bennett  Funding is an equipment  leasing and
finance company based in Syracuse,  New York. For several years, the Bank, along
with many other financial  institutions  and  individuals  throughout the United
States, invested in office equipment leases sold through Bennett Funding. During
1996,  Bennett Funding filed for Chapter 11 bankruptcy  protection,  and certain
officers of Bennett  Funding are being  investigated  for  possible  wrongdoing,
including  criminal  securities  fraud.  At December 31, 1996, the Bank had a $3
million  specific loan loss reserve for Bennett  Funding and related  companies.
The $4.5 million lease  portfolio is classified as "Doubtful," a  classification
that  generally  requires  reserves equal to 50 percent of the carrying value of
the asset (See "Bennett Funding Group,  Inc." In the "Management  Discussion and
Analysis of Financial  Condition and Results of Operation,"  "Allowance for Loan
Losses" and "Non-Performing Assets," of the Company's 1996 Annual Report.)

    Residential Construction Loans

     Approximately  $11.8  million  or  7.74% of the  loans  held by the Bank at
December 31, 1996 were residential  construction loans,  consisting primarily of
residential  construction  mortgage  loans to  owner-occupants  and, to a lesser
extent, to persons building  residential  properties for resale. These loans are
made for an initial term of up to six months, have fixed rates of interest,  are
generally  limited to 75% of the  appraised  value of the lot and the  completed
value of the  proposed  structure,  but  construction  loans of up to 90% can be
issued with private mortgage insurance coverage for owner occupants. These loans
also provide for  disbursement of loan funds based on receipts  submitted by the
builder during  construction and periodic site  inspections.  The loans are then
completed,  extended or sold.  Extensions for  additional  fees are permitted if
construction has continued  satisfactorily  and if the loan is current and other
circumstances warrant the extension. In response to competitive conditions,  the
Bank  permits a  portion  of its  single-family  residential  construction  loan
portfolio  to  consist of loans  made  without  commitments  for  "take-out"  or
permanent financing from third parties.

    Residential construction financing,  like commercial real estate lending, is
generally  considered to involve a higher  degree of credit risk than  permanent
mortgage financing of residential  properties,  and this additional risk usually
is reflected in higher interest  rates.  The higher risk of loss on construction
loans is  attributable  in large part to the fact that loan funds are  estimated
and advanced  upon the security of the project under  construction,  which is of
uncertain value prior to the completion of  construction.  Moreover,  because of
the uncertainties inherent in estimating construction costs, delays arising from
labor problems, material shortages and other unpredictable contingencies,  it is
relatively  difficult to  accurately  evaluate the total loan funds  required to
complete a project and to accurately evaluate the related  loan-to-value ratios.
If the estimates of  construction  costs and the salability of the property upon
completion  of the project prove to be  inaccurate,  the Bank may be required to
advance funds beyond the amount originally committed to permit completion of the
project.  If the  estimate  of value  proves to be  inaccurate,  the Bank may be
confronted, at or prior to the maturity of the loan, with a project with a value
which is insufficient to assure full repayment.

    The Bank's  underwriting  criteria are designed to evaluate and minimize the
risk of each  residential  construction  loan.  Among  other  things,  the  Bank
considers  evidence of the  availability  of  permanent  financing or a take-out
commitment  to the  borrower,  the  financial  strength  and  reputation  of the
borrower,  an  independent  appraisal  and  review of cost  estimates,  and,  if
applicable, the amount of the borrower's equity in the project, pre-construction
sale  or  leasing  information  and  cash  flow  projections  of  the  borrower.
Origination, Purchase and Sale of Loans

                                       15
<PAGE>

Origination, Purchase and Sale of Loans

    The Bank is permitted  by  applicable  regulations  to originate or purchase
loans secured by real estate located in any part of the United States.  The Bank
originates  loans in Troup County,  Georgia  through its main office,  its Lee's
Crossing  office and its  LaFayette  Parkway  office,  all located in  LaGrange,
Georgia.  The Bank also  originates  loans in Muscogee County and Harris County,
Georgia and Russell County,  Alabama through a loan production office located in
Columbus,  Muscogee  County,  which the Bank  operates  under the name  Piedmont
Mortgage  Service.  The Bank also operates a second loan production office under
the name of  Piedmont  Mortgage  Service in Auburn,  Lee County,  Alabama  which
originates  loans in Lee County.  As of December  31,  1996,  Troup County had a
population  of  approximately  59,000,  Muscogee  County  had  a  population  of
approximately  187,000,  Harris County had a population of approximately 20,000,
Russell  County had a population  of  approximately  52,000 and Lee County had a
population of  approximately  94,000,  based on Troup County,  Muscogee  County,
Harris County, Russell County and Lee County Chambers of Commerce estimates.

    Loans are  originated  by seven loan  officers in the Bank's main office and
one loan officer in each of the Lee's Crossing and LaFayette  Parkway offices in
LaGrange,  Georgia.  In addition,  two loan  officers  operate from the Piedmont
Mortgage Service office in Columbus, Georgia, and one loan officer operates from
the Piedmont  Mortgage  Service office in Auburn,  Alabama.  These loan officers
solicit loan applications from existing customers, real estate agents, builders,
real estate developers and others. The Bank also receives loan applications as a
result of customer referrals and walk-ins to its offices.

    Upon receipt of a loan application and all required  supporting  information
from a prospective  borrower,  a credit report is obtained and  verification  is
made of specific information relating to the loan applicant's employment, income
and credit  standing.  An  appraisal  of any real estate  intended to secure the
proposed loan is undertaken by an  independent  appraiser  approved by the Bank.
The Bank's loan officers and underwriters then analyze the loan applications and
any collateral  involved.  All real estate loans,  regardless of amount, and all
consumer and commercial loans in excess of the loan officer's  lending limit, as
set by the Board of  Directors,  are approved by a loan  committee  comprised of
executive officers and one outside director.

    Almost all loans in the Bank's  portfolio  were  originated by the Bank. The
Bank generally does not purchase loans;  however, in order to improve the Bank's
interest rate  sensitivity,  the Bank has purchased a small number of adjustable
rate  loans  for its  portfolio.  The  Bank  originates  adjustable  rate  loans
primarily  for its  portfolio  and  generally  originates  permanent  fixed-rate
residential  mortgage loans for sale in the secondary market or for pooling into
MBSs for sale in the secondary  market.  All fixed rate  conforming  residential
mortgage loans  originated by the Bank in 1996 either were sold in the secondary
market or are carried on the  balance  sheet (at the lower of cost or market) as
"loans held for sale."

    The sale of  fixed-rate  loans in the  secondary  mortgage  market  not only
reduces the Bank's risk of an unfavorable  interest rate spread over the cost of
funds but also  allows the Bank to continue to make loans  during  periods  when
savings flows decline or funds are not otherwise available for lending purposes.
The Bank  generally  retains the  servicing  (i.e.,  collection of principal and
interest  payments)  of the loans  sold in the  secondary  market,  for which it
generally receives a fee of 1/4% to 1/2% per annum of the unpaid balance of each
loan.   Secondary  market  sales  are  made  primarily  to  mortgage  companies,
commercial   banks,    other   thrift    institutions   and   governmental   and
quasi-governmental  agencies  such as the  FHLMC,  the FNMA  and the  Government
National Mortgage Association ("GNMA") which purchase residential mortgage loans
from financial institutions. As market conditions dictate, the Bank may elect to
hold permanent  mortgage loans in its portfolio where favorable spreads over the
cost of funds make these  investments  advantageous.  All secondary market sales
are made without recourse to the Bank.

                                       16
<PAGE>

    The table below shows the Bank's loan origination, purchase (including MBSs)
and sale activity during the periods indicated.

                                                   Years Ended December 31,
                                                      1996          1995
                                                       -----------------
                                                     (dollars in thousands)
Loans originated:
  Residential mortgage .........................     $ 79,597     $ 66,812
  Commercial real estate .......................       23,481       15,610
  Consumer .....................................       10,399       22,377
  Commercial loans/leases ......................       25,116        8,228
  Residential construction .....................       11,296        7,286
  Loans refinanced .............................       19,212       20,260
                                                     --------     --------
     Total loans originated ....................     $169,101     $140,573

Loans purchased ................................          449        2,987
                                                     --------     --------
     Total loans originated and purchased ......     $169,550     $143,560

Loans sold:
  Residential mortgage .........................     $ 63,042     $ 47,962
  Commercial real estate .......................         --           --
  Consumer .....................................         --           --
  Commercial loans/leases ......................         --           --
  Residential construction .....................         --           --
                                                     --------     --------
Total loans sold ...............................     $ 63,042     $ 47,962
                                                     --------     --------
     Net loan activity .........................     $106,508     $ 95,598
                                                     ========     ========

Loan Fee Income

    In  addition  to  interest  earned  on  loans,  the Bank  receives  fees for
originating  loans,  fees  for  commitments  to make  certain  loans,  fees  for
continuing to service loans (i.e.,  collecting  principal and interest payments)
after selling such loans in the secondary market,  purchased  servicing fees and
other fees for miscellaneous  loan-related services. Such fee income varies with
the volume of loans made,  prepaid or sold, and the rates of fees vary from time
to time  depending  on the  supply of funds and  competitive  conditions  in the
mortgage markets.

    Origination  fees are a percentage of the principal amount of the loan which
are  charged to the  borrower  for the  granting of the loan.  Origination  fees
normally are deducted from the proceeds of the loan and generally  range from 1%
to 2% of the  principal  amount,  depending on the type and volume of loans made
and market  conditions such as the demand for loans,  the  availability of money
and general economic conditions.

    It is the  policy  of the Bank to make  loan  commitments  for a term not to
exceed 30 days without  charging a commitment  fee. From time to time,  however,
the Bank receives commitment fees for certain longer term forward commitments on
permanent fixed-rate  residential mortgage loans,  generally not in excess of 1%
of the requested loan amount.  The Bank has not experienced a significant number
of loan  applications/commitments  that were not funded  within  the  commitment
period.  The Bank did not  receive  any  commitment  fees  during the year ended
December 31, 1996.

                                       17
<PAGE>

    Servicing  fees are payable  monthly in an amount  equal to 1/4% to 1/2% per
annum of the unpaid principal balance of each loan serviced.  As of December 31,
1996,  1995 and 1994,  the Bank was  servicing  loans for others with  principal
balances  aggregating  approximately  $247.9 million,  $249.3 million and $273.1
million,  respectively.  Loan servicing  income expressed as a percentage of net
interest  income for the years ended December 31, 1996, 1995 and 1994 was 3.90%,
5.91%, and 5.36%, respectively.

    The Bank also  receives  fee income from late  payment  charges,  prepayment
premiums, loan assumption fees, property inspection fees, property transfer fees
and miscellaneous services related to its existing loans. These fees and charges
have not constituted a material source of income for the Bank.

    In  accordance  with  the  Financial  Accounting  Standards  Board  ("FASB")
Statement  of  Financial   Accounting   Standards   No.  91,   "Accounting   for
Nonrefundable  Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases," the Bank records  income from loan  origination
and  commitment  fees,  net of certain  direct loan  origination  costs (such as
advertising,  administrative,  occupancy  and  equipment  costs and a portion of
employee  compensation and benefit  amounts),  for each loan as an adjustment of
yield over the contractual  life of the loan rather than recognizing such income
in full at the time of origination.  The Bank had net deferred  origination fees
totaling  $218,314  at  December  31,  1996  that will be  recognized  in future
periods.  See Note 2 of Notes to Consolidated  Financial Statements contained in
the Company's 1996 Annual Report, which information is incorporated by reference
in Item 8 hereof.

Credit Risk Management

Classification and Collection of Problem Loans

    In  originating  loans,  the Bank  recognizes  that  credit  losses  will be
experienced  and that the risk of loss will vary with,  among other things,  the
type of loan being made, the  creditworthiness  of the borrower over the term of
the loan and, in the case of a secured  loan,  the guarantee of the security for
the loan. The loan portfolio is continually reviewed by the Bank's management to
identify deficiencies and to take corrective actions as necessary.  As discussed
below,  each of the Bank's  loans is  assigned a rating in  accordance  with the
Bank's  internal  loan  rating  system and is reviewed  regularly  to update its
rating in accordance  with the  performance  of the loan. All past due loans are
reviewed weekly by the Bank's collection  manager and monthly by the Loan Review
Committee of the Bank and by the Board of Directors, and all loans classified as
"substandard"  or "doubtful" are reviewed at least quarterly by the Asset Review
Committee  of the Board of  Directors.  In  addition,  all loans to a particular
borrower,  regardless of  classification,  are reviewed by the originating  loan
officer and the collection manager each time such borrower requests a renewal or
extension of any loan or requests an  additional  loan.  All lines of credit are
reviewed  annually prior to renewal.  Such reviews include,  but are not limited
to, the ability of the borrower to repay the loan, the loan to value ratio,  the
value of any collateral and the estimated loss to the Bank, if any.

     The Bank's internal loan rating system  establishes  three  classifications
for problem assets: substandard,  doubtful and loss. Additionally, in connection
with regulatory  examinations of the Bank,  federal  examiners have authority to
identify  problem  assets and, if  appropriate,  to require the Bank to classify
them.  Assets that have one or more defined  weaknesses and are characterized by
the  distinct   possibility  that  the  Bank  will  sustain  some  loss  if  the
deficiencies are not corrected are classified as "substandard.  Assets that have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses  make  collection or  liquidation  in full, on the basis of currently
existing facts,  conditions and values,  highly  questionable and improbable are
classifed  as   "doubtful."   An  asset   classified  as  "loss"  is  considered
uncollectible  and of such little value that continuance as an asset of the Bank
is not warranted.

    Assets  classified as substandard or doubtful  require the Bank to establish
general allowances for loan losses. If an asset or portion thereof is classified
as loss,  the Bank must either  establish a specific  allowance for loan loss in
the amount of 100% of the portion of the asset  classified as loss or charge off
such amount.  General  loss  allowances  established  to cover  possible  losses
related to assets  classified as substandard or doubtful may be included,  up to
certain limits,  in determining the Bank's  regulatory  capital,  while specific
valuation allowances for loan losses do not qualify as regulatory capital.

                                       18
<PAGE>

    The Bank's collection  procedures  provide that when a loan becomes ten days
delinquent,  the borrower is contacted by mail and payment is requested.  If the
delinquency  continues,  subsequent  efforts  are made to  contact  and  request
payment from the delinquent  borrower.  Most loan delinquencies are cured within
30 days and no legal action is required. In certain circumstances,  the Bank may
modify  the loan,  grant a limited  moratorium  on loan  payments  or revise the
payment  schedule to enable the  borrower to  restructure  his or her  financial
affairs.  Generally,  the Bank stops accruing  interest on delinquent loans when
payment is in arrears for 90 days or when collection otherwise becomes doubtful.
If the  delinquency  exceeds 120 days and is not cured through the Bank's normal
collection  procedures  or  through a  restructuring,  the Bank  will  institute
measures  to  enforce  its  remedies  resulting  from  the  default,   including
commencing a foreclosure,  repossession or collection  action. In certain cases,
the Bank will consider accepting a voluntary conveyance of collateral in lieu of
foreclosure or repossession.  Real property  acquired by the Bank as a result of
foreclosure  or by deed in lieu of  foreclosure  is  classified  as "real estate
owned"  until it is sold and is  carried  at the lower of (i) fair  value  minus
estimated costs to sell or (ii) the adjusted cost basis.

Allowance for Loan Losses

     The  allowance or reserve for possible  loan losses is a means of absorbing
future  losses  which  could  be  incurred  from  the  current  loan  portfolio.
Management  utilizes  a  systematic  methodology  each  month  to  independently
evaluate the adequacy of the allowance for loan losses.  The Bank's Asset Review
Committee meets monthly.  During this meeting,  presentations are made,  reports
are reviewed and discussions  arise  regarding the Bank's loan  portfolio,  loan
delinquencies,  non-performing  and classified loans, and loan payment activity.
During the course of this meeting, management considers the risk inherent in the
Bank's loan portfolio and determines the adequacy of the reserve for loan losses
This  determination is based on such factors as the levels of non-performing and
substandard loans,  portfolio mix,  borrowers'  financial  condition,  estimated
underlying collateral values, current and prospective local economic conditions,
and historical loss  experience.  The Bank establishes  specific  allowances for
assets or portions  thereof  classified  as a loss in an amount equal to 100% of
the loan or a portion thereof.  As explained in "Commercial  Loans/Leases,"  the
Allowance  for Loan  Losses  includes a specific  reserve  of  approximately  $3
million for a lease portfolio with a remaining balance of $4.5 million purchased
from Bennett Funding.  The following table presents this specific reserve on the
line identified as " "Commercial loans/leases."

    The following  table  summarizes the Bank's  allocation of the allowance for
loan losses for each of the following types of loans at the dates indicated.

<TABLE>
<CAPTION>

                                                              At December 31,
                                                              ---------------
                                              1996                 1995                  1994
                                      -------------------   --------------------  -------------------
                                               Percent of           Percent of             Percent of
                                      Amount   Total Loans  Amount  Total Loans   Amount   Total Loans
                                      ------   -----------  ------  -----------   ------   -----------
                                                          (dollars in thousands)

<S>                                    <C>                 <C>         <C>        <C>             
Permanent mortgage loans.. ..........  $ --        --      $    16     0.01%      $ --          --
Commercial real estate loans ........     261     0.17%        257     0.17%        53         0.04%
Consumer loans ......................       7     0.01%         19     0.01%        35         0.02%
Commercial loans & leases ...........   2,978     1.93%       --        --          --          --
Residential construction loans ......    --        --         --        --          --          --
                                       ------     ----      ------     ----       -----        -----
  Total loans .......................  $3,246     2.11%     $  292     0.19%        88         0.06%

Unallocated allowance ...............   1,093     0.71       1,047     0.70      1,156         0.78%
                                       ------     ----      ------     ----       -----        -----
  Total allowance for possible
    loan losses .....................  $4,339     2.82%     $1,339     0.89%     1,244         0.84%
                                       ======     ====      ======     ====       =====        =====
</TABLE>

                                       19
<PAGE>

     General and specific valuation  allowances will be maintained at the levels
as  determined  above by  periodic  charges  against  income.  A loan or portion
thereof is charged off against the allowance when management has determined that
losses on such loans are probable.  Recoveries on any loans charged off in prior
fiscal  periods are credited to the  allowance.  It is the opinion of the Bank's
management  that the balance in the allowance for loan losses as of December 31,
1996  is  adequate  to  absorb  possible  losses  from  loans  currently  in the
portfolio.

    The  following  table  sets  forth  information  regarding  changes  in  the
allowance for loan losses for the periods indicated.


                                                 Years Ended December 31,
                                                 ------------------------
                                                 1996        1995        1994
                                               --------     -------     -------
                                                    (dollars in thousands)

Average net loans ...........................  $151,084    $146,144     $141,640

Allowance for possible loan losses,
 beginning of the period ....................     1,339       1,244          882

Charge-offs for the period:
  Consumer loans ............................        87         118           88
  Commercial loans/leases ...................        --          --           --
  Residential construction loans ............        22          23            2
  Residential mortgage loans ................       410          60           35
  Commercial real estate loans ..............        --         364           --
                                               --------    --------     --------

     Total charge-offs.......................  $    519    $    565    $     125
                                               --------    --------     --------

Recoveries for the period:
  Consumer loans.............................  $     35    $     30           46
  Commercial loans/leases ...................        --          --           --
  Residential construction loans ............        --          --            1
  Residential mortgage loans ................        --          --           --
  Commercial real estate loans ..............        --          --           --
                                               --------    --------     --------

     Total recoveries........................  $     35    $     30           47
                                               --------    --------     --------
       Net charge-offs for the period .......       484         535           78

Provision for loan losses ...................     3,484         630          440
                                               --------    --------     --------

Allowance for possible loan losses,
 end of period ..............................  $  4,339    $  1,339        1,244
                                               ========    ========     ========

Ratio of allowance for loan losses to
 total net loans outstanding ................     2.84%       0.91%        0.88%

Ratio of net charge-offs during the
 period to average net loans outstanding
 during the period ..........................     0.32%       0.37%        0.06%

                                       20
<PAGE>

Risk Elements

     The   following   table  sets  forth   information   regarding  the  Bank's
non-performing   assets  and  troubled  debt  restructurings  as  of  the  dates
indicated.  Non-performing  assets consist of  nonaccruing  loans and foreclosed
properties.  The Bank has no loans 90 days or more past due as to which interest
is still  accruing and has no loans  categorized as  in-substance  foreclosures.
Material  potential problem loans (i.e.,  those with respect to which management
has serious doubts regarding the ability of the borrowers to comply with present
loan repayment  terms) have been classified as nonaccrual  loans,  regardless of
payment  status.  Included  in  non-performing/nonaccruing  loans  is the  lease
portfolio with a remaining balance of approximately  $4.5 million purchased from
Bennett Funding (see "Bennett  Funding Group,  Inc." In Management's  Discussion
and Analysis of Financial  Condition  and Results of Operation in the  Company's
1996 Annual Report).

                                                   December 31,
                                                   ------------
                                       1996      1995      1994    1993    1992
                                     --------  --------  -------  ------  ------
                                               (dollars in thousands)

Nonaccruing loans                    $6,688    $1,394     $2,751  $3,280  $3,505
Loans past due 90 days
     and still accruing..........       --        --        --      --       --
Troubled debt restructuring .....       --        --        --      --       --

    For the year ended December 31, 1996,  the Bank recorded no interest  income
on the non-performing  assets listed above subsequent to their classification as
non-performing  assets.  The gross interest income that would have been recorded
during the year ended  December  31,  1996 if the assets  listed  above had been
current in accordance  with their original  terms would have been  approximately
$470,000.  The  amount of  interest  income on those  assets  that was  actually
recorded  during the year ended December 31, 1996 prior to their  classification
as non-performing assets was approximately $148,000.

     The Bank  attempts to sell real estate owned  promptly  after  foreclosure.
During 1996,  seven  commercial and residential  properties were foreclosed with
aggregate investments, net of reserves, of $769,398. The aggregate charge-off to
the loan loss  reserve  for these  properties  was  $227,822.  During  1996,  14
residential  properties were sold with carrying values of $570,007.  At December
31, 1996, foreclosed  properties consisted of three residential  properties with
an aggregate  investment,  net of reserves,  of approximately  $525,000.  All of
these  properties are in the Bank's west central Georgia or east central Alabama
market areas.

     There may be additional  loans within the Bank's  portfolio that may become
classified as conditions dictate; however,  management was not aware of any such
loans that are material in amount at December  31,  1996.  At December 31, 1996,
management was unaware of any known trends,  events or  uncertainties  that will
have,  or that are  reasonably  likely to have a  material  effect on the Bank's
liquidity, capital resources or operations.

                                       21
<PAGE>

Investment Activities

    Federally chartered savings  institutions such as the Bank have authority to
invest in various types of liquid assets,  including U.S. Treasury  obligations,
securities of various federal  agencies and of state and municipal  governments,
certificates  of  deposits  at  federally  insured  banks and  savings  and loan
associations, certain bankers' acceptances and federal funds. Subject to various
restrictions, federally chartered savings institutions may also invest a portion
of their assets in commercial paper, corporate debt securities and mutual funds,
the assets of which conform to the investments that federally  chartered savings
institutions  are otherwise  authorized to make  directly.  Federally  chartered
savings  institutions  are required to classify their securities in one of three
categories:  securities  purchased  or held for  investment,  for  sale,  or for
trading. Such investments must be carefully managed for quality,  maintenance of
current market yields and matching of rate sensitivity. Investment decisions are
made within formal policy guidelines established by the Board of Directors.

    Income from investments in securities  provides the second largest source of
revenues for the Company  after  interest on loans,  constituting  approximately
$3.2  million or 15.50% of total  interest  and other  income for the year ended
December 31, 1996. The Bank's  investment  portfolio  totaled  approximately $50
million as of December 31, 1996 or 22.73% of total assets and  consisted of FHLB
stock,  United States Government and federal  government agency  obligations and
other  investments,  as  compared  to $65  million or 28.03% of total  assets at
December 31, 1996.  At December 31, 1996,  the  investment  portfolio  had a net
unrealized  loss  of  approximately  $572,000.  See  Notes 3 and 4 of  Notes  to
Consolidated Financial Statements contained in the Company's 1996 Annual Report,
which information is incorporated by reference in Item 8 hereof.

    The following  table sets forth the book value of the Bank's  investments at
the dates indicated.

                                                 At December 31,
                                                 ---------------
                                         1996         1995          1994
                                       --------     --------      --------
                                              (dollars in thousands)

Mortgage-backed securities ..........  $37,920      $44,608       $49,983
U.S. Government and federal
 agency securities ..................    4,018        9,250        17,250
Other debt securities ...............    1,096            -           401
Interest-bearing deposits
 and bankers' acceptances ...........    3,557        1,539         3,334
FHLB stock and
 other equity investments ...........    3,857        7,210         4,466
Federal funds sold ..................        -        2,010             -
                                       -------      -------       -------

Total ...............................  $50,448      $64,617       $75,434
                                       =======      =======       =======

                                       22
<PAGE>

     The following table sets forth the book value of the Bank's  investments at
December 31, 1996,  the weighted  average  yields on the Bank's  investments  at
December  31, 1996 and the periods to  maturity of the Bank's  investments  from
December 31, 1996. Yields on tax exempt  obligations have not been computed on a
tax equivalent basis.
<TABLE>
<CAPTION>
                                           Periods to Maturity from December 31, 1996
                                           ------------------------------------------
                                         After 1 through   After 5 through
                         1 Year or Less      5 Years          10 Years        After 10 Years       Total
                        ----------------  ---------------  --------------- -----------------  ---------------
                                Weighted         Weighted         Weighted          Weighted          Weighted
                                Average          Average           Average           Average           Average
                        Amount   Yield    Amount  Yield    Amount   Yield   Amount    Yield   Amount    Yield 
                        ------ -------    ------ --------  ------  -------  ------   -------  ------  --------- 
                                                      (dollars in thousands)

<S>                      <C>      <C>     <C>      <C>     <C>      <C>     <C>       <C>     <C>       <C>  
Mortgage-backed
 securities ..........   $  999   5.63%   $4,829   6.08%   $2,904   6.22%   $29,188   6.39%   $37,920   6.32%
U.S. Government
 and federal
 agency securities ...        -      -     2,000   5.72     2,018   6.44          -      -      4,018   6.08
Other debt
 securities ..........        -      -       981   7.27       115   6.81          -      -      1,096   7.22
Interest-bearing
 deposits and bankers'
 acceptances .........    3,557   5.35         -      -         -      -          -      -      3,557   5.35
FHLB stock and
 preferred stock .....    3,857   9.01         -      -         -      -          -      -      3,857   9.01
Federal funds sold ...        -      -         -      -         -      -          -      -          -      -
                         ------   ----    ------   ----    ------   ----    -------   ----    -------   ----
Total ................   $8,413   7.06%   $7,810   6.14%   $5,037   6.32%   $29,188   6.39%   $50,448   6.46%
                         ======   ====    ======   ====    ======   ====    =======   ====    =======   ====
</TABLE>

     As of December 31, 1996,  none of the Bank's  investment  in  securities of
other issuers exceeded 10% of the shareholders' equity of the Bank. the Bank.

Sources of Funds

General

    Time, money market, savings and demand deposits are the major sources of the
Bank's funds for lending and other investment  purposes.  In addition,  the Bank
obtains funds from loan principal repayments, proceeds from sales of loans, loan
participations and investment securities, and advances from the FHLB of Atlanta.
Loan repayments are a relatively  stable source of funds,  while deposit inflows
and outflows and sales of loans, loan  participations and investment  securities
are significantly  influenced by prevailing interest rates,  economic conditions
and the Bank's asset and liability management strategies. Borrowings may be used
on a short-term  basis to compensate for reductions in the availability of other
sources  of  funds  or on a  longer  term  basis  to  support  expanded  lending
activities and for other general business purposes.

Deposits

     The Bank  offers  several  types of deposit  accounts,  with the  principal
differences relating to the minimum balance required,  the time period the funds
must remain on deposit and the interest  rate.  Deposits are obtained  primarily
from the Bank's  Troup  County  market  area.  The Bank does not  advertise  for
deposits  outside  of this  area,  and an  insignificant  amount  of the  Bank's
deposits are from  out-of-state  sources.  The Bank  generally  does not solicit
funds from  brokers,  although the Bank  occasionally  consults  with brokers to
obtain  information on competitive market rates offered on jumbo certificates of
deposit ("CDs") which the Bank occasionally  offers in minimum  denominations of
$100,000.

                                       23
<PAGE>

The Bank does not rely upon any single person or group of related  persons for a
material portion of its deposits.  The Bank held CDs with minimum  denominations
of $100,000 totaling $33.1 million at December 31, 1996.

     The  following  table sets forth the  composition  of  deposits,  excluding
accrued interest  payable,  by type of account and interest rate category at the
dates indicated.

<TABLE>
<CAPTION>
                                                                                
                                              December 31,                      
                                          ------------------                    
                                    1996                         1995           
                          ------------------------------------------------------
                         Interest                    Interest                   
Type of Account            Rate    Amount  Percent(1)  Rate     Amount    Percent 
---------------           ------   ------   -------   ------    ------    ------- 
                                         (dollars in thousands)                   
                                                                                  
<S>                        <C>     <C>         <C>     <C>     <C>          <C>   
Regular savings deposits   2.75%   $16,514     9.27%   2.75%   $ 16,401     9.22% 
NOW accounts...........    2.25%    28,820    16.19    2.25%     27,977    15.67  
Super NOW accounts.....    2.70%     1,828     1.03    2.70%      2,100     1.24  
Money market deposits..    3.20%    14,709     8.26    3.20%     15,438     8.68  
                                   -------    -----            --------   ------  
   Total...............            $61,871    34.75%           $ 61,916    34.81% 
                                   -------    -----            --------    -----  
                                                                                  
Certificates of deposit  Below 4% $     50     0.03%  Below 4% $     89    0.05%  
                             4-6%   84,258    47.34      4-6%    60,608   34.08   
                             6-8%   31,821    17.88      6-8%    54,731   30.77   
                            8-10%        -        -     8-10%       504    0.29   
                                  --------    ------           --------   ------  
Total time deposits ..            $116,129    65.25%           $115,932   65.19%  
                                  --------    -----            --------   ------  
                                                                                  
                                                                                  
   Total deposits.....            $178,000   100.00%           $177,848   100.00% 
                                  ========   ======            ========   ======  




                                                                                
                                 December 31,            
                             ------------------         Increase (Decrease)     
                                    1994                   During the      
                          ---------------------------      Year Ended
                         Interest                          December 31,
Type of Account            Rate    Amount  Percent(1)         1996    
---------------           ------   ------   -------        --------  
                            (dollars in thousands)      
                                                                     
<S>                        <C>     <C>         <C>        <C>        
Regular savings deposits   2.75%   $15,976     9.64%       $   113    
NOW accounts...........    2.25%    22,752    13.73            843    
Super NOW accounts.....    2.70%     1,859     1.12           (272)   
Money market deposits..    3.20%    16,466     9.94           (729)   
                                   -------    -----         ------    
   Total...............            $57,053    34.43%       $   (45)   
                                   -------    -----         ------    
                                                                     
Certificates of deposit  Below 4% $ 12,383     7.47%       $   (39)   
                             4-6%   80,122    48.35         23,650    
                             6-8%   14,603     8.81        (22,910)   
                            8-10%    1,560     0.94           (504)   
                                  --------    ------        ------    
Total time deposits ..            $108,667    65.57%       $   197    
                                  --------    -----         ------    
                                                                     
                                                                     
   Total deposits.....            $165,720   100.00%       $   152
                                  ========   ======        =======
                                                     

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

(1) Represents  percentage of deposits in the respective category of deposits to
total deposits.

</TABLE>

                                       24
<PAGE>

     The following table sets forth information with respect to interest expense
and average deposit balances for the periods indicated.

                                        Years Ended December 31,
                                        ------------------------
                                   1996                          1995
                          ------------------------------------------------------
                                             Average                     Average
                          Average   Interest  Rate    Average   Interest   Rate
                          Balance   Expense   Paid    Balance   Expense    Paid
                                         (dollars in thousands)
Deposits:
Noninterest- bearing 
 demand deposits....... $   8,370    $    -      -    $ 10,066    $    -      -
Interest-bearing
 demand deposits.......    23,074       546   2.37      17,581       529   3.01
Money market deposit
 accounts..............    15,497       532   3.43      15,844       540   3.41
Passbook and statement
 savings...............    16,937       408   2.41      16,352       404   2.47
Time deposits..........   114,371     6,525   5.71     114,793     6,551   5.71
                         --------    ------   ----    --------    ------   ----
    Total deposits.....  $178,249    $8,011   4.49%   $174,636    $8,024   4.58%
                         ========    ======   ====    ========    ======   ====

         The following  table sets forth the amount of time deposits at December
31, 1996 maturing in the periods indicated.

                                        Amount Maturing

                      Within      Within      Within       After
Interest Rate         1 Year      2 Years    3 Years      3 Years     Total
-------------        --------     -------    -------      -------     -----
                                      (dollars in thousands)

Below  4%..........   $    40     $    10     $    -      $     -    $     50
 4% -  6%..........    65,240      10,891      4,525        3,602      84,258
 6% -  8%..........    18,092       8,518      2,411        2,800      31,821
 8% - 10%.........          -           -          -            -           -
                      -------     -------     ------      -------    --------
   Total ..........   $83,372     $19,419     $6,936      $ 6,402    $116,129
                      =======     =======     ======      =======    ========
                               

                                       25
<PAGE>

     The  following  table sets forth the maturity  distribution  of time CDs of
$100,000 or more and other time  deposits  of  $100,000 or more at December  31,
1996.

                                                      December 31,
                                                      ------------
                                                                  Other
                                                 Time              Time
Time to Maturity                                  CDs            Deposits
----------------                                  ---            --------
                                                 (dollars in thousands)

3 months or less.............................   $ 8,791             $-
Over 3 months through 6 months...............     8,715              -
Over 6 months through 12 months..............    10,878              -
Over 12 months...............................     4,716              -
                                                -------            ---
   Total outstanding.........................   $33,100             $-

     In the event of liquidation  of the Bank,  savings  account  holders of the
Bank would be entitled to full payment of their  savings  accounts  prior to any
payment to the holders of capital stock of the Bank.

Borrowings

    Deposits  are the  primary  source  of  funds  for the  Bank's  lending  and
investment  activities and for its general business purposes.  However, the Bank
periodically  borrows  from the FHLB of  Atlanta  to  supplement  its  supply of
lendable funds and to meet deposit withdrawal requirements.  The FHLB of Atlanta
functions as a central reserve bank providing credit for thrift institutions and
certain other member financial institutions.  See "Supervision and Regulation --
Regulation  of Federal  Savings  Associations  -- Federal Home Loan Bank System"
below.  As a member,  the Bank is required  to own capital  stock in the FHLB of
Atlanta and is  authorized  to apply for  advances on the security of such stock
and  certain  of the  Bank's  home  mortgages  and  other  assets  (principally,
securities  which are  obligations  of, or  guaranteed  by, the  United  States)
provided certain standards related to creditworthiness have been met.

    Advances  are made  pursuant  to several  different  programs.  Each  credit
program  has its own  interest  rate and  range of  maturities,  and the FHLB of
Atlanta may prescribe the acceptable uses to which the advances pursuant to each
program may be put, as well as limit the size of such advances. Depending on the
program,  limitations  on the  size of  advances  are  based  either  on a fixed
percentage of the Bank's net worth or on the FHLB of Atlanta's assessment of the
Bank's  creditworthiness.  The  Bank's  advances  from the FHLB of  Atlanta  are
typically  secured by the Bank's  stock in the FHLB of Atlanta and its pledge of
qualified  first mortgage loans equal to 165% of the advances  outstanding.  The
Bank's  advances  in the  short-term  credit  program  are  secured  by MBSs and
CMOs.
    The following  table sets forth the borrowing  activities of the Bank at the
end of and during the periods indicated.

                                        At and for the Years Ended December 31,
                                        ---------------------------------------
                                          1996         1995           1994
                                          ----         ----           ----
                                               (dollars in thousands)

Balance, end of period ...............  $17,371       $29,504       $43,281
Highest month-end balance ............  $25,413       $39,230       $48,222
Weighted average interest rate
 at end of period ....................     5.28%         5.47%         5.84%
Average balances for period ..........  $21,585       $31,962       $36,567
Weighted average interest rate
 during the period ...................     5.32%         5.82%         4.50%

                                       26
<PAGE>

     The Bank has not  used  and does not plan to use  subordinated  debentures,
CMOs or reverse purchase agreements as borrowing tools in the immediate future.

Retail Services

    The Bank provides its customers with a variety of retail  banking  services.
The Bank has 24-hour  automatic teller machines  ("ATMs") at five of its offices
in LaGrange as well as at LaGrange  College and the West Georgia  Medical Center
in  LaGrange.  The Bank is a member  of the  Southeast  Switch,  Inc.  system of
automatic  tellers,  and the PLUS(R) and CIRRUS(R)  systems,  which provide Bank
customers with access to HONOR(R), PLUS(R) and CIRRUS(R) services at more than 1
million  locations  throughout  the United States and the world.  Also, the Bank
offers the First Federal Check Card which gives Bank customers access to VISA(R)
merchants  world-wide through point of sale transactions.  The Bank provides (in
addition  to  the  lending  and  deposit  services  described  above),  checking
accounts,   savings  programs,   night  depository  services  and  safe  deposit
facilities.  The Bank also  provides cash  management  services for its business
customers.  The Bank offers certain  securities  brokerage  services through its
wholly owned service  corporation,  Piedmont Mortgage  Service,  Inc., under the
name of Piedmont  Investment  Service,  and,  based on an  arrangement  with the
brokerage firm of Attkisson,  Carter & Akers,  Inc., a registered  broker-dealer
and a  member  firm  of the New  York  Stock  Exchange.  This  service  provides
customers with a variety of investment  products and services that are common in
the financial markets of today.

Competition

    Based on total  assets of  approximately  $222 million at December 31, 1996,
the Bank is the 10th largest of 38 thrift institutions  headquartered in Georgia
and the largest financial institution headquartered in Troup County.

     The Bank's most direct competition, for both deposits and loans, comes from
commercial  banks,  other thrift  institutions and mortgage  banking  companies.
NationsBank  N.A.(South),  Commercial Bank & Trust Company and SunTrust  Company
Bank of Columbus,  N.A. are the Bank's major  competitors  for  deposits.  These
institutions along with Charter Federal Savings and Loan Association and various
mortgage bankers are also the Bank's major  competitors with regard to mortgages
and consumer  lending.  Some of these  institutions  are  affiliated  with large
regional  financial  institutions and have  substantially  greater resources and
lending limits than the Bank.  The Bank also faces  competition in certain areas
of its business from consumer  finance  companies,  insurance  companies,  money
market mutual funds and investment  banking firms, some of which are not subject
to the same degree of regulation as the Bank.

    The Bank competes for deposits  principally by offering depositors a variety
of deposit  programs  with  competitive  interest  rates,  quality  service  and
convenient  location  and hours.  The Bank  competes  for loan  originations  by
offering a variety of loan programs, competitive interest rates, discount points
and loan fees, timely processing and quality service. 

    The competitive  pressures among thrift  institutions,  commercial banks and
other entities have increased  significantly in recent years and are expected to
continue  to  do  so.  The  establishment  of  money  market  accounts  and  the
elimination  of rate  controls for interest  rates paid on deposits in the early
and mid-1980s, for example, have increased the competition for deposits and tend
to increase the Bank's cost of funds, especially during periods of high interest
rates.

     The  Riegle-Neal  Interstate  Banking and Branching  Efficiency Act of 1994
(the  "Interstate  Banking Act"),  which became effective on September 29, 1995,
repealed the prior statutory restrictions on interstate acquisitions of banks by
bank holding  companies,  such that banks and bank holding companies may acquire
banks located in other states, regardless of state law to the contrary,  subject
to  certain  deposit-percentage   limitations,  aging  requirements,  and  other
restrictions.  The Interstate  Banking Act also generally  provides that,  after
June 1, 1997, national and  state-chartered  banks may branch interstate through
acquisitions  of banks in other states.  By adopting  legislation  prior to that
date, a state has the ability  either to "opt in" and  accelerate the date after
which interstate  branching is permissible or "opt out" and prohibit  interstate
branching  altogether.  Georgia has enacted  "opt in"  legislation  that permits
interstate  branching in Georgia on a reciprocal basis through June 1, 1997, and
on an unlimited basis thereafter. Competition within Georgia among financial

                                       27
<PAGE>

institutions  generally,  and among  savings  institutions  in  particular,  may
increase,  due in part to this "opt in"  legislation,  as well as the  increased
number of newly-chartered  financial  institutions,  the increased  incidence of
branching by savings institutions  headquartered in other parts of the state and
the country,  and the  acquisition of  Georgia-based  financial  institutions by
out-of-state   financial   institutions   although  the  extent  to  which  such
competition will increase, or the timing of such increase, cannot be predicted.

Employees

     As of  December  31,  1996,  the Bank had 102  full-time  and 17  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.

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 for
deposit  insurance are currently  paid to the SAIF. The Bank is also a member of
the  FHLB of  Atlanta.  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 savings and loan 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  loan  loss  reserves  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.

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

Regulation of Savings and Loan Holding Companies

    As a savings  and loan  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 savings and loan
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
consider the financial  and  managerial  resources  and future  prospects of the

                                       28
<PAGE>

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 savings and loan 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
tender ("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 savings and
loan  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  savings  and loan  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 savings and loan 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."

     During 1996, Congress 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 savings and loan 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  savings  and  loan  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 Board of  Governors  of the  Federal  Reserve  System  (the
"FRB").  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

                                       29
<PAGE>

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
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.  

     The OTS has  indicated  that it  considers  a series of leases and  secured
loans  made by the Bank to  Bennett  Funding  Group,  Inc.  and  certain  of its
affiliates to be transactions with one borrower.[These  leases and loans have an
aggregate  principal  balance of $4.5  million  which  exceeds the Bank's  legal
lending  limit of $3.2  million.]  To the  extent  that these  transactions  are
aggregated,  the Bank  will be  deemed  to be in  violation  of the loans to one
borrower rule under HOLA, as discussed  above.  The Bank has agreed with the OTS
to develop a plan to remedy the  situation,  although  the  details of such plan
have not yet been  determined.  Bennett  Funding  Group,  Inc. is presently  the
subject of bankruptcy proceedings in which the Trustee is contesting the secured
status of the Bank's  loans.  The Bank is  vigorously  defending its status as a
fully secured, perfected creditor and has established a reserve of approximately
$3  million  to  cover   potential   losses  incurred  in  connection  with  the
proceedings.  See  "Litigation."  The outcome of such proceedings may affect the
Bank's  method  of  addressing  the  loans to one  borrower  violation,  and the
outcome,  timing,  and effect of such  proceedings and such violation  cannot be
determined at this time.


    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, 1996, the Bank maintained 74.86%
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

                                       30
<PAGE>

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 3.0% 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. The 3.0% core capital requirement has been effectively superseded by the
OTS' prompt  corrective  action  regulations,  which  impose a 4.0% core capital
requirement  for  "adequately  capitalized"  thrifts  and a  5.0%  core  capital
requirement for "well capitalized"  thrifts.  See "Prompt Corrective  Regulatory
Action." 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.

     Tangible  capital is defined,  generally,  as common  stockholders'  equity
(including retained earnings)and certain noncumulative perpetual preferred stock
and  related   earnings,   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 certain 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, 1996, the Bank was
not required to maintain any additional risk-based capital under this rule.

                                       31
<PAGE>

    At December 31, 1996, the Bank met each of the OTS capital requirements,  in
each case on a fully  phased-in  basis.  The table  below  presents  the  Bank's
regulatory  capital as compared to the OTS regulatory  capital  requirements  at
December 31, 1996:
                                            December 31,
                           -------------------------------------------------
                               Actual          Required           Excess
                           -------------------------------------------------
                           Amount    %       Amount   %        Amount    %
                           ------    -       ------   -        ------    -
                                        (dollars in thousands)
Core capital...........   $19,694   8.84%  $  6,681  3.00%    $13,013   5.84%
Tangible capital.......    19,694   8.84      3,340  1.50      16,354   7.34
Risk-based capital.....    21,568  14.38     12,000  8.00       9,568   6.38

     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.

                                       31
<PAGE>

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 exchanges 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.

    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 savings and loan holding company,  is not deemed to be in
troubled condition, has received either of the two highest composite supervisory

                                       32
<PAGE>

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%
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, 1996 was 7.75%,  and its  short-term  liquidity  ratio was
3.83%, 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
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

                                       33
<PAGE>

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
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 FRB  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.

                                       34
<PAGE>

    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
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

                                       35
<PAGE>

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 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 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,
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



                                       36
<PAGE>

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 savings and
loan 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.  Asessment  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.

     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 pre-tax.

     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

                                       37
<PAGE>

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 for the years 1997 through 1999, assuming
no further changes in announced premium assessment rates.]

     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 FHLB of Atlanta,  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 FHLB of
Atlanta,  is required to acquire and hold shares of capital stock in the FHLB of
Atlanta  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 FHLB of Atlanta.  The Bank was in compliance  with this  requirement at
December 31, 1996 with an investment  in FHLB of Atlanta stock , of  $1,895,900.
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.

    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.

                                       38
<PAGE>

    Federal Reserve System

    The Bank is  subject  to  provisions  of the FRA and the  FRB'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 FRB 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 FRB may adjust between 8.0% and 12%. The FRB regulations
currently exempt $4.3 million of otherwise  reservable balances from the reserve
requirements,  which  exemption  is adjusted by the FRB 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 FRB,  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  FRB 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 FRB regulations  require
such  institutions  to exhaust all FHLB sources before  borrowing from a Federal
Reserve Bank.




                                     PART II


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

Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operation

General

FLAG Financial  Corporation  ("FLAG") is a unitary  thrift holding  company that
owns 100 percent of the common stock of First  Federal  Savings Bank of LaGrange
(the  "Bank").  The Bank is a  federally  chartered  stock  savings  bank  doing
business in west central  Georgia.  The Bank is a full-service,  retail oriented
community bank primarily engaged in retail banking, small business,  residential
and commercial real estate lending and mortgage banking.

In 1993, the  shareholders  of the Bank approved the  organization  of FLAG as a
holding  company for the Bank (the  "Reorganization").  The  Reorganization  was
effective on March 1, 1994, when each share of the  outstanding  common stock of
the Bank automatically was converted into one share of the common stock of FLAG,
and the Bank became a wholly-owned subsidiary of FLAG.

Because the primary activity of FLAG is the ownership and operation of the Bank,
FLAG's  financial  performance  is determined  primarily by the operation of the
Bank. Accordingly,  the discussion below relates principally to the operation of
the Bank. As used herein,  the term "FLAG" includes FLAG and, where appropriate,
the Bank. The following discussion presents financial information regarding FLAG
for periods ending after the  Reorganization and for the Bank for periods ending
prior to the  Reorganization.  This  discussion  and the  financial  information
contained  herein  are  presented  to assist  the  reader in  understanding  and
evaluating the financial  condition,  results of operations and future prospects
of FLAG  and  should  be read as a  supplement  to and in  conjunction  with the
Consolidated Financial Statements and related notes.

Forward-Looking Statements

In the following  pages,  the  management of FLAG presents an analysis of FLAG's
financial  condition as of December 31, 1996,  as well as  comparisons  to prior
years.  In addition to this  historical  information,  the following  discussion
contains forward-looking statements that involve risks, estimates,  expectations
and other  uncertainties.  Economic  circumstances beyond the control of FLAG as
well  as  FLAG's   operations   and  actual   financial   results  could



                                       39
<PAGE>

TABLE 1
                                                   December 31,
                                         ---------------------------------
                                        1996           1995            1994
                                        ----           ----            ----
Net Interest Income ............    $ 8,172,716     $ 7,282,756     $ 6,836,718
Provision for Loan Losses ......     (3,484,529)       (630,000)       (440,000)
Other Income ...................      2,992,798       2,459,034       1,879,726
Operating Expenses .............     (8,169,833)     (6,040,872)     (5,527,953)
                                    -----------     -----------     -----------
Pretax Income ..................       (488,848)      3,070,918       2,748,491
Provision for Income Taxes .....        311,222      (1,044,911)       (980,639)
                                    -----------     -----------     -----------
Net Income / (Loss) ............    ($  177,626)    $ 2,026,007     $ 1,767,852
                                    ===========     ===========     ===========

differ   significantly  from  the  assumptions  and  figures  discussed  in  the
forward-looking  statements.  Some of the factors that could cause or contribute
to such  differences  are  discussed  herein  but also  include  changes  in the
economy, changes in the interest rates in the nation and changes in the interest
rates in FLAG's general market area.


Operating Results

FLAG reported a  consolidated  net loss for the year ended  December 31, 1996 of
$177,626,  or $0.09 per share, a decrease of $2,203,633  from  consolidated  net
income of $2,026,007,  or $0.97 per share,  for 1995.  FLAG's  consolidated  net
income for the year ended December 31, 1994 was $1,767,852,  or $0.85 per share.
The two largest factors in the decrease in 1996's earnings when compared to 1995
were charges related to Bennett Funding Group, Inc.  ("Bennett  Funding") and an
assessment to recapitalize the Savings Association Insurance Fund ("SAIF"), both
of which are discussed in further detail below. Excluding non-recurring charges,
net income for the year ended  December  31, 1996 was  $2,453,000,  or $1.18 per
share,  versus  $2,026,000,  or $0.97 per share, for the year ended December 31,
1995.

Bennett Funding Group, Inc.

Bennett  Funding is an equipment  leasing and finance company based in Syracuse,
New York. For several years, FLAG, along with many other financial  institutions
and  individuals  throughout  the United  States,  invested in office  equipment
leases sold through  Bennett  Funding.  During 1996,  Bennett  Funding filed for
Chapter 11 bankruptcy  protection,  and certain  officers of Bennett Funding are
being  investigated  for  possible  wrongdoing,  including  but not  limited  to
criminal  securities fraud. As a result of the Chapter 11 bankruptcy filing, the
collection of cash flows and the values associated with these leases became less
certain,  and to reflect this  possible  loss in value,  the Bank  established a
specific  reserve for possible  Bennett Funding losses of $678,000 in the second
quarter of 1996.

After further review and consultation  with regulatory  authorities and advisors
to the Bank,  it was  determined  that an additional  special  provision of $2.3
million  should be added to the reserves of $678,000.  Reflecting the additional
provision  of  $2.3  million,   approximately   $3.0  million  in  reserves  was
established  in connection  with the portfolio.  As part of this review,  it was
also determined  that the $4.5 million in equipment  leases should be classified
as "Doubtful," a classification  which generally  requires  reserves equal to 50
percent of the carrying value of the asset.


                                       40
<PAGE>


Although  the  establishment  of this level of reserves  reflects  the risk that
significantly  less than book value will be realized from these leases, it in no
way limits the amount of recovery  sought by the Bank.  Although there is no way
to anticipate the timing or ultimate  resolution of the Bennett  Funding matter,
the Company  continues  to seek full  recovery of the  amounts  invested  and is
aggressively pursuing legal and other actions to seek such recovery.

SAIF Assessment

On September 30, 1996,  President  Clinton  signed  legislation  providing for a
special assessment on financial  institutions whose deposits are insured by SAIF
of the Federal Deposit Insurance Corporation ("FDIC").  Pursuant to the new law,
a one-time  fee was paid by all  SAIF-insured  institutions  at the rate of 65.7
cents per $100 of deposits  held by such  institutions  at March 31,  1995.  The
money collected will recapitalize the SAIF reserve to the level required by law.
In  September  1996 the  Company  recorded  an  expense of  $1,156,000  for this
assessment.

The new law provides for the merger, subject to certain conditions,  of the SAIF
into the Bank  Insurance  Fund  ("BIF")  by 1999 and also  requires  BIF-insured
institutions to share in the payment of interest on the bonds previously  issued
by a specially created government entity,  the Financing  Corporation  ("FICO"),
the  proceeds of which were applied  toward  resolution  of the thrift  industry
crisis in the 1980s.  Beginning  on January 1, 1997,  SAIF-insured  institutions
began paying deposit  insurance  premiums at an annual rate of approximately 6.4
basis points of their  insured  deposits,  and  BIF-insured  institutions  began
paying deposit  insurance  premiums at an annual rate of approximately 1.3 basis
points of their  insured  deposits  towards  the payment of interest on the FICO
bonds.  These FICO interest  premiums are in addition to the insurance  premiums
paid by  SAIF-insured  institutions to maintain the SAIF reserve at its required
level (which  ranges from zero basis  points to 27 basis points  pursuant to the
current risk classification system).

Based on the Company's  insured  deposits at December 31, 1996, the expected new
deposit  insurance  premium  level,  inclusive of the payment of interest on the
FICO bonds,  would result in an estimated 1997 pre-tax savings of  approximately
$300,000 beginning in the March 1997 quarter.

Table 1 provides a summary and the following discussion provides a more detailed
explanation of operating  results for the three year period ending  December 31,
1996.

Net Interest Income

Net interest  income  (interest  income less interest  expense)  increased  from
$6,836,718 in 1994 to $7,282,756 in 1995 and to $8,172,716 in 1996. Net interest
income is  determined  by the  amount of  interest-earning  assets  compared  to
interest-bearing  liabilities and their related yields and costs. The difference
between the weighted  average interest rates earned on  interest-earning  assets

TABLE 2                                                                        
                                            YEAR ENDED DECEMBER 31,         
                                                    1996                    
                                   ---------------------------------------------
                                                    INCOME         WEIGHTED     
                                      AVERAGE         OR           AVERAGE      
                                      BALANCE       EXPENSE         RATE        
                                   ---------------------------------------------

Interest-earning assets:
Loans ............................  $151,084,092   $14,039,683      9.29%
Mortgage-backed securities .......    40,000,629     2,458,011      6.14%
Investment securities ............    11,254,754       698,079      6.20%
Interest -bearing deposits
 in other banks...................     1,692,240        90,599      5.35%
Federal funds sold ...............     1,342,879        76,988      5.73%
Repurchase agreements ............          --            --        --   
Other short-term investments .....          --            --        --   
                                     -----------   -----------      -----
Total interest-
 earning assets ..................  $205,374,594   $17,363,360      8.45%
                                    ============   ===========      ==== 

Interest-bearing liabilities:
Savings deposits .................   $55,508,307    $1,485,966      2.68%
Other time deposits ..............   114,371,184     6,525,050      5.71%
Federal funds purchased ..........       206,710        11,665      5.64%
FHLB advances ....................    21,530,738     1,167,963      5.42%
                                      ----------     ---------      ---- 

Total interest-bearing
 liabilities .....................  $191,616,939    $9,190,644      4.80%
                                    ============    ==========      ==== 

Interest rate spread .............                                  3.65%
Net interest margin ..............                                  3.98%
Interest-earning assets/
interest -bearing liabilities ....                                   107%

                                          YEAR ENDED DECEMBER 31,         
                                                   1995                   
                                   ---------------------------------------
                                                    INCOME         WEIGHTED
                                   AVERAGE           OR            AVERAGE
                                   BALANCE         EXPENSE          RATE
                                   ---------------------------------------
                                   
Interest-earning assets:
Loans ............................  $146,143,602  $12,745,773       8.72%
Mortgage-backed securities .......    46,239,347    3,018,244       6.53%
Investment securities ............    19,006,528    1,247,822       6.57%
Interest -bearing deposits
in other banks ...................     2,959,588      138,372       4.68%
Federal funds sold ...............       333,088       18,238       5.48%
Repurchase agreements ............          --           --          --   
Other short-term investments .....          --           --          --   
                                    -----------   ----------     --------
Total interest-
  earning assets .................  $214,682,153  $17,168,449       8.00%
                                    ============  ===========       ==== 
Interest-bearing liabilities:
Savings deposits .................   $49,777,172   $1,473,125       2.96%
Other time deposits ..............   114,793,340    6,551,062       5.71%
Federal funds purchased ..........          --           --          --  
FHLB advances ....................    31,961,667    1,861,506       5.82%
                                    -----------   ----------     --------
Total interest-bearing
  liabilities ....................   196,532,179    9,885,693       5.03%
                                     ===========    =========       ==== 

Interest rate spread .............                                  2.97%
             
Net interest margin ..............                                  3.39%
 ............. 
Interest-earning assets/
interest -bearing liabilities ....                                  109%

                                            YEAR ENDED DECEMBER 31,         
                                                   1994                      
                                    --------------------------------------
                                                   INCOME         WEIGHTED  
                                      AVERAGE        OR           AVERAGE   
                                      BALANCE      EXPENSE         RATE    
                                    --------------------------------------
Interest-earning assets:                
Loans ............................  $140,610,236  $11,273,849       8.02%
Mortgage-backed securities .......    47,673,253    2,550,982       5.35%
Investment securities ............    19,065,624    1,125,221       5.90%
Interest -bearing deposits
in other banks ...................     3,226,604      108,438       3.36%
Federal funds sold ...............          --           --           -- 
Repurchase agreements ............          --           --           -- 
Other short-term investments .....          --           --           -- 
                                                                         
                                    -----------   ----------     --------
Total interest-                                                          
  earning assets .................  $210,575,717  $15,058,490       7.15%
                                    ===========    ==========    ========

Interest-bearing liabilities:
Savings deposits .................   $50,608,968   $1,469,691       2.90%
Other time deposits ..............   104,059,715    5,059,436       4.86%
Federal funds purchased ..........          --           --           --
FHLB advances ....................    36,000,834    1,692,645       4.70%
                                     -----------    ---------    --------
Total interest-bearing
  liabilities ....................   190,669,517    8,221,772       4.31%
                                    ===========    ==========    ========
Interest rate spread .............                                  2.84%
Net interest margin ..............                                  3.25%
Interest-earning assets/
interest -bearing liabilities ....                                   110%


                                       41
<PAGE>

TABLE 3
                                                    Year Ended December 31,
                                                1996         1995          1994
                                           -------------------------------------

Average net loans .........................   $151,084    $146,144    $141,640
Allowance for loan losses, 
  beginning of period .....................      1,339       1,244         882
Charge-offs for the period
    Consumer loans ........................         87         118          88
    Commercial loans ......................          0         364           2
    Permanent mortgage loans ..............        410          60          35
    Residential construction loans ........         22          23           0
                                              --------    --------    --------
        Total charge-offs .................        519         565         125
                                              --------    --------    --------
Recoveries for the period
    Consumer loans ........................         35          30          46
    Commercial loans ......................          0           0           0
    Permanent mortgage loans ..............          0           0           1
    Residential construction loans ........          0           0           0
                                              --------    --------    --------
        Total recoveries ..................         35          30          47
                                              --------    --------    --------
Net charge-offs for the period ............        484         535          78
Provision for loan losses .................      3,484         630         440
Allowance for loan losses, end of period...   $  4,339    $  1,339    $  1,244
Ratio of allowance for loan losses to
     total net loans outstanding ..........       2.84%       0.91%       0.88%
Ratio of net charge-offs to average
     net loans for the period .............       0.32%       0.37%       0.06%


(i.e., loans and investment  securities) and the weighted average interest rates
paid on interest-bearing  liabilities is called the net interest spread. Another
measure of the difference in interest income earned versus interest expense paid
is net  interest  margin.  Net  interest  margin is  calculated  by dividing net
interest income by average earning assets. Table 2 presents, for the three years
ended December 31, 1996, the Bank's average balances of interest-earning  assets
and interest-bearing  liabilities and the weighted average interest rates earned
and paid on those  balances.  In addition,  interest rate spreads,  net interest
margins  and  the  ratio  of  interest-earning  assets  versus  interest-bearing
liabilities for those years are presented.

TABLE 4
                                                Year Ended December 31,
                                           1996           1995            1994
                                      ------------------------------------------
Checking accounts
Number of accounts ................         14,628         13,689         12,541
Balance ...........................    $45,356,770    $45,515,784    $41,077,917
Average balance per account .......    $     3,101    $     3,325    $     3,275
Deposit related fees ..............    $ 1,621,516    $ 1,435,076    $ 1,284,169

TABLE 5
                                    Annual Mortgage Loan Production
                             1996                1995               1994
                      ----------------------------------------------------------
                       No.     Amount       No.     Amount     No.     Amount
                      ----------------------------------------------------------
Mortgage types originated
Conforming .......     552   $45,879,255    392   $32,468,141  491   $37,964,116
VA/FHA ...........     255    17,788,369    229    15,859,414  263    18,724,503
                       ---    ----------    ---    ----------  ---    ----------
    Total activity     807   $63,667,624    621   $48,327,555  754   $56,688,619
                       ===   ===========    ===   ===========  ===   ===========


As shown in Table 2, the Bank's average  interest-earning  assets increased from
$210,575,717  in 1994 to  $214,682,153  in 1995 but decreased to $205,374,594 in
1996, while average interest-bearing  liabilities increased from $190,669,517 in
1994 to  $196,532,179  in 1995 but decreased to $191,616,939 in 1996. The Bank's
net  interest  margin  was  3.25%  in 1994,  3.39%  in 1995  and  3.98% in 1996.
Throughout  1994 interest rates increased  dramatically,  causing the Bank's net
interest spread and margin to decline. The reason for this is that when interest
rates increase,  deposit rates respond more quickly than interest rates on loans
and most  securities,  which typically have longer terms. In 1995 interest rates
reached the peak of this  interest rate cycle early in the year and then started
declining.  When interest  rates decline,  as they did throughout  most of 1995,
interest rate spreads and net interest  margins  typically widen again,  because
interest rates paid on deposits normally adjust more quickly than interest rates
earned on loans and most  securities.  In 1996,  interest rates remained  fairly
stable,  although  long-term  interest rates generally rose more than short-term
rates.  As a result,  the Bank's net interest  spread and margin  increased  due
primarily to a higher rate earned on loans and a slight  moderation in the rates
paid on deposit accounts.

Provision For Possible Loan Loss

Table 3  presents  an  analysis  of the  provision  for  possible  loan loss and
activities in the allowance for possible loan losses  account for the past three
years.  An allowance  for  possible  losses is provided  through  charges to the
Bank's expenses in the form of a provision for possible loan loss. The provision
for possible loan losses was $440,000 in 1994,  $630,000 in 1995 and  $3,484,000
in 1996.  The large  increase in the provision for loan losses from 1995 to 1996
is directly attributable to the Bennett Funding matter, as previously discussed.
Excluding the provision  associated with Bennett Funding, the provision for loan
losses would have been $506,000.  The Bank determines the level of the provision
for possible loan losses based on  outstanding  loan and lease  balances and the
levels of nonperforming assets and assets classified as substandard, doubtful or
loss,  together  with  an  analysis  of  historical  loss  experience,  economic
conditions  and specific  problem and potential  problem loans and leases in the
Bank's portfolio.

Historically, the Bank's loan portfolio has consisted primarily of loans secured
by one-to-four  family residential  properties,  and actual losses have not been


                                       42
<PAGE>

significant. The Bank also provides other services and loan products to meet the
growing  financial needs of the Bank's  communities,  including  consumer loans,
commercial loans and commercial real estate loans. Because these loans present a
somewhat  higher  credit  risk than  loans  secured by  residential  properties,
management has significantly increased the allowance for loan losses compared to
historic levels to reflect the increased potential for future losses.  Excluding
the portion of the  provision  that was  attributable  to Bennett  Funding,  the
provision  for loan  losses  in 1996  would  have  been  $124,000  less than the
provision in 1995.

As shown in Table 3, the year-end  allowance for possible loan losses  increased
from  $1,244,000  at December 31, 1994 to $1,339,000 at December 31, 1995 and to
$4,339,000 at December 31, 1996. The allowance for possible losses has increased
from  0.88%  of net  outstanding  loans  at  December  31,  1994 to 0.91% of net
outstanding  loans at  December  31,  1995 and to 2.84% at  December  31,  1996.
Management  believes that the allowance for possible loan losses for each of the
past three fiscal years is both adequate and  appropriate.  However,  the future
level  of the  allowance  for  loan  losses  is  highly  dependent  upon  future
developments  surrounding  the Bennett  Funding matter and cannot be anticipated
with a high degree of certainty.

Other Income

As  shown  in  Table  1,  other  income  increased  from  $1,879,726  in 1994 to
$2,459,034 in 1995 and to  $2,992,798  in 1996.  The increase in other income in
1996 was due to a combination of higher fee and service charge income as well as
to an increase in gains from the sale of investment  securities  and loans.  The
increase  in other  income in 1995  compared  to 1994 was due to an  increase in
deposit related fees (see Table 4).

Table 5 reflects  the Bank's  mortgage  banking  activity  for each of the three
years in the period ended  December 31,  1996.  This table shows that  mortgages
originated for sale in the secondary  mortgage  market were  $56,688,619 in 1994
but were only $48,327,555 in 1995 and increased to $63,667,624 in 1996. Gains on
sales of mortgage loans decreased from $707 in 1994 to a loss of $42,497 in 1995
and  increased  to  $246,800  in 1996.  Mortgage  rates  increased  dramatically
throughout 1994, which  significantly  reduced mortgage loan origination volumes
and  opportunities to sell mortgages at gains.  Although mortgage interest rates
significantly declined in the latter half of 1995, they did not reach low enough
levels to produce  significant  mortgage  refinancing  activity,  and the Bank's
overall  volume in 1995 was even  lower than 1994.  In 1996,  loan  originations
accelerated in part due to continued  strong  economic  conditions and generally
stable interest rates.

Table 4 presents the results of the Bank's checking account acquisition program.
As seen in this table,  checking  accounts  increased from 12,541  accounts with
balances  totaling  $41,077,917 at December  31, 1994 to 13,689  accounts  with
balances of  $45,515,784  at  December  31,  1995 and to 14,628  accounts  with
balances totaling  $45,356,770 at December 31, 1996. Fee income related to these
accounts has  increased  from  $1,284,169  in 1994 to  $1,435,076 in 1995 and to
$1,621,516 in 1996.

As this table shows, the Bank remains  successful in the acquisition of personal
and commercial checking accounts.  These checking accounts provide the Bank with
additional fee income and  noninterest-bearing  funds.  Management believes that
its  continued  focus on mortgage  banking  activities  and the  acquisition  of
checking accounts is necessary to increase noninterest income.


Operating Expenses

Operating  expenses  increased from $5,527,953 in 1994 to $6,040,872 in 1995 and
to  $8,169,833  in 1996.  Employee  compensation  and  benefits  increased  from
$2,149,214  in 1994 to  $2,337,143 in 1995 and to $2,581,523 in 1996. In 1994, a
loan  production  office was opened in Auburn,  Alabama,  an appraisal  services
office  was  opened  and in the  fourth  quarter  of the  year a large  drive-up
facility  was  opened  in  LaGrange  across  from the  main  office  to  relieve
congestion  at the main  office.  The  increase  in  employee  compensation  and
benefits  in 1995  reflects a full year's  operation  of the  drive-up  facility
mentioned  above and the opening of a full-service  branch on the east sector of
LaGrange,  near  Interstate 85 south and West Georgia Commons Mall. The increase
in  employee  compensation  and  benefits  in 1996 was  primarily  due to normal
increases  in  compensation  levels  as well as to the  hiring  of  several  key
individuals during the year.

FDIC deposit  insurance  premiums were $436,665 in 1994,  $459,581 in 1995  and
$1,666,101  in 1996.  The large  increase in 1996 was due to the  one-time  SAIF
assessment of $1,156,000, as was previously discussed.

Advertising expense was $264,020 in 1994, $178,394 in 1995 and $210,190 in 1996.
The decrease in 1995 reflects the  conclusion of certain  promotional  campaigns
which were  implemented  during 1994.  The increase in 1996 was due to increased
promotional efforts surrounding the previously mentioned  full-service branch on
the east  sector of  LaGrange as well as  increases  associated  with the Bank's
checking account acquisition program.

General  and payroll  tax  expense  was  $292,428 in 1994,  $270,451 in 1995 and
$343,875 in 1996.  The decrease in 1995 and the increase in 1996 were partly due
to changes in the overall level of compensation as well as to timing differences
on the recognition of such expenses.

The growth in the number of loan and deposit accounts,  significant increases in
the number of  transactions,  new costs  associated  with check  imaging and the
increase  in the  number of  automatic  teller  machines  added in 1994 and 1995


                                       43
<PAGE>

TABLE 6                                              December 31,
                                        -------------------------------------
                                               1996                1995
                                               ----                ----

Total assets .....................        $221,957,881          $232,105,364
Loans- net........................         152,644,436           147,402,036
Securities .......................          46,412,092            60,556,400
Deposits .........................         177,999,415           177,848,121
FHLB advances ....................        $ 17,370,833          $ 29,504,167

TABLE 7                                              December 31,
                                   ---------------------------------------------
                                           1996                       1995
                                           ----                       ----
                                     Amount    Percent      Amount      Percent

Residential mortgages ........     $ 78,263      48.96%    $ 88,719      57.61%
Commercial real estate loans .       33,844      21.17%      23,976      15.57%
Consumer loans ...............       18,166      11.36%      14,732       9.57%
Commercial loans/leases.......       17,780      11.12%      16,916      10.98%
Residential construction loans       11,812       7.39%       9,664       6.28%
                                   --------     ------     --------      ------
  Gross loans receivable .....     $159,865     100.00%    $154,007     100.00%

continued to drive up data processing expenses.  They increased from $414,045 in
1994 to $480,209 in 1995 and to $520,762 in 1996.

Other operating expenses were $644,328 in 1994,  $775,874 in 1995 and $1,018,751
in 1996.  The increase in 1995 is  attributable  to local and wide area networks
and new image statement  processing that were introduced in 1995 . With this new
imaged statement process,  customers receive images of their checks, up to 24 to
a page,  in an easier to read  format.  Storage is much easier for the  customer
with this new system.  Future  savings to the Bank  should be  obtained  through
reduced postage costs and research time. The increase in 1996 was largely due to
investments  in the Bank's new  leasing  program and  research-related  expenses
associated with the Bennett Funding matter.

Provision For Income Taxes

The provision for income taxes  increased from $980,639 in 1994 to $1,044,911 in
1995 and decreased to $(311,222) in 1996. The effective actual tax rate for each
of those years (tax provision as a percentage of income before taxes) was 35.7%,
34.0% and  (63.7)%,  respectively.  The  income  tax  benefit  recorded  in 1996
resulted  from the net loss before  income  taxes  during that year.  Management
deemed the items  creating the 1996 loss to be  temporary  in nature,  therefore
resulting in the recording of a deferred tax asset  representing  the tax effect
of future taxable benefits which could be recognized.

Financial Condition

As presented in Table 6, total assets decreased  approximately  $10,147,000 from
$232,105,364 at December 31, 1995 to  $221,957,881  at December 31, 1996.  Total
liabilities  decreased  $9,967,559,  from  $211,407,148  at December 31, 1995 to
$201,439,589  at  December  31,  1996.  The  decrease in  liabilities  primarily
resulted  from a decrease in Federal  Home Loan Bank  advances  of  $12,133,334.
Stockholders'  equity declined $179,924 from $20,698,216 at December 31, 1995 to
$20,518,292 at December 31, 1996.

Investment and Mortgage-Backed Securities

Investment securities and mortgage-backed  securities decreased $14,144,308 from
December 31, 1995 to December  31,  1996.  This  decrease  resulted  from sales,
normal paydowns and prepayments of securities. In 1995, various held-to-maturity
mortgage-backed  securities were transferred to the available-for-sale  category
as allowed by Financial  Accounting  Standards Board Special Report, "A Guide to
Implementation of Statement 115."

Loans

Gross loans  receivable  increased by  approximately  $5,858,000  in 1996,  from
approximately $154,007,000 at December 31, 1995 to approximately $159,865,000 at
December 31, 1996.  This increase was the result of growth in consumer loans and
commercial  loans  and  mortgages.  As shown in  Table 7,  commercial  mortgages
increased by approximately $9,868,000, consumer loans increased by approximately
$3,434,000 and commercial loans and leases increased by approximately  $864,000.
The decrease in residential mortgages resulted from the Bank's policy of selling
originated  long-term fixed rate mortgages and the normal paydown and prepayment
of portfolio mortgages.

Deposits

Total deposits increased $151,294 during 1996, from $177,848,121 at December 31,
1995 to  $177,999,415  at December  31,  1996.  As shown in Table 8,  commercial
checking  was  the  largest  component  of the  increase,  with an  increase  of
approximately  $1,904,000.  There was also an increase of approximately $310,000
in passbook and other savings and certificates of deposit.

FHLB Advances

As shown in Table 6, Federal Home Loan Bank advances  decreased by approximately
$12,133,000 in 1996. Even though loan demand was strong in 1996, stable deposits
and reductions in investment and  mortgage-backed  securities allowed management
to reduce advances from the Federal Home Loan Bank.

TABLE 8                                                    December 31,
                                                 -------------------------------
                                                     1996              1995
                                                     ----              ----
Commercial checking ......................       $ 11,352,839       $  9,448,925
Retail checking and NOW accounts .........         19,294,867         20,628,369
MMDA's ...................................         14,709,064         15,438,490
Passbook and other savings ...............         16,514,007         16,401,140
Certificates of deposit ..................        116,128,638        115,931,197
                                                 ------------       ------------
Total Deposits ...........................       $177,999,415       $177,848,121
                                                 ============       ============


                                       44
<PAGE>

TABLE 9
                                                    Maturing or Repricing in
                                                                Over
(Dollars in Thousands)             1 Year  1-3 Years 3-5 Years 5 Years   Total
                                  --------------------------------------------
Interest-earning assets:
  Adjustable rate mortgages and
    mortgage-backed securities ..  $80,852   $8,160        $0       $0   $89,012
  Fixed rate mortgages and
    mortgage-backed securities ..   28,114    8,325     6,411   25,235    68,085
  Other loans ...................   20,082    4,105     2,370    4,200    30,757
  Investment securities .........    4,858    1,982         0    2,113     8,953
  Interest-bearing deposits
    in other banks ..............    3,557        0         0        0     3,557
                                  --------  -------    ------  -------  --------
    Total interest rate
       sensitive assets ......... $137,463  $22,572    $8,781  $31,548  $200,364
                                  ========  =======    ======  =======  ========
Interest-bearing liabilities:
  Fixed maturity deposits .......  $84,679  $18,059   $10,496   $2,895  $116,129
  NOW and money market demand
    accounts ....................   20,949    5,256     3,384    7,397    36,986
  Passbook accounts .............    9,585      690       537    5,702    16,514
  Federal  funds purchased ......    2,210        0         0        0     2,210
  FHLB advances .................   15,950      400         0    1,021    17,371
                                    ------      ---         -    -----    ------
    Total interest rate
       sensitive liabilities      $133,373  $24,405   $14,417  $17,015  $189,210
                                  ========  =======   =======  =======  ========

Interest sensitivity gap ........   $4,090 ($1,833)  ($5,636)  $14,533   $11,154
Cumulative interest rate                             
      sensitivity gap ... .......   $4,090   $2,257  ($3,379)  $11,154   -------
Cumulative interest rate
      sensitivity gap
      to total assets ...........     1.84%   1.02%   -1.52%    5.03%   -------

Asset-Liability Management

A primary  objective  of FLAG's  asset and  liability  management  program is to
control  exposure to interest rate risk (the exposure to changes in net interest
income due to changes in market  interest  rates) so as to enhance its  earnings
and protect its net worth against  potential  loss  resulting from interest rate
fluctuations.

Historically,  the average term to maturity or repricing  (rate  changes) of the
assets of the Bank (primarily loans and investment  securities) has exceeded the
average  repricing  period of the Bank's  liabilities  (primarily  deposits  and
borrowings).  Table 9 provides information about the amounts of interest-earning
assets and interest-bearing  liabilities outstanding for the year ended December
31, 1996 that are  expected  to mature,  prepay or reprice in each of the future
time periods shown (i.e., the interest rate  sensitivity).  As presented in this
table,  at December 31, 1996,  the Bank's assets  subject to rate changes within
one year exceeded its liabilities  subject to rate changes within one year. This
mismatched condition subjects the Bank to interest rate risk within the one year
period because the assets,  due to their  generally  shorter term to maturity or
repricing,  are more  sensitive  to  short-term  interest  rate changes than the
liabilities. It is management's belief that the result of this position would be
an increase in net interest  income if market interest rates rise and a decrease
in net interest income if market interest rates decline.

Management  carefully measures and monitors the Bank's interest rate sensitivity
and believes that its operating  strategies  offer  protection  against interest
rate risk.  As  required  by  regulations  of the  Office of Thrift  Supervision
("OTS"),  the Board of Directors of the Bank has  established  an interest  rate
risk policy which sets specific limits on interest rate risk exposure. Adherence
to this policy is reviewed  quarterly by the Board of Directors' Asset Liability
Committee.

To  help  manage  interest  rate  risk,   mortgage-backed   securities   (MBSs),
collateralized  mortgage  obligations (CMOs) and callable agency securities with
step-up features (Agency  Step-ups) have been acquired for the Bank's investment
portfolio.  Some of these  securities  (CMOs and Agency Step-ups) are considered
derivative  investments.  Derivatives  within the portfolio  are primarily  U.S.
Agency debt  securities with  adjustable and step-up  coupons.  Many of the CMOs
coupons adjust  monthly.  Most of the others adjust  semi-annually  or annually.
Although most of these derivatives have adjustable  coupons,  if market interest
rates increase more rapidly than maximum incremental interest rate resets of the
security,  the market  value of the  security  will be less than its book value.
However, the same is generally true for all adjustable rate securities.  Notes 3
and 4 to the Consolidated Financial Statements disclose the unrealized gains and
losses in the Bank's investment portfolio.

Management has maintained positive ratios of average  interest-earning assets to
average  interest-bearing  liabilities.  As  represented  in Table 2 this ratio,
based on average  balances for the respective  years,  was 110% in 1994, 109% in
1995 and 107% in 1996.

Liquidity

The Bank is required under federal  regulations to maintain in cash and eligible
short-term  investment  securities a monthly  average of 5% of net  withdrawable
deposits  and  borrowings  payable  in one  year or  less.  The  Bank's  average
liquidity in December 1996 was 7.36% of the aggregate of the prior month's daily
average  deposits and short-term  borrowings.  The Bank's liquidity was 7.75% at
December 31, 1996 and 9.60% at December 31, 1995.


                                       45
<PAGE>

The Bank's  primary  sources of  liquidity  (funds)  are deposit  inflows,  loan
repayments,  proceeds  from  sales of loans and  securities,  advances  from the
Federal Home Loan Bank of Atlanta (the "FHLBA") and earnings  from  investments.
Short-term deposits,  particularly  noninterest-bearing  checking accounts,  are
becoming a more significant source of liquidity than they have been historically
to  the  Bank.  Advances  from  the  FHLBA  were  $29,504,167  and  $17,370,833,
respectively, at December 31, 1995 and 1996.

Subject to certain limitations,  the Bank may borrow funds from the FHLBA in the
form of advances. Credit availability from the FHLBA to the Bank is based on the
Bank's financial and operating condition.  Credit availability from the FHLBA to
the Bank was  approximately  $58 million at December  31,  1996.  In addition to
creditworthiness,  the Bank must own a minimum  amount of FHLBA  capital  stock.
This minimum is 5.00% of outstanding FHLBA advances.  Unused borrowing  capacity
at December 31, 1996 was $40.6  million.  The Bank uses FHLBA  advances for both
long-term and short-term  liquidity needs. Other than normal banking operations,
the Bank has no long-term liquidity needs. The Bank has never been involved with
highly  leveraged  transactions  that  may  cause  unusual  potential  long-term
liquidity needs.

The Consolidated  Statements of Cash Flows for the years ended December 31, 1995
and 1996 detail the Bank's sources and uses of funds for those periods.

TABLE 10
                                     Required      Actual        Excess
                                     Capital       Capital      Capital
                                     -------       -------      -------
                                          (Dollars in Thousands)
Tangible capital .............        $3,340       $19,694      $16,354
                                       1.50%         8.84%        7.34%
Core capital .................        $6,681       $19,694      $13,013
                                       3.00%         8.84%        5.84%
Risk-based capital ...........       $12,000       $21,568       $9,568
                                       8.00%        14.38%        6.38%

TABLE 11
                                     Total Risk-   Tier 1 Risk-     Tier 1
                                     Based Ratio   Based Ratio   Leverage Ratio*
                                    ------------  ------------   ---------------
Well capitalized .................. 10% or above   6% or above   5% or above
Adequately capitalized ............  8% or above    4% or above   4% or above
Under capitalized .................    Under 8%       Under 4%      Under 4%
Significantly under capitalized ...    Under 6%       Under 3%      Under 3%
----------
*Note: A "Critically under  capitalized"  category exists for institutions whose
Tier 1 Leverage Ratio is less than 2%.


Capital Adequacy

Adequate  capital  provides  the  foundation  for balance  sheet  expansion  and
protection  against  unforeseen  losses.  The OTS  requires the Bank to maintain
certain  minimum  capital  levels.  As can be seen from examining  Table 10, the
Bank's capital levels at December 31, 1996 significantly exceeded the regulatory
capital requirements.  The Federal Deposit Insurance Corporation Improvement Act
("FDICIA")  required federal banking agencies to take "prompt corrective action"
with regard to institutions that do not meet minimum capital requirements.  As a
result of FDICIA, the federal banking agencies  introduced an additional capital
measure  called the "Tier 1 risk-based  capital  ratio." The Tier 1 ratio is the
ratio of core capital to risk adjusted total assets. Table 11 presents a summary
of   FDICIA's   capital   tiers.   The   Bank  met  all   requirements   of  the
"well-capitalized" institution at December 31, 1996.

In October 1995,  FLAG purchased  128,100 shares of its common stock in the open
market for $12.75 per share. Since it is not the intent of management to reissue
these  shares,  these  shares were  classified  as  authorized  but  unissued at
December 31, 1995. No shares were repurchased in 1996.

Impact of Inflation and Changing Prices

The  consolidated  financial  statements  and related  financial  data presented
herein have been  prepared in  accordance  with  generally  accepted  accounting
principles  which require the  measurement  of financial  position and operating
results in terms of historical dollars without  considering  changes in relative
purchasing power over time due to inflation.

Unlike most industrial companies, virtually all of the assets and liabilities of
a financial  institution  are monetary in nature.  As a result,  interest  rates
generally  have  a  more  significant   impact  on  a  financial   institution's
performance  than does the  effect of  inflation.  The  liquidity  and  maturity
structures of FLAG's assets and  liabilities  are critical to the maintenance of
acceptable performance levels.

Statement of Management's Responsibility

Management  of FLAG is  responsible  for the  preparation  and  integrity of the
consolidated financial statements and other information presented in this Annual
Report. The consolidated  financial  statements have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis, and
necessarily  include amounts that are based on best estimates and judgments with
appropriate consideration to materiality.


                                       46
<PAGE>

Management also is responsible  for maintaining a system of internal  accounting
controls.  The  purpose of the system is to provide  reasonable  assurance  that
assets are safeguarded  and that the books reflect only authorized  transactions
of FLAG. The system includes proper  segregation of duties, the establishment of
appropriate  policies  and  procedures,  and  careful  selection,  training  and
supervision of qualified personnel.  In addition, both the independent certified
public  accountants and the internal auditor  periodically  review the system of
internal accounting controls and report their findings to the Audit Committee of
the Board of Directors.

The  Board of  Directors  pursues  its  responsibility  for  reported  financial
information  through  its  Audit  Committee.  The  Audit  Committee  meets  with
management, the internal auditor and independent certified public accountants to
assure  that  they  are  carrying  out  their  responsibilities  and to  discuss
auditing,  internal control and financial  reporting matters.  Both the internal
auditor and the independent  certified public accountants have free and separate
access to the Audit Committee.  The minutes of all Audit Committee  meetings are
presented to the Board of Directors for their review and approval.

Accounting Rule Changes

In 1994, the Bank adopted Financial Accounting Standards Board Statement No. 115
("FASB  115"),   "Accounting   for  Certain   Investments  in  Debt  and  Equity
Securities."  Prior to  implementing  FASB 115,  investment and  mortgage-backed
securities  were stated at cost,  adjusted  for  amortization  of  premiums  and
accretion of discounts.  These  securities were carried at cost because the Bank
had the ability and intent to hold the  securities  to  maturity.  Certain  debt
securities and marketable equity securities were carried at the lower of cost or
market.  Accounting changes related to adopting FASB 115 require that securities
held for short-term  resale are classified as trading  securities and carried at
fair value.  Debt  securities that management has the ability and intent to hold
to maturity are classified as held-to-maturity and carried at cost, adjusted for
amortization of premiums and accretion of discounts using methods  approximating
the  interest   method.   Other   marketable   securities   are   classified  as
available-for-sale  and are carried at fair value. Realized and unrealized gains
and losses on trading  securities are included in income.  Unrealized  gains and
losses on securities classified as available-for-sale are recognized as a direct
increase  or  decrease  in  stockholders'  equity.  However,  the OTS and  other
financial institution regulators do not require financial institutions to report
unrealized gains and losses in their securities  available-for-sale portfolio as
a separate  component of  shareholders'  equity.  In fact,  unrealized gains and
losses  related to  securities  available-for-sale  have no  regulatory  capital
effect.

As mentioned  previously in "Investment and  Mortgage-Backed  Securities" and in
Note  4 to  the  Consolidated  Financial  Statements,  various  held-to-maturity
mortgage-backed  securities were  transferred in 1995 to the  available-for-sale
classification  as permitted by Financial  Accounting  Standards  Board  Special
Report, "A Guide to Implementation of Statement 115."

In March 1995, the Financial  Accounting  Standards  Board  ("FASB")  issued its
Statement of Financial  Accounting  Standards No. 121 ("FASB 121"),  "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." FASB 121 requires that long-lived assets and certain intangibles to be held
and used by an entity be  reviewed  for  impairment  when  events or  changes in
circumstances  indicate  that the  carrying  amount may not be  recoverable.  In
addition,  FASB 121 requires  long-lived  assets and certain  intangibles  to be
disposed of to be  reported  at the lower of carrying  amount or fair value less
costs to sell.  FASB 121 is effective for fiscal years  beginning after December
15, 1995.  Management does not expect the application of this  pronouncement  to
have a material effect on the Company's financial statements.

In May 1995, FASB issued its Statement of Financial Accounting Standards No. 122
("FASB  122"),  "Accounting  for Mortgage  Servicing  Rights." FASB 122 requires
entities to allocate the cost of acquiring or originating mortgage loans between
the  mortgage  servicing  rights and the  loans,  based on their  relative  fair
values,  if the bank sells or  securitizes  the loans and retains  the  mortgage
servicing  rights.  In  addition,  FASB 122  requires  entities  to  assess  its
capitalized  mortgage servicing rights for impairment based on the fair value of
those rights.  FASB 122 is effective for fiscal years  beginning  after December
15, 1995.  Management does not expect the application of this  pronouncement  to
have a material effect on the Company's financial statements.

In June 1996,  FASB issued its Statement of Financial  Accounting  Standards No.
125 ("FASB 125"),  "Accounting  for Transfers and Servicing of Financial  Assets
and  Extinguishments of Liabilities." FASB 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities.  After a transfer of financial  assets,  an entity  recognizes  the
financial and servicing  assets it controls and the liabilities it has incurred,
derecognizes   financial   assets  when  control  has  been   surrendered,   and
derecognizes liabilities when extinguished. In addition, a transfer of financial
assets in which the transferor surrenders control over those assets is accounted
for as a sale to the extent that consideration  other than beneficial  interests
in the  transferred  assets is received in exchange.  FASB 125 is effective  for
transfers and servicing of financial assets and  extinguishments  of liabilities
occurring  after  December  31,  1996,  and  is  to  be  applied  prospectively.
Management  does not  expect the  application  of this  pronouncement  to have a
material effect on the financial statements of the Company.

                                       47
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

             Table of Contents to Consolidated Financial Statements

                                                                          Pages
Independent Auditors' Report.......................................         20

Consolidated Statements of Condition at December 31, 1996 and 1995          21

Consolidated Statements of Income for Each of the Three Years in the
  Period Ended December 31, 1996................................         22-23

Consolidated Statements of Stockholders' Equity for Each of  the Three
  Years in the Period Ended December 31, 1996..................             23

Consolidated Statements of Cash Flows for Each of the Three Years in
  the Period Ended December 31, 1996.............................        24-25

Notes to Consolidated Financial Statements........................       26-46


                                       48
<PAGE>

Independent Auditors' Report


Board of Directors
FLAG Financial Corporation
LaGrange, Georgia


We have audited the  accompanying  consolidated  statements of condition of FLAG
Financial  Corporation and its subsidiaries as of December 31, 1996 and 1995 and
the related consolidated  statements of income,  stockholders'  equity, and cash
flows for each of the three years in the period ended  December 31, 1996.  These
consolidated  financial  statements are the  responsibility of the management of
FLAG  Financial  Corporation  and its  subsidiaries.  Our  responsibility  is to
express an  opinion  on these  consolidated  financial  statements  based on our
audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the  financial  position of FLAG  Financial
Corporation  and its  subsidiaries  as of December  31,  1996 and 1995,  and the
results of their  operations  and cash flows for each of the three  years in the
period ended December 31,
1996, in conformity with generally accepted accounting principles.


/s/ Robinson, Grimes & Company, P.C.

Certified Public Accountants


Columbus, Georgia
January 31, 1997


                                       49
<PAGE>

CONSOLIDATED STATEMENTS OF CONDITION

                                                             DECEMBER 31,
                                                         1996           1995
                                                         ----           ----
ASSETS                                                 
Cash and due from banks .........................   $  2,527,785   $  4,301,653
Interest bearing deposits .......................      3,557,138      1,538,601
Federal funds sold ..............................              0      2,010,000
                                                       ---------      ---------
   Cash and cash equivalents ....................      6,084,923      7,850,254
Proceeds receivable from secondary market .......      1,162,121      2,482,757
Investment securities available-for-sale
  at fair value ................................       7,057,494     14,555,238
Mortgage-backed securities held-to-maturity
  (fair value of$3,108,722 in 1996 and
  $3,772,337 in 1995) .........................        3,209,696      3,897,180
Mortgage-backed securities available-for-sale
at fair value ...................................     34,249,002     40,208,082
Investment in limited partnership ...............      1,475,000      1,000,000
Investment required by law - FHLB stock - at cost      1,895,900      1,895,900
Loans receivable - net ..........................    152,644,436    147,402,036
Loans held for sale .............................        343,677         30,750
Mortgage servicing rights .......................      1,703,710      1,455,983
Accrued interest and dividends receivable .......      1,763,345      1,750,434
Real estate acquired through foreclosure ........        524,703        800,714
Fixed assets - net ..............................      5,417,962      5,572,290
Deferred income taxes ...........................      1,711,438        690,891
Refundable income taxes .........................        301,549         88,164
Cash surrender value of life insurance ..........      1,910,657      1,832,000
Other assets ....................................        502,268        592,691
                                                    ------------   ------------
        Total assets ............................   $221,957,881   $232,105,364
                                                    ============   ============
LIABILITIES AND STOCKHOLDERS' EQUITY
   LIABILITIES

Savings accounts .................................   $177,999,415   $177,848,121
Federal funds purchased ..........................      2,210,000              0
Advances from Federal Home Loan Bank .............     17,370,833     29,504,167
Advances from borrowers for taxes and insurance ..        709,672        971,777
Advances payable to secondary market .............      1,982,676      1,788,205
Accrued interest on savings and borrowings .......        323,783        399,390
Dividends payable on common stock ................        173,144        143,603
Other liabilities ................................        670,066        751,885
                                                     ------------   ------------
    Total liabilities ............................    201,439,589    211,407,148
                                                     ------------   ------------

STOCKHOLDERS' EQUITY

Preferred stock (10,000,000 shares authorized;
  none issued and outstanding) ...............               0                0
Common stock,($1 par value, 20,000,000 shares
  authorized, 2,036,990 shares issued and
  outstanding in 1996, and 2,044,100 shares
  issued and 1,916,000 shares outstanding
  in 1995) ...................................       2,036,990        1,916,000
Additional paid-in capital ...................       8,044,728        7,519,001
Retained earnings - substantially restricted .      10,732,992       11,580,579
Net unrealized loss on securities
  available-for-sale .........................        (296,418)        (317,364)
   Total stockholders' equity ................      20,518,292       20,698,216
                                                    ----------       ----------
   Total liabilities and stockholders' equity    $ 221,957,881    $ 232,105,364
                                                 =============    =============
See Notes to Consolidated Financial Statements


                                       50
<PAGE>

CONSOLIDATED STATEMENTS OF INCOME
                                               YEAR ENDED DECEMBER 31,
                                          1996          1995           1994
                                          ----          ----           ----
INTEREST INCOME
 Interest and fees on loans .........  $14,039,683   $12,745,773   $11,273,849
 Interest and dividends on
   investments ......................      698,079     1,247,822     1,125,221
 Interest on mortgage-backed
   securities .......................    2,458,011     3,018,244     2,550,982
  Interest on time deposits .........      167,587       156,610       108,438
                                      ------------  ------------  ------------
      Total interest income .........   17,363,360    17,168,449    15,058,490
                                      ------------  ------------  ------------

INTEREST EXPENSE
 Interest on savings ................    8,011,016     8,024,187     6,529,127
 Interest on borrowings .............    1,179,628     1,861,506     1,692,645
                                      ------------  ------------  ------------
      Total interest expense ........    9,190,644     9,885,693     8,221,772
                                      ------------  ------------  ------------
   Net interest income before
    provision for loan losses .......    8,172,716     7,282,756     6,836,718

PROVISION FOR LOAN LOSSES ...........    3,484,529       630,000       440,000
                                      ------------  ------------  ------------
   Net interest income after
    provision for loan losses .......    4,688,187     6,652,756     6,396,718
                                      ------------  ------------  ------------

OTHER INCOME
 Gain on sales of investment
   securities .......................      206,873       133,627        23,038
 Gain (loss) on sales of loans ......      246,800       (42,497)          707
 Gain (loss) on sales of
   mortgage-backed securities .......       12,506        85,440        (2,354)
 Fees and service charges ...........    2,395,829     2,140,872     1,717,407
 Miscellaneous.......................      210,433       109,074       189,767
 Gain (loss) on real estate - net ...      (79,643)       32,518       (48,839)
                                      ------------  ------------  ------------
   Total other income ...............    2,992,798     2,459,034     1,879,726
                                      ------------  ------------  ------------
   Income before operating
    expenses and income taxes .......    7,680,985     9,111,790     8,276,444
                                      ------------  ------------  ------------

OPERATING EXPENSES
Compensation
    Directors and executive committee       83,100        86,000        78,150
    Officers and employees ..........    1,996,150     1,857,636     1,702,964
Pension and other employee benefits .      585,373       479,507       446,250
Office occupancy expense ............      261,507       246,133       216,442
 Federal insurance premiums .........    1,666,101       459,581       436,655
 Furniture, fixtures and equipment
   expenses .........................      213,637       151,250       132,893
 Advertising ........................      210,190       178,394       264,020
 General and payroll tax expense ....      343,875       270,451       292,428
 Legal, professional and supervisory
   exams ............................      419,476       249,694       211,564
 Printing and postage ...............      296,915       299,865       264,214
 Data processing ....................      520,762       480,209       414,045
 Depreciation .......................      553,996       506,278       424,000
 Other expenses .....................    1,018,751       775,874       644,328
                                      ------------  ------------  ------------
   Total operating expenses .........    8,169,833     6,040,872     5,527,953
                                      ------------  ------------  ------------
   Income (loss) before provision
    (benefit) for income taxes ......     (488,848)    3,070,918     2,748,491

See Notes to Consolidated Financial Statements



                                       51
<PAGE>

CONSOLIDATED STATEMENTS OF INCOME (Continued)

PROVISION (BENEFIT) FOR INCOME TAXES ...     (311,222)    1,044,911      980,639
                                           ----------    ----------   ----------
    Net income (loss) ..................   $ (177,626)   $2,026,007   $1,767,852
                                           ==========    ==========   ==========

EARNINGS (LOSS) PER COMMON SHARE:
Net income (loss) ...................      $     (.09)   $     1.02   $      .88
                                                  ====         ====         ====
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                         
                                                                                          
                                                  COMMON      ADDITIONAL                        NET            TOTAL           
                                     COMMON       STOCK        PAID-IN        RETAINED       UNREALIZED    STOCKHOLDERS'
                                     STOCK    DISTRIBUTABLE    CAPITAL        EARNINGS       LOSS ON AFS      EQUITY
                                     -----    -------------    -------        --------       -----------      ------
<S>              <C>               <C>           <C>          <C>           <C>            <C>           <C>         
Balance, January 1, 1994 ........  $ 1,006,250   $1,006,250   $ 7,867,500   $ 9,993,733    $         0   $ 19,873,733
 Initial adoption of SFAS No. 115         --           --            --            --          213,552        213,552
 Common stock distribution ......    1,006,250   (1,006,250)            0             0              0              0
 Increase in unrealized loss on
   marketable equity securities .            0            0             0             0     (2,239,961)    (2,239,961)
 Net income .....................            0            0             0     1,767,852              0      1,767,852
 Dividends declared .............            0            0             0      (603,750)             0       (603,750)
                                     --------------------------------------------------------------------------------
Balance, December 31, 1994 ......    2,012,500            0     7,867,500    11,157,835     (2,026,409)    19,011,426
 Common stock options exercised .       26,793            0        97,605             0              0        124,398
 Issuance of common stock .......        4,807            0        54,679             0              0         59,486
 Repurchase of common stock .....     (128,100)           0      (500,783)   (1,004,389)             0     (1,633,272)
 Decrease in unrealized loss on
   securities available-for-sale             0            0             0             0      1,709,045      1,709,045
 Net income .....................            0            0             0     2,026,007              0      2,026,007
 Dividends declared .............            0            0             0      (598,874)             0       (598,874)
                                     --------------------------------------------------------------------------------
Balance, December 31, 1995 ......    1,916,000            0     7,519,001    11,580,579       (317,364)    20,698,216
Common stock options exercised ..      120,207            0       517,520             0              0        637,727
Issuance of common stock ........          783            0         8,207             0              0          8,990
Decrease in unrealized loss on
  securities available-for-sale .            0            0             0             0         20,946         20,946
Net loss ........................            0            0             0      (177,626)             0       (177,626)
Dividends declared ..............            0            0             0      (669,961)             0       (669,961)
                                   -----------------------------------------------------------------------------------
 Balance, December 31, 1996 .....  $ 2,036,990   $        0   $ 8,044,728   $10,732,992    $  (296,418)  $ 20,518,292
                                   ==================================================================================
</TABLE>

See Notes to Consolidated Financial Statements.

                                       52
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS

                                               YEAR ENDED DECEMBER 31,
                                          1996            1995           1994
                                          ----            ----           ----
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income ......................    $ (177,626)  $  2,026,007   $  1,767,852
                                       ----------   ------------   ------------

Adjustments to reconcile net income to net cash
 provided by operating activities:
Provision for loan losses .........     3,484,529        630,000        440,000
Provision for depreciation ........       553,996        506,278        424,000
Amortization of premiums/
  discounts on securities .........       236,685        148,757        238,474
Amortization of mortgage
  servicing rights ................       203,666        203,665         69,535
Gain on sales of investment
  securities available-for-sale ...      (206,873)      (133,627)       (23,038)
(Gain) loss on sales of loans .....      (246,800)        42,497           (707)
(Gain) loss on sales of
 mortgage-backed securities
 available-for-sale ...............       (12,506)       (85,440)         2,354
(Gain) loss on sales of real
  estate acquired through
  foreclosure before provision
  for losses ......................        79,643        (32,518)        48,839
(Gain) loss on sales of fixed
  assets ..........................           400         (9,148)       (10,813)
(Increase) decrease in loans 
  held-for-sale ...................      (312,927)        22,050      2,671,753
Cash value of life insurance ......       (54,655)       (50,000)             0
(Increase) decrease in proceeds
  receivable ......................     1,320,636     (1,359,294)       557,432
(Increase) decrease in accrued
  interest and dividends
  receivable ......................       (12,911)        97,975       (424,998)
Increase in deferred income taxes .    (1,033,206)       (78,049)       (39,525)
(Increase) decrease in estimated
  refundable income taxes .........      (213,385)       (74,024)       130,646
Decrease in deferred origination
  fees/costs ......................       (69,082)       (21,543)       (21,265)
Increase (decrease) in accrued
  interest on savings and
  borrowings ......................       (75,607)        57,166        148,214
Other - net .......................       (72,852)       357,221       (453,328)
                                          -------        -------       -------- 
    Total adjustments .............     3,568,751        221,966      3,757,573
                                       ----------       --------     ----------
    Net cash provided by
     operating activities .........     3,391,125      2,247,973      5,525,425
                                       ----------     ----------     ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities
  of investment securities
  available-for-sale ..............    16,609,727     18,601,248      7,134,746
Proceeds from sales and
  maturities of mortgage-backed
  securities available-for-sale ...     6,099,005     10,047,401      3,586,660
Maturities of mortgage-backed
  securities held-to-maturity .....             0              0        660,281
Proceeds from sales of
  fixed assets ....................           389         14,000         22,376
Proceeds from sales of
  FHLB stock ......................             0        318,500        370,600
Investment in foreclosed real
  estate ..........................      (238,138)    (1,525,138)      (457,372)
Proceeds from sales of
  foreclosed real estate ..........       516,326        989,228        577,849
Net change in loans ...............    (2,952,229)    (2,313,658)     18,401,005
Purchase of investment securities
  available-for-sale ..............    (8,909,864)   (10,024,257)   (23,338,491)


                                       53
<PAGE>

                                                YEAR ENDED DECEMBER 31,         
                                          1996            1995          1994 
                                          ----            ----          ---- 
CASH FLOWS FROM INVESTING ACTIVITIES: (Continued)
Purchase of mortgage-backed
  securities available-
  for-sale ........................    (4,647,760)    (9,176,680)   (18,846,976)
Purchase of mortgage-backed
  securities held-to-maturity .....             0              0     (9,149,250)
Purchase of loans .................      (449,683)      (275,601)    (9,890,358)
Investment in limited partnership .      (475,000)      (250,000)      (150,000)
Purchase of FHLB stock ............             0              0       (712,600)
Purchase of fixed assets ..........      (400,457)    (1,065,156)      (841,587)
Investment in mortgage servicing
  rights ..........................      (451,393)       (34,141)    (1,508,846)
Acquisition of cash value of
  life insurance ..................       (24,002)    (1,782,000)             0
                                          -------     ----------     ----------
    Net cash used in investing
     activities ...................      4,676,921     3,523,746    (34,141,963)
                                       -----------    -----------   ----------- 

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in savings
  accounts ..................             151,294     12,127,395      2,904,727
Net increase in federal                            
  funds purchased ...........           2,210,000              0              0
Proceeds from FHLB advances .          16,000,000     67,800,000    123,500,000
Repayment of FHLB advances ..         (28,133,334)   (81,576,389)  (100,719,444)
Increase (decrease) in                             
  advances payable to                              
  secondary market ..........             194,471        294,131       (465,473)
Increase (decrease)                                
  in advances from                                 
  borrowers for taxes                              
  and insurance .............            (262,105)      (214,534)       738,656
Issuance of common stock ....             646,717        183,884              0
Repurchase of common stock ..                   0     (1,633,272)             0
Cash dividends paid .........            (640,420)      (606,209)      (603,750)
                                         --------       --------       -------- 
 Net cash provided by                              
    (used in) financing                             
    activities ..............          (9,833,377)    (3,624,994)    25,354,716
                                       ----------     ----------     ----------
 Net increase (decrease)                           
    in cash and cash                               
    equivalents .............          (1,765,331)     2,146,725     (3,261,822)
 Cash and cash equivalents, 
    January 1 ..............            7,850,254      5,703,529      8,965,351
                                        ---------      ---------      ---------
 Cash and cash equivalents,
    December 31 .............     $     6,084,923  $   7,850,254  $   5,703,529
                                  ===============  =============  =============
                                                   
CASH AND CASH EQUIVALENTS:                         
 Cash and due from banks ....     $     2,527,785  $   4,301,653  $   4,265,250
 Interest bearing deposits ..           3,557,138      1,538,601      1,438,279
 Federal funds sold .........                   0      2,010,000              0
                                                -      ---------              -
   Total cash and cash                             
     equivalents ............     $     6,084,923  $   7,850,254  $   5,703,529
                                  ===============  =============  =============

Supplemental Disclosure of Noncash Financing Activities - 
   Increase (decrease) in 
     dividends payable ......              29,541        (7,335)              -




See Notes to Consolidated Financial Statements.


                                       54
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1996

1.   Nature of Operations

     FLAG  Financial  Corporation's  primary  operations are carried out through
     First Federal Savings Bank of LaGrange. The Savings Bank provides financial
     services to  individuals  and  corporate  customers.  The  Savings  Bank is
     subject  to the  regulations  of certain  Federal  agencies  and  undergoes
     periodic examinations by those regulatory authorities.  The Savings Bank is
     located in LaGrange,  Georgia and has loan origination offices in Columbus,
     Georgia  and  Auburn,  Alabama.  The Savings  Bank's  subsidiary,  Piedmont
     Mortgage Service,  Inc. provides appraisal services to the Savings Bank and
     other  financial   institutions  and  brokerage  services  to  individuals.
     Piedmont is also located in LaGrange, Georgia.

2.    Summary of Significant Accounting Policies

     Principles of Consolidation - The consolidated financial statements include
     the accounts of FLAG Financial  Corporation  ("FLAG")  FLAG's  wholly-owned
     subsidiary,  First Federal  Savings Bank of LaGrange ("the Savings  Bank"),
     and the Savings Bank's wholly-owned subsidiary,  Piedmont Mortgage Service,
     Inc.  (Piedmont).  All significant  intercompany  accounts and transactions
     have been eliminated.

     Investment and  Mortgage-Backed  Securities - Securities  that are held for
     short-term resale are classified as trading  securities and carried at fair
     value.  Debt  securities that management has the ability and intent to hold
     to  maturity  are  classified  as  held-to-maturity  and  carried  at cost,
     adjusted for  amortization  of premium and  accretion  of  discounts  using
     methods  approximating the interest method. Other marketable securities are
     classified as  available-for-sale  and are carried at fair value.  Realized
     and unrealized  gains and losses on trading  securities are included in net
     income.  Unrealized gains and losses on securities  available-for-sale  are
     recognized as direct increases or decreases in stockholders'  equity net of
     applicable  income taxes.  Cost of securities sold is recognized  using the
     specific identification method.


     Mortgage-backed  securities represent  participating  interests in pools of
     long-term  first mortgage  loans  originated and serviced by issuers of the
     securities.  Mortgage-backed  securities  are  carried at unpaid  principal
     balances,   adjusted  for  unamortized  premiums  and  unearned  discounts.
     Premiums  and  discounts  are  amortized  over  the  remaining   period  to
     contractual maturity, adjusted for anticipated prepayments. Mortgage-backed
     securities  also includes  collateralized  mortgage  obligations  for which
     certain factors such as prepayments and interest rates may affect the yield
     or recoverability.

     Investment in Limited  Partnership - The Savings Bank owns a 39.6% interest
     in a limited partnership,  Guilford Georgia Affordable Housing Fund V, L.P.
     The partnership  invests in multi-family  real estate and passes low income
     housing  credits to the investors.  The Savings Bank  recognizes  these tax
     credits in the year  received and accounts for the  investment  on the cost
     basis which approximates the value on the equity method.


2.   Summary of Significant Accounting Policies (Continued)

     Investment  Required by Law - The  Savings  Bank is required as a member of
     the FHLB system to maintain a specified  level of investment in FHLB stock.
     The stock  investment is carried at cost because it represents a restricted
     investment for which there is no market value.

     Loans Held for Sale - Loans held for sale represent mortgage collateralized
     loans which the Savings Bank intends to sell to the secondary market. These
     loans are carried at the lower of their  aggregate  cost or market value. A
     valuation  allowance is  established  by direct  charges to income when the
     market value is less than the cost.


                                       55
<PAGE>

     Accrued  Interest and Dividends  Receivable - Interest and dividends due to
     the Savings Bank, but not yet received, are calculated through year end and
     accrued for reporting  purposes based on normal accounting  procedures.  An
     allowance for accrued interest on loans under foreclosure,  bankruptcy, and
     uncollectible  loans reduces accrued interest and dividends  receivable for
     financial statement reporting.


     Loans  Receivable  -  Loans  receivable  are  stated  at  unpaid  principal
     balances,   less  the   allowance   for  loan  losses,   and  net  deferred
     loan-origination fees and discounts.

     The  allowance  for loan  losses is  increased  by  charges  to income  and
     decreased  by  charge-offs  (net  of  recoveries).   Management's  periodic
     evaluation of the adequacy of the allowance is based on the Savings  Bank's
     past  loan loss  experience,  known and  inherent  risks in the  portfolio,
     adverse  situations  that may affect the borrower's  ability to repay,  the
     estimated  value  of  any  underlying  collateral,   and  current  economic
     conditions.

     For loans  originated  prior to 1988,  amounts for loan origination fees in
     excess of  origination  costs were  amortized into income over an estimated
     average loan term using a method which approximates the level-yield method.
     When  these  loans  were paid off or sold  before  the  expiration  of such
     period,  the  remaining  deferred  fee was  credited  to income.  For loans
     originated  after 1987,  loan  origination  and commitment fees and certain
     direct loan origination  costs are deferred and the net amount is amortized
     as an adjustment of the related  loan's yield in accordance  with Financial
     Accounting Standards Board Statement No. 91.

     Loans are placed on nonaccrual when a loan is specifically determined to be
     impaired or when  principal or interest is delinquent  for 90 days or more.
     Interest  income  generally is not  recognized on specific  impaired  loans
     unless the likelihood of further loss is remote. Interest payments received
     on such loans are applied as a  reduction  of the loan  principal  balance.
     Interest income on other  nonaccrual loans is recognized only to the extent
     of interest payments received.

     Foreclosed Real Estate - Real estate  properties  acquired  through,  or in
     lieu of  foreclosure  are initially  recorded at fair value less  estimated
     costs to sell at the date of foreclosure,  which becomes the property's new
     basis.  Any  write-downs  based  on the  asset's  fair  value  at  date  of
     acquisition are charged to the allowance for loan losses. Costs incurred in
     maintaining  foreclosed  real estate and subsequent  write-downs to reflect
     declines in the fair value of the  property  are included in gain (loss) on
     real estate - net.  Costs  incurred to bring the  property to a rentable or
     salable condition are capitalized.


     Fixed Assets and Related Depreciation - Fixed assets are stated at cost and
     are  depreciated  principally  on the  straight-line  method for  financial
     reporting  purposes,  at various  rates,  to  extinguish  the cost over the
     estimated useful lives of the assets as follows:

     Buildings and improvements                         15 - 40 years
     Furniture, fixtures and equipment                   3 - 10 years

     Mortgage Servicing Rights - Mortgage servicing rights include all purchased
     mortgage  servicing rights and originated  mortgage  servicing rights since
     January 1, 1995,  the date the Savings Bank adopted  Statement of Financial
     Accounting  Standards No. 122,  "Accounting for Mortgage Servicing Rights".
     (See  Note 7 for  further  description.)  The  carrying  value of  mortgage
     servicing  rights are amortized in  proportion  to, and over the period of,
     estimated  net  servicing  revenues.   Management   periodically  evaluates
     mortgage  servicing  rights and the  related  amortization  in  relation to
     estimated future net servicing revenues taking into  consideration  changes
     in interest  rates,  current  prepayment  rates,  and expected  future cash
     flows.  Management  evaluates the carrying value of the servicing portfolio
     by  estimating  the future net servicing  income of the portfolio  based on
     estimated  remaining loan lives on an undiscounted basis for pools of loans
     with  similar  characteristics,  including  interest  rate,  loan  term and
     origination dates.


                                       56
<PAGE>

     Gain or Loss on Sales of Loans - The Savings  Bank  periodically  generates
     additional funds for lending by selling whole and  participating  interests
     in residential  and commercial  real estate loans.  Gains or losses on such
     sales  are  recognized  at the time of the sale and are  determined  by the
     difference  between the net sales proceeds and the unpaid principal balance
     of the  loans  sold,  adjusted  for  any  deferred  fees  or  costs,  yield
     differential,  servicing  fees and  servicing  costs  applicable  to future
     years. Net fee income from  originating  these loans is included as part of
     gain or loss on sale of loans along with direct operating expenses when the
     loans are sold  servicing  released,  when  loans  are sold with  servicing
     retained,  a portion of the operating expenses may be allocated to mortgage
     servicing rights. In addition, any loans held for sale are carried at lower
     of cost or market, as determined on an aggregate basis.


     Income Taxes - FLAG files a consolidated income tax return with the Savings
     Bank and reports for income  taxes on  substantially  the same basis as for
     financial  statement purposes except for timing differences  related to the
     basis of  available-for-sale  securities,  loan origination fees, allowance
     for loan losses and  alternative  methods of  depreciation of fixed assets.
     Deferred  income  taxes  represent  the  future  tax  consequences  and are
     provided on these timing differences when material.


     Earnings  Per Share - Earnings  per share are  calculated  by dividing  net
     income by the  weighted  average  number of common  and  common  equivalent
     shares  outstanding  after  consideration  of the dilutive  effect of stock
     options outstanding as of the date of issuance of the financial statements.


     Statements  of Cash Flows - For purposes of the  statements  of cash flows,
     FLAG considers all cash and due from banks,  interest-bearing deposits, and
     federal funds sold to be cash equivalents.


     Reclassifications - Certain items in the 1995 and 1994 financial statements
     have been reclassified in order to be in conformity with the 1996 statement
     presentation.

     Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
     accepted  accounting  principles  requires management to make estimates and
     assumptions  that affect the reported amounts of assets and liabilities and
     disclosure  of  contingent  assets  and  liabilities  at  the  date  of the
     financial  statements  and the  reported  amounts of revenues  and expenses
     during  the  reporting  period.  Actual  results  could  differ  from those
     estimates.


     Material estimates that are particularly  susceptible to significant change
     relate  to the  determination  of the  allowance  for loan  losses  and the
     valuation of real estate  acquired in connection  with  foreclosures  or in
     satisfaction  of  loans.  In  connection  with  the  determination  of  the
     allowances for loan losses and foreclosed real estate,  management  obtains
     independent appraisals for significant properties.


     A  significant  portion of the Savings  Bank's loan  portfolio  consists of
     single-family  residential loans originated in local markets.  Accordingly,
     the ultimate  collectibility of a substantial portion of the Savings Bank's
     loan  portfolio and the recovery of a  substantial  portion of the carrying
     amount of foreclosed real estate are susceptible to changes in local market
     conditions.

     While  management uses available  information to recognize  losses on loans
     and  foreclosed  real estate,  future  additions to the  allowances  may be
     necessary  based on  changes in local  economic  conditions.  In  addition,
     regulatory  agencies,  as an integral  part of their  examination  process,
     periodically  review  the  Savings  Bank's  allowances  on loan  losses and
     foreclosed  real  estate.  Such  agencies  may require the Savings  Bank to
     recognize  additions  to the  allowances  based  on their  judgments  about
     information available to them at the time of their examination.  Because of
     these factors,  it is reasonably possible that the allowances for losses on
     loans and foreclosed real estate may change materially in the near term.


                                       57
<PAGE>

3.   Investment Securities

     Investment  securities  available-for-sale  at December 31, 1996 consist of
     the following:
                                           GROSS        GROSS
                          AMORTIZED     UNREALIZED    UNREALIZED      FAIR
                             COST         GAINS         LOSSES        VALUE
                             ----         -----         ------        -----
 Equity securities .... $ 1,960,918    $   5,891    $   (7,583)   $ 1,959,226
 U.S. Government and
    federal agencies ..   4,018,271        2,109       (27,409)     3,992,971
 State and local
    governments .......     114,695          712             0        115,407
 Corporate debt
    securities ........     980,790        9,100             0        989,890
                            -------        -----             -        -------
                        $ 7,074,674    $  17,812    $  (34,992)   $ 7,057,494
                        ===========    =========    ==========    ===========


     Investment  securities  available-for-sale  at December 31, 1995 consist of
     the following:
                                         GROSS          GROSS
                         AMORTIZED     UNREALIZED     UNREALIZED        FAIR
                            COST         GAINS         LOSSES           VALUE
                            ----         -----         ------           -----
  Equity securities .   $  5,314,238   $       3    $  (2,867)   $  5,311,374
  U.S. Government and
    federal agencies       9,250,230      37,761      (44,127)      9,243,864
                           ---------      ------      -------       ---------
                        $ 14,564,468   $  37,764    $ (46,994)   $ 14,555,238
                        ============   =========    =========    ============


     The   following   is  a   summary   of   maturities   of  debt   securities
     available-for-sale as of December 31, 1996:
    
                                       SECURITIES
                                   AVAILABLE-FOR-SALE
                                   ------------------
  Amounts maturing in:           AMORTIZED
                                    COST      FAIR VALUE
                                    ----      ----------
    One year or less ........   $        0   $         0
    After one year through 
     five years .............    2,980,685     2,984,788
    After five years through
     ten years ..............    2,133,071     2,113,480
    After ten years .........            0             0
                                         -             -
                                $5,113,756    $5,098,268
                                ==========    ==========

     During 1996, the Savings Bank sold securities  available-for-sale for total
     proceeds of approximately $10,356,000, resulting in gross realized gains of
     approximately  $231,000 and gross realized losses of approximately $25,000.
     During 1995, the Savings Bank sold securities  available-for-sale for total
     proceeds of approximately $16,487,000, resulting in gross realized gains of
     approximately  $159,000 and gross realized losses of approximately $26,000.
     During 1994, the Savings Bank sold investment securities for total proceeds
     of  approximately   $6,141,000,   resulting  in  gross  realized  gains  of
     approximately $73,000 and gross realized losses of approximately $50,000.


                                       58
<PAGE>

4.   Mortgage-Backed Securities

     Mortgage-backed securities held-to-maturity at December 31, 1996 consist of
     the following:
                                                 GROSS       GROSS
                                  AMORTIZED   UNREALIZED  UNREALIZED   FAIR
                                    COST        GAINS       LOSSES     VALUE
                                    ----        -----       ------     -----
 Federal National Mortgage 
   Association certificates . .  $   117,547    $1,396   $       0  $  118,943
 Collateralized mortgage
   obligations ................    3,092,149     4,099    (106,469)  2,989,779
                                  ----------     -----   ---------  ----------
        Total .................   $3,209,696    $5,495   $(106,469) $3,108,722
                                  ==========    ======   =========  ==========

     Mortgage-backed securities held-to-maturity at December 31, 1995 consist of
     the following:
                                               GROSS        GROSS
                                 AMORTIZED   UNREALIZED   UNREALIZED   FAIR
                                   COST        GAINS        LOSSES     VALUE
                                   ----        -----        ------     -----
  Federal National Mortgage 
   Association certificates ... $  130,793    $ 2,616    $       0   $  133,409
  Collateralized mortgage 
   obligations ................  3,766,387      8,107     (135,566)   3,638,928
                                ----------    -------    ----------  ----------
         Total ................ $3,897,180    $10,723    $(135,566)  $3,772,337
                                ==========    =======     =========  ==========

     Mortgage-backed securities  available-for-sale at December 31, 1996 consist
     of the following:
                                               GROSS      GROSS
                                AMORTIZED    UNREALIZED  UNREALIZED     FAIR
                                  COST         GAINS      LOSSES        VALUE
                                  ----         -----      ------        -----
 Federal National Mortgage
  Association certificates ... $ 3,116,349   $ 17,596   $ (63,087)   $ 3,070,858
 Government National
  Mortgage Association
  certificates ...............   4,096,479     31,955     (14,157)     4,114,277
 Federal Home Loan Mortgage
  Corporation certificates ...   6,330,571     34,826     (69,418)     6,295,979
 Small Business 
  Administration pool 
  certificates ...............   4,034,000     35,441      (6,181)     4,063,260
 Collateralized mortgage
  obligations ................  17,132,514     17,921    (445,807)    16,704,628
                                ----------    --------  ----------    ----------
       Total ................. $34,709,913    $137,739  $(598,650)   $34,249,002
                               ===========    ========  =========    ===========



                                       59
<PAGE>

     Mortgage-backed securities  available-for-sale at December 31, 1995 consist
     of the following:
                                              GROSS      GROSS
                              AMORTIZED     UNREALIZED  UNREALIZED     FAIR
                                 COST         GAINS       LOSSES       VALUE
                                 ----         -----       ------       -----
Federal National Mortgage
 Association certificates    $ 4,898,630   $  27,502   $ (48,941)   $ 4,877,191
Government National
 Mortgage Association
 certificates ............     3,251,438       8,647      (9,137)     3,250,948
Federal Home Loan Mortgage
 Corporation certificates      7,373,259      33,723     (45,053)     7,361,929
Small Business
 Administration Pool
 certificates ............     2,359,744      15,762        (241)     2,375,265
Collateralized mortgage
 obligations .............    22,827,659      25,545    (510,455)    22,342,749
                             -----------   ---------   ---------    -----------
   Total .................   $40,710,730   $ 111,179   $(613,827)   $40,208,082
                             ===========   =========   =========    ===========

     The amortized cost and fair value of mortgage-backed securities at December
     31, 1996 by contractual maturity, are shown below. Expected maturities will
     differ from contractual  maturities because borrowers may have the right to
     call or prepay obligations without penalties.

                                                    AMORTIZED
                                                       COST         FAIR VALUE
                                                       ----         ----------
Mortgage-backed securities:
 In one year or less .........................      $   998,818      $ 1,005,271
 After one year through five years ...........        4,908,433        4,891,902
 After five years through ten years ..........        5,770,006        5,647,238
 After ten years .............................       26,242,352       25,813,313
                                                     ----------       ----------
                                                    $37,919,609      $37,357,724
                                                    ===========      ===========

     During   1996,   the   Savings   Bank   sold   mortgage-backed   securities
     available-for-sale   for  total  proceeds  of   approximately   $5,295,000,
     resulting  in gross  realized  gains of  approximately  $19,000  and  gross
     realized losses of approximately $6,500. During 1995, the Savings Bank sold
     mortgage-backed   securities   available-for-sale  for  total  proceeds  of
     approximately   $9,981,000,   resulting   in   gross   realized   gains  of
     approximately  $87,000 and gross realized losses of  approximately  $2,000.
     During   1994,   the   Savings   Bank   sold   mortgage-backed   securities
     available-for-sale for total proceeds of approximately $606,000,  resulting
     in gross realized losses of approximately $2,000.

     In  1995,   various   held-to-maturity   mortgage-backed   securities  were
     transferred  to the  available-for-sale  category as permitted by Financial
     Accounting  Standards Board Special Report,  "A Guide to  Implementation of
     Statement  115 on  Accounting  for Certain  Investments  in Debt and Equity
     Securities".  The securities  had an amortized cost of $17,341,580  and net
     unrealized  losses  of  $52,625  at the  time of  transfer.  There  were no
     held-to-maturity   mortgage-backed   securities   transferred   to  another
     classification during 1996.

     As of December  31,  1996,  approximately  $17,920,000  of  mortgage-backed
     securities  were  pledged  to secure  advances  from FHLB and  deposits  of
     government agencies as required or permitted by law.

     As of December 31, 1996,  the Savings Bank had no high-risk  collateralized
     mortgage obligations.


                                       60
<PAGE>

5.   Loans Receivable

     Loans receivable are summarized as follows:

                                                           DECEMBER 31,
                                                     1996                1995
                                                     ----                ----
Conventional real estate loans:
  Residential and commercial ...............      $112,107,034      $112,693,968
  Construction and land acquisition ........        11,812,220         9,665,024
                                                    ----------         ---------
     Total .................................       123,919,254       122,358,992

  Loans secured by savings accounts ........         1,021,688           916,298
  Consumer loans ...........................        17,143,823        13,816,222
  Commercial loans .........................        10,209,043        10,261,530
  Lease financings .........................         7,571,427         6,654,470
                                                     ---------         ---------
    Total ..................................       159,865,235       154,007,512
                                                   -----------       -----------
  Less:
  Undisbursed portion of loans
     in process ............................         2,663,178         4,978,687
  Deferred loan fees - net .................           218,314           287,396
  Allowance for loan losses ................         4,339,307         1,339,393
                                                     ---------         ---------
    Total ..................................         7,220,799         6,605,476
                                                     ---------         ---------
    Loans receivable - net .................      $152,644,436      $147,402,036
                                                  ============      ============

     The adequacy of the provision for loan losses is  continually  evaluated by
     management and adjusted as deemed  necessary.  The Savings Bank's allowance
     for loan losses is summarized as follows:
                                                       DECEMBER 31,
                                            1996           1995            1994
                                            ----           ----            ----
Beginning balance, allowance for
  loan losses .....................   $ 1,339,393    $ 1,243,623    $   881,989
Current year's provision for loan
   losses .........................     3,484,529        630,000        440,000
Recoveries ........................        36,830         38,613         46,402
Uncollectible loans charged
   against the allowance ..........      (521,445)      (572,843)      (124,768)
                                         --------       --------       -------- 
Ending balance, allowance for
   loan losses ....................   $ 4,339,307    $ 1,339,393    $ 1,243,623
                                      ===========    ===========    ===========

     As of December 31, 1996,  1995,  and 1994,  the principal  balance of loans
     sold with  recourse  amounted to  $3,404,360,  $4,281,966  and  $6,421,588,
     respectively. Proceeds receivable reflects loans sold in December, 1996 and
     1995 to the  secondary  market and  collected  in  January,  1997 and 1996,
     respectively.

     As of  December  31,  1996,  1995 and  1994,  the  Savings  Bank had  loans
     amounting  to   approximately   $13,095,000,   $4,121,000  and  $2,593,000,
     respectively,  that were specifically  classified as impaired.  The average
     balance of these loans  amounted  to  approximately  $215,000,  $52,000 and
     $35,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
     The  allowance  for loan  losses  related to  impaired  loans  amounted  to
     approximately  $3,775,000,  $1,114,000  and  $463,000 at December 31, 1996,
     1995 and 1994, respectively.

     Nonaccrual  and  renegotiated  loans for which  interest  has been  reduced
     totaled approximately $8,536,000,  $3,520,000 and $4,599,000 as of December
     31, 1996,  1995, and 1994,  respectively.  Interest  income that would have
     been  recorded  under the  original  terms of such  loans and the  interest
     income actually recognized are summarized as follows:


                                       61
<PAGE>

                                                YEAR ENDED DECEMBER 31,
                                          1996          1995           1994
                                          ----          ----           ----
Interest income that would
   have been recorded .............     $ 470,250      $ 209,922      $ 261,658
Interest income recognized ........      (148,442)      (140,829)      (120,745)
                                        ---------      ---------      ---------
Interest income foregone ..........     $ 321,808      $  69,093      $ 140,913
                                        =========      =========      =========

6.   Loans Held for Sale
  
     The Savings Bank had  $343,677 and $30,750 of mortgage  loans held for sale
     in the secondary market at December 31, 1996 and 1995, respectively, stated
     at the lower of cost or market value.

7.   Mortgage Servicing Rights

     Mortgage  servicing  rights  include the rights to service  mortgage  loans
     purchased  by the Savings  Bank.  Mortgage  servicing  rights also  include
     rights to service loans  originated by the Savings Bank sold with servicing
     rights  retained  since  January 1, 1995,  the date  Statement of Financial
     Accounting Standard No. 122, "Accounting for Mortgage Servicing Rights" was
     adopted.  When originated  mortgage loans are sold and the servicing rights
     are retained,  the total cost is allocated  between the mortgage  loans and
     the servicing rights based on their relative fair values.

     Mortgage  loans  serviced for others are not  included in the  accompanying
     consolidated  statements of  condition.  The unpaid  principal  balances of
     these loans were approximately $247,963,000 and $249,309,000 as of December
     31, 1996 and 1995, respectively.

     Custodial  escrow  balances  maintained  in  connection  with mortgage loan
     servicing were approximately  $695,000 and $618,000 as of December 31, 1996
     and 1995, respectively.

     The activity related to mortgage servicing rights is summarized as follows:
                                                           YEAR ENDED
                                                           DECEMBER 31,
                                                       1996          1995
                                                       ----          ----
Beginning balance ........................       $ 1,455,983        $ 1,625,507
Purchased servicing rights ...............            33,245             18,263
Originated servicing rights ..............           418,148             15,878
Amortization .............................          (203,666)          (203,665)
                                                    --------           -------- 
   Ending balance ........................       $ 1,703,710        $ 1,455,983
                                                 ===========        ===========

8.   Accrued Interest and Dividends Receivable

     Accrued interest and dividends receivable is summarized as follows:

                                                         DECEMBER 31,
                                                   1996               1995
                                                   ----               ----
Loans ........................................     $ 1,482,869      $ 1,289,015
Mortgage-backed securities ...................         256,154          331,752
Investments and others .......................          99,727          198,760
                                                        ------          -------
                                                     1,838,750        1,819,527
Allowance for uncollectible interest .........         (75,405)         (69,093)
                                                       -------          ------- 
    Total accrued interest and dividends
     receivable ..............................     $ 1,763,345      $ 1,750,434
                                                   ===========      ===========


                                       62
<PAGE>

9.   Fixed Assets and Related Depreciation

     Major classes of fixed assets and accumulated  depreciation  are summarized
     as follows:

                                                          DECEMBER 31,
                                                     1996               1995
                                                     ----               ----
Land and improvements ......................      $ 1,091,577       $ 1,084,947
Buildings and improvements .................        4,097,162         4,087,605
Furniture, fixtures and equipment ..........        3,870,297         3,498,972
                                                    ---------         ---------
     Subtotal ..............................        9,059,036         8,671,524
Accumulated depreciation ...................       (3,641,074)       (3,099,234)
                                                   ----------        ---------- 
     Fixed assets - net ....................      $ 5,417,962       $ 5,572,290
                                                  ===========       ===========

10.  Savings Accounts

           Savings accounts are summarized as follows:


                                                           DECEMBER 31,
                                                      1996              1995
                                                      ----              ----
NOW accounts and MMDA accounts ...........       $ 45,356,770       $ 45,515,784
Passbook accounts ........................         16,514,007         16,401,140
Time deposits ............................        116,128,638        115,931,197
                                                 ------------       ------------
    Total ................................       $177,999,415       $177,848,121
                                                 ============       ============

     The aggregate amount of deposits with a minimum  denomination over $100,000
     was  approximately  $37,497,000  and  $31,553,000  at December 31, 1996 and
     1995,  respectively.  Interest expense on deposits  exceeding  $100,000 was
     approximately  $820,000,  $774,000  and  $505,000  in 1996,  1995 and 1994,
     respectively.

     At December 31, 1996,  the  scheduled  maturities  of time  deposits are as
     follows:
                     1997 ..................  $ 84,679,214
                     1998 ..................    18,058,866
                     1999 ..................     6,277,560
                     2000 ..................     4,218,127
                     2001 and thereafter ...     2,894,871
                                                 ---------
                                              $116,128,638
                                              ============

     Interest expense on savings accounts is summarized as follows:

                                                  YEAR ENDED DECEMBER 31,
                                             1996          1995          1994
                                             ----          ----          ----
NOW accounts and MMDA accounts .......    $1,078,079    $1,069,096    $1,053,787
Passbook accounts ....................       407,887       404,029       415,904
Time deposits ........................     6,561,637     6,602,060     5,087,884
                                           ---------     ---------     ---------
  Subtotal ...........................     8,047,603     8,075,185     6,557,575
Less penalties on early withdrawals
of certificates of deposit ...........        36,587        50,998        28,448
                                           ---------   -----------   -----------
  Total ..............................    $8,011,016    $8,024,187   $6,529,127
                                          ==========    ==========   ==========


                                       63
<PAGE>

11.  Advances from Federal Home Loan Bank

     Advances  from the FHLB are  secured by FHLB stock and  certain  securities
     held by the Savings Bank and pledged  qualified  first mortgage loans equal
     to, when discounted at 75% of the unpaid  principal  balances,  100% of the
     advances  outstanding.  Advances  as of  December  31,  1996  and  1995 are
     summarized as follows:

                                                              DECEMBER 31,
                                     INTEREST RATE          1996       1995
                                     -------------          ----       ----
Due in 1996, fixed and variable
 rates ...........................   4.93% - 5.97%     $         0   $17,050,000
Due in 1997, fixed and variable
 rates ...........................   5.34% - 5.54%       5,450,000       450,000
Due in 1998, fixed rate only .....           5.75%         400,000       400,000
Due in 2000, fixed rate only,
 callable ........................           5.00%      10,500,000    10,500,000
Due in 2009, fixed rate only .....           6.75%       1,020,833     1,104,167
                                                       -----------   -----------
          Total advances .........                     $17,370,833   $29,504,167
                                                       ===========   ===========
     Interest  expense on advances  from  Federal Home Loan Bank  borrowings  is
     summarized as follows:
                                                 YEAR ENDED DECEMBER 31,
                                         1996            1995           1994
                                         ----            ----           ----
Short-term borrowings ..........      $  597,162      $1,695,356      $1,468,066
Long-term borrowings ...........         582,466         166,150         224,579
                                         -------         -------         -------
          Total ................      $1,179,628      $1,861,506      $1,692,645
                                      ==========      ==========      ==========
12.   Stockholders' Equity

     The  Savings  Bank is subject to various  regulatory  capital  requirements
     administered  by its  primary  federal  regulator,  the  Office  of  Thrift
     Supervision   (OTS).   Failure  to  meet  the  minimum  regulatory  capital
     requirements  can  initiate  certain  mandatory,  and  possible  additional
     discretionary  actions  by  regulators,  that if  undertaken,  could have a
     direct  material  effect  on  the  Bank  and  the  consolidated   financial
     statements.  Under  the  regulatory  capital  adequacy  guidelines  and the
     regulatory  framework for prompt corrective  action,  the Savings Bank must
     meet specific capital  guidelines  involving  quantitative  measures of the
     Savings Bank's assets, liabilities,  and certain off-balance-sheet items as
     calculated  under  regulatory  accounting  practices.  The  Savings  Bank's
     capital  amounts and  classifications  under the prompt  corrective  action
     guidelines  are also subject to  qualitative  judgments  by the  regulators
     about components, risk weightings and other factors.


     Quantitative  measures established by regulation to ensure capital adequacy
     require the Savings Bank to maintain  minimum  amounts and ratios of: total
     risk-based  capital and Tier 1 capital to risk-weighted  assets (as defined
     in the  regulation),  Tier 1 capital to adjusted total assets (as defined),
     and tangible capital to adjusted total assets (as defined).

     As of  December  31,  1996,  the  most  recent  notification  from  the OTS
     categorized  the  Savings  Bank as well  capitalized  under the  regulatory
     framework  for  prompt  corrective   action.  To  be  categorized  as  well
     capitalized,  the Bank  must  maintain  minimum  ratios as set forth in the
     table below. There are no conditions or events since that notification that
     management believes have changed the institution's category.


                                       64
<PAGE>

     The Savings  Bank's actual  capital  amounts and ratios are also  presented
     below.
<TABLE>
<CAPTION>
                                                                                   TO BE WELL  
                                                                               CAPITALIZED UNDER
                                                       FOR CAPITAL             PROMPT CORRECTIVE
                                    ACTUAL           ADEQUACY PURPOSES         ACTION PROVISIONS
                                    ------           -----------------         -----------------
                               AMOUNT     RATIO      AMOUNT     RATIO          AMOUNT       RATIO
                               ------     -----      ------     -----          ------       -----
As of December 31, 1996:
 Total risk-based capital
<S>                          <C>             <C>   <C>          <C>        <C>            <C>  
 (to risk-weighted assets)   $21,568,000     14.4% $11,999,760   >/= 8.0%   $14,999,700   >/= 10.0%
Tier 1 capital
(to risk-weighted assets)     19,694,000     13.1%   5,999,880   >/= 4.0%     8,999,820   >/=  6.0%
 Tier 1 capital
(to adjusted total assets)    19,694,000      8.8%   8,907,440   >/= 4.0%    11,134,300   >/=  5.0%
Tangible capital
(to adjusted total assets)    19,694,000      8.8%   3,340,290   >/= 1.5%     3,340,290   >/=  1.5%

As of December 31, 1995:
Total risk-based capital
(to risk-weighted assets)     21,348,000     14.1%  12,033,120   >/= 8.0%    15,041,400   >/= 10.0%
Tier 1 capital
(to risk-weighted assets)     20,301,000     13.5%   6,016,560   >/= 4.0%     9,024,840   >/=  6.0%
Tier 1 capital
(to adjusted total assets)    20,301,000      8.7%   9,307,240   >/= 4.0%    11,634,050   >/=  5.0%
Tangible capital
(to adjusted total assets)    20,301,000      8.7%   3,490,215   >/= 1.5%     3,340,290   >/=  1.5%

</TABLE>

     FLAG declared dividends of $.33 per share on common stock during 1996.

     During 1995,  FLAG  repurchased  and retired 128,100 shares of common stock
     for  $1,633,272.  The  excess of the cost of shares  acquired  over the par
     value  resulted in a reduction of additional  paid-in  capital based on the
     per share amounts of additional  paid-in  capital for all shares,  with the
     difference charged to retained earnings.

     In December,  1993, the Board of Directors of the Savings Bank authorized a
     2 for 1 stock  split of the  Savings  Bank's  common  stock,  distributable
     January,  1994. As a result of the split, 1,006,250 shares were issued with
     no change in the $1 par value.


                                       65
<PAGE>

13.  Income Taxes

     FLAG  and its  subsidiaries  file  consolidated  income  tax  returns  on a
     calendar-year  basis.  Income tax expense or benefit is allocated among the
     affiliates  based on a separate  return  basis.  Prior to 1996,  if certain
     conditions  were met as  specified  by the Internal  Revenue  Service,  the
     Savings Bank was allowed a special bad-debt deduction based on a percentage
     of taxable income or specified experience formulas.  The Savings Bank based
     its  bad  debt  deduction  on the  experience  method  in 1995  and  used a
     percentage of taxable income in 1994.  For 1996 and future years,  bad debt
     deductions are based on actual losses. If the Savings Bank fails to qualify
     as a Bank  in  future  years,  pre-1988  bad  debt  reserves  amounting  to
     approximately $2,036,000 would be restored to taxable income ratably over a
     six-year period.

     Components of the consolidated  provision (benefit) for income taxes are as
     follows:
                                                YEAR ENDED DECEMBER 31,
                                         1996           1995            1994
                                         ----           ----            ----
Federal
  Current ......................    $   620,845     $ 1,024,824     $   905,658
  Deferred .....................       (841,930)       (101,270)        (33,614)
                                       --------        --------         ------- 
     Total federal
     provision (benefit) .......       (221,085)        923,554         872,044
                                       --------         -------         -------
State
  Current ......................         54,171         139,228         114,527
  Deferred .....................       (144,308)        (17,871)         (5,932)
                                       --------         -------          ------ 
     Total state
       provision (benefit) .....        (90,137)        121,357         108,595
                                        -------         -------         -------
     Total .....................    $  (311,222)    $ 1,044,911     $   980,639
                                    ===========     ===========     ===========

     The differences between FLAG's consolidated  provision (benefit) for income
     taxes and the amount  computed by  applying  statutory  federal  income tax
     rates to income before provision (benefit) for income taxes are as follows:

                                                YEAR ENDED DECEMBER 31,
                                          1996          1995            1994
                                          ----          ----            ----
Provision (benefit) for
 income taxes at
 statutory rates ..................   $  (166,208)   $ 1,044,112    $   934,487
Increase (decrease)
 resulting from:
  Nontaxable FHLB dividends .......       (46,734)       (54,596)       (38,137)
  Effect of state taxes ...........       (64,549)        80,096         69,468
  Cash surrender value of
   life insurance increase ........       (16,304)       (17,000)             0
  Other permanent differences .....       (17,427)        (7,701)        14,821
                                          -------         ------         ------
     Provision for income
      tax expense (benefit) .......   $  (311,222)   $ 1,044,911    $   980,639
                                      ===========    ===========    ===========


                                       66
<PAGE>

     The expected future tax consequences of temporary  differences  between the
     financial   statement   carrying  amounts  and  tax  basis  of  assets  and
     liabilities  which  comprise the net deferred tax asset are  summarized  as
     follows:
                                                              DECEMBER 31,
                                                          1996           1995
                                                          ----           ----
Difference between financial statement and
    tax basis of available-for-sale securities ...   $   181,675    $   194,514
Net loan fees deferred for financial reporting
purposes .........................................        82,959        109,210
Difference between financial statement and
tax basis depreciation and amortization ..........      (180,036)      (160,143)
Provision for loan losses not currently
recognized for tax purposes ......................     1,690,755        593,228
Other, net .......................................       (63,915)       (45,918)
                                                     -----------    -----------
                                                     $ 1,711,438    $   690,891
                                                     ===========    ===========

     Estimated income taxes refundable are summarized as follows:

                                                               DECEMBER 31,
                                                             1996        1995
Federal ..............................................     $254,299     $ 69,227
State ................................................       47,250       18,937
                                                             ------       ------
      Total...........................................     $301,549     $ 88,164
                                                           ========     ========

14.  Commitments and Contingencies

     At December  31,  1996,  the Savings Bank had  outstanding  commitments  to
     originate loans, principally fixed rate, totaling approximately $9,932,000.
     Terms of the loans  range from 5 to 30 years and rates  range from 6.00% to
     10.75%. The Savings Bank also had issued approximately $7,146,000 of unused
     lines of  credit  and  letters  of credit to  customers  and  approximately
     $945,000 of standby letters of credit.

           The Savings Bank  established  a partially  self-insured  health care
           plan,  effective July 1, 1993, for the benefit of eligible  employees
           and their eligible  dependents.  Piedmont  Associates,  a division of
           Group Resources,  Inc. in Atlanta, is the third party  administrator.
           Claims  in excess  of  $15,000  per  person  annually,  but less than
           $1,000,000,  are covered by an insurance policy with Guarantee Mutual
           Life  Company.  The Savings Bank is  responsible  for any claims less
           than $15,000 per person annually.
15.  Profit Sharing Plan

     The Savings  Bank has a profit  sharing  plan for which  substantially  all
     employees  are  eligible.  Contributions  to  the  plan  are  made  at  the
     discretion  of the Board of  Directors  in an amount  not to exceed  15% of
     eligible compensation.  The plan allows participants to direct up to 75% of
     account  balance and/or  contributions  to the plan be invested in stock of
     the Savings  Bank.  The  trustee of the plan is  required  to purchase  the
     Savings  Bank's stock at fair value on the open market and the plan may not
     acquire more than 25% of the issued and outstanding  shares.  Contributions
     of $186,000,  $182,000 and $150,000 were recorded for 1996,  1995 and 1994,
     respectively.


                                       67
<PAGE>

16.  Pension Plan

     The Savings Bank has a trusteed  defined  benefit pension plan which covers
     substantially  all employees.  The Savings Bank's policy is to fund pension
     cost as actuarially  determined on an annual basis.  Assets of the plan are
     invested primarily in a common trust fund.

     The  following is a  reconciliation  of the funded status of the plan using
     the latest actuarial information applicable for each plan year:

                                          1996            1995          1994
                                          ----            ----          ----
Accumulated benefit obligation ....   $   872,174    $   843,440    $   614,293
                                      ===========    ===========    ===========
Projected benefit obligation ......   $ 1,342,926    $ 1,394,731    $ 1,011,163
                                      ===========    ===========    ===========
Plan assets at fair value .........   $ 1,192,941    $   923,680    $   825,830
                                      ===========    ===========    ===========
Funded status .....................   $  (149,985)   $  (471,051)   $  (185,333)
Unrecognized net transaction
  amount ..........................        17,888         20,021         22,154
Unrecognized prior service cost ...       151,530        161,588         (8,215)
Unrecognized net gain (loss) ......      (107,685)       202,427        147,795
                                      -----------    -----------    -----------
   Accrued pension liability ......   $   (88,252)   $   (87,015)   $   (23,599)
                                      ===========    ===========    =========== 

     The assumed rate of return on assets used was 8% for 1996,  1995,  and 1994
     and the assumed rate of compensation  increase was  approximately  5.5% for
     1996, 1995, and 1994. The assumed weighted average discount rate was 8% for
     1996,  1995, and 1994.  Prior service costs are generally  amortized over a
     period of 30 years.

     Net pension expense is summarized as follows:
                                                     YEAR ENDED DECEMBER 31,
                                           1996           1995            1994
                                           ----           ----            ----
Service cost component ............     $  71,238      $  84,835      $  70,674
Interest cost component ...........        95,648         98,476         70,719
Actual return on assets ...........       (85,327)       (68,476)       (62,180)
Other funded amounts/credits ......        28,493         21,401         14,359
                                           ------         ------         ------
   Subtotal .......................       110,052        136,236         93,572
Administrative expenses ...........        52,948         39,664         13,028
                                           ------         ------         ------
   Net pension expense ............     $ 163,000      $ 175,900      $ 106,600
                                        =========      =========      =========
17.  Employee Savings Thrift Plan and Trust

     Effective  January 1, 1987,  the Savings  Bank  adopted a 401K plan for all
     employees  who meet the  eligibility  requirements.  The  plan  provides  a
     matching  contribution in direct relation to the voluntary salary reduction
     elected by each participating employee.  Employer contributions amounted to
     approximately  $47,600,  $49,200  and  $40,000,  for  1996,  1995 and 1994,
     respectively.


                                       68
<PAGE>

18.  Stock Options

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," became effective January 1, 1996. This statement encourages,  but
does not  require,  entities to compute the fair value of options at the date of
grant and to recognize such costs as compensation  expense  immediately if there
is no vesting period or ratably over the vesting period of the options. FLAG has
chosen  not to adopt  the cost  recognition  principles  of this  statement.  No
compensation  expense has been  recognized in 1996 or 1995 relating to the stock
option plans. Had compensation cost been determined based upon the fair value of
the options at the grant dates  consistent with the method of the new statement,
FLAG's net  earnings  and net  earnings per share would have been reduced to the
pro forma amounts indicated below.

                                                 1996       1995
                                                 ----       ----
                        
Net earnings (loss)         As reported       (177,626)   2,026,007
                            Pro forma         (184,064)   2,026,007
                        
Earnings (loss)             As reported           (.09)        1.02
   per share                Pro forma             (.09)        1.02
                   

The fair  value of each  option  is  estimated  on the date of grant  using  the
minimum  value  options  pricing  model  with  the  following  weighted  average
assumptions used for grants in 1996:  dividend yield of 3%;  risk-free  interest
rate of 6% and an expected life of 5 years. The weighted average grant-date fair
value of options granted in 1996 was $1.73.

     The Company has an Employee Stock  Incentive Plan under which the Committee
     of the Board of  Directors  has the  authority  to grant  stock  options to
     employees of the Company.  The options granted shall be immediately  vested
     as of the  grant  date and the  maximum  term is ten  years.  No more  than
     201,250 shares may be issued under this Plan.

     There were 120,207  employee  stock  options,  issued prior to December 15,
     1994, outstanding at January 1, 1996 with a weighted average exercise price
     of $5.38. All 120,207 options were exercised during the year.

     The Company also has a Directors Stock Incentive Plan.  Under this Plan, no
     more than  100,625  shares  may be issued.  The  options  granted  shall be
     immediately  vested  as of the date of grant  and the  maximum  term is ten
     years.

     There were 40,000  Director  stock options  outstanding at January 1, 1996.
     Each option can be exercised at a price of $9.50 and these  options  expire
     in the year 2004. An additional 6,000 shares were granted during 1996. Each
     option can be  exercised at a price of $13.50 and these  options  expire in
     the year 2006. No Director Stock Options were exercised during the year.

19.  Flexible Compensation Plan

     The  Savings  Bank  established  a flexible  compensation  plan,  effective
     February 1, 1993,  to offer  eligible  employees a choice  between cash and
     certain   non-taxable   statutory   fringe   benefits.   The   plan   is  a
     non-discriminatory  "Cafeteria  Plan" as defined by Internal  Revenue  Code
     Section 125. As a part of the flexible  compensation  plan the Savings Bank
     established a medical  reimbursement  plan, as defined by Internal  Revenue
     Code  Section  105(h),  for the  benefit of  eligible  employees.  With the
     implementation of these plans, employees' payments for health care are on a
     pre-tax basis.

20.  Indexed Retirement Plan

     The Savings Bank established an indexed retirement plan, effective February
     3, 1995, to provide retirement benefits to Directors. The Savings Bank also
     established a similar plan for the benefit of certain  executive  officers.
     The index  used by the plans is the  earnings  on life  insurance  policies
     purchased on the Directors' and Officers'  lives.  The Savings Bank retains
     the  tax-free  build-up of cash  surrender  value in the policies up to the
     after  tax  opportunity  costs  for  premiums  paid  on the  policies.  Any
     remaining  earnings from the policies are accrued to deferred  compensation
     liability  accounts  for the  Director  or Officer to be paid in ten annual
     installments commencing thirty days following retirement.


                                       69
<PAGE>

21.  Loans to Related Parties

     The Savings Bank makes loans to its directors, executive officers and their
     associates on substantially the same terms as to others. Set forth below is
     an analysis of loans to directors,  executive officers and their associates
     during the following periods:

Balance, December 31, 1994 .............................            $   940,198
Additions ..............................................                128,105
Repayments .............................................               (148,495)
                                                                    -----------
Balance, December 31, 1995 .............................                919,808
Additions ..............................................                972,108
Repayments .............................................               (216,016)
                                                                    -----------
Balance, December 31, 1996 .............................            $ 1,675,900
                                                                    ===========

22.  Supplemental Disclosures of Cash Flow Information

     Cash paid during the year for:
                                             YEAR ENDED DECEMBER 31,
                                      1996             1995             1994
                                      ----             ----             ----
Interest .................        $9,266,251        $9,828,527        $8,073,558
Income taxes .............         1,016,855         1,204,398           887,417

     Supplemental schedules of noncash investing and financing activities:

     Unrealized  losses on  securities  available-for-sale  for the years  ended
     December 31, 1996, 1995 and 1994 are as follows:
                                             YEAR ENDED DECEMBER 31,
                                      1996             1995             1994
                                      ----             ----              ----
Initial adoption of
  SFAS No. 115 ..............     $         0      $         0      $  (213,552)
Unrealized loss .............         317,364        2,026,409                0
Increase (decrease) in
  unrealized loss ...........         (11,647)        (899,488)       2,239,961
Decrease in unrealized
  loss due to sales,
  calls, and maturities .....          (9,299)        (809,557)               0
                                  -----------      -----------      -----------
   Total ....................     $   296,418      $   317,364      $ 2,026,409
                                  ===========      ===========      ===========

     Non-cash transactions - During 1996, the Savings Bank's deferred income tax
     asset increased $1,020,547 and decreased $1,047,478 during 1995.


                                       70
<PAGE>

23.  Operating Leases

     The Savings Bank was a party to five operating  leases for office space and
     equipment during 1996. One lease has a 10 year renewal option,  and another
     lease has an annual  renewal  option for  $1,500  after the  initial  lease
     period expires.

     The total rent  expense  for all  operating  leases  amounted  to  $61,495,
     $59,880 and $64,430 during 1996, 1995, and 1994, respectively.

24.  Financial Instruments with Off-Balance-Sheet Risk

     The Savings Bank is a party to financial instruments with off-balance-sheet
     risk in the normal  course of business to meet the  financing  needs of its
     customers. These financial instruments include commitments to extend credit
     and  standby  letters  of credit.  These  instruments  involve,  to varying
     degrees, elements of credit and interest rate risk in excess of the amounts
     recognized in the statements of financial condition.

     The Savings Bank's  exposure to credit loss in the event of  nonperformance
     by the other party to the financial  instruments  for commitments to extend
     credit and  standby  letters of credit is  represented  by the  contractual
     amount of those  instruments  (see Note 14). The Savings Bank uses the same
     credit policies in making  commitments  and  conditional  obligations as it
     does for on-balance-sheet instruments.

     Commitments  to extend credit are  agreements to lend to a customer as long
     as there is no  violation of any  condition  established  in the  contract.
     Commitments  generally  have fixed  expiration  dates or other  termination
     clauses and may require payment of a fee. Since many of the commitments are
     expected to expire without being drawn up on, the total commitment  amounts
     do not necessarily  represent future cash requirements.  The bank evaluates
     each customer's  creditworthiness  on a case-by-case  basis. The amount and
     type of collateral  obtained,  if deemed necessary by the Savings Bank upon
     extension of credit,  varies and is based on management's credit evaluation
     of the counterparty.

     Standby letters of credit are conditional commitments issued by the Savings
     Bank to guarantee the  performance of a customer to a third party.  Standby
     letters  of  credit   generally  have  fixed   expiration  dates  or  other
     termination  clauses  and may  require  payment of a fee.  The credit  risk
     involved  in  issuing  letters  of credit is  essentially  the same as that
     involved in extending  loan  facilities  to customers.  The Savings  Bank's
     policy for  obtaining  collateral,  and the nature of such  collateral,  is
     essentially  the same as that  involved  in  making  commitments  to extend
     credit.


                                       71
<PAGE>

25.  Fair Value of Financial Instruments

     SFAS No.  107,  "Disclosures  about  Fair Value of  Financial  Instruments"
     requires disclosure of fair value information about financial  instruments,
     whether or not recognized on the face of the balance sheet, for which it is
     practicable to estimate that value.  The assumptions used in the estimation
     of the fair value of the Savings Bank's financial  instruments are detailed
     below.  Where  quoted  prices are not  available,  fair values are based on
     estimates using discounted cash flows and other valuation  techniques.  The
     use  of  discounted  cash  flows  can  be  significantly  affected  by  the
     assumptions used,  including the discount rate and estimates of future cash
     flows.  The following  disclosures  should not be considered a surrogate of
     the liquidation value of the Savings Bank or its subsidiaries, but rather a
     good-faith  estimate of the  increase  or  decrease  in value of  financial
     instruments  held by the  Savings  Bank  since  purchase,  origination,  or
     issuance.

     Cash and Cash  Equivalents - For cash and due from banks,  interest bearing
     deposits  and  federal  funds sold,  the  carrying  amount is a  reasonable
     estimate of fair value.

     Investment  Securities  and  Mortgage-Backed  Securities  - Fair values for
     investment  securities and  mortgage-backed  securities are based on quoted
     market prices.

     Investment  in FHLB Stock - The carrying  value of FHLB stock  approximates
     fair value.

     Loans  Receivable  - The fair  value of fixed rate  loans is  estimated  by
     discounting  the future cash flows using the current rates at which similar
     loans would be made to borrowers with similar credit ratings.  For variable
     rate loans, the carrying amount is a reasonable estimate of fair value.

     Mortgage  Servicing  Rights - Fair value of  mortgage  servicing  rights is
     determined  by  estimating  the present  value of the future net  servicing
     income, on a disaggregated basis, using anticipated prepayment assumptions.

     Deposits,  Advances from Borrowers and Advances Payable to Secondary Market
     - The fair  value of  demand  deposits,  savings  accounts,  NOW  accounts,
     certain money market deposits, advances from borrowers and advances payable
     to secondary  market is the amount payable on demand at the reporting date.
     The fair value of fixed  maturity  certificates  of deposit is estimated by
     discounting  the future  cash flows using the rates  currently  offered for
     deposits of similar remaining maturities.

     Federal Funds Purchased - For federal funds purchased,  the carrying amount
     is a reasonable estimate of fair value.

     Advances from FHLB - The fair value of the FHLB fixed rate  borrowings  are
     estimated  using  discounted cash flows,  based on the current  incremental
     borrowing rates for similar types of borrowing  arrangements.  For variable
     rate  borrowings,  the  carrying  amount is a  reasonable  estimate of fair
     value.

     Commitments  to  Extend  Credit  and  Standby  Letters  of Credit - Because
     commitments  to extend credit and standby  letters of credit are made using
     variable  rates or for short  terms,  the  contract  value is a  reasonable
     estimate of fair value.

     Limitations - Fair value  estimates  are made at a specific  point in time,
     based on relevant market  information  and information  about the financial
     instrument.  These  estimates  do not reflect any premium or discount  that
     could result from  offering for sale at one time the Savings  Bank's entire
     holdings of a particular financial instrument. Because no market exists for
     a significant  portion of the Savings Bank's  financial  instruments,  fair
     value estimates are based on many judgments. These estimates are subjective
     in nature and involve  uncertainties  and matters of  significant  judgment
     and, therefore, cannot be determined with precision. Changes in assumptions
     could significantly affect the estimates and it is reasonably possible that
     these estimates may change materially in the near term.


                                       72
<PAGE>

     Fair  value  estimates  are  based on  existing  on and  off-balance  sheet
     financial   instruments   without  attempting  to  estimate  the  value  of
     anticipated  future business and the value of assets and  liabilities  that
     are  not  considered   financial   instruments.   Significant   assets  and
     liabilities that are not considered financial  instruments include deferred
     income taxes and fixed assets. In addition,  the tax ramifications  related
     to  the  realization  of  the  unrealized  gains  and  losses  can  have  a
     significant  effect on fair value estimates and have not been considered in
     the estimates.

     The  carrying  amount  and  estimated  fair  values of the  Savings  Bank's
     financial instruments at December 31, 1996 are as follows:

                                                                1996
                                                      CARRYING       ESTIMATED
                                                       AMOUNT       FAIR VALUE
Assets:
   Cash and cash equivalents .................     $  6,084,923     $  6,084,923
   Investment securities .....................        7,057,494        7,057,494
   Mortgage-backed securities ................       37,458,698       37,357,724
   Investment in FHLB stock ..................        1,895,900        1,895,900
   Loans receivable - net ....................      152,644,436      154,718,806
   Mortgage servicing rights .................        1,703,710        1,703,710

Liabilities:
   Deposits ..................................      177,999,415      178,521,623
   Federal funds purchased ...................        2,210,000        2,210,000
   Advances from Federal Home Loan Bank ......       17,370,833       17,370,833
   Advances from borrowers and advances
     payable to secondary market .............        2,692,348        2,692,348

Unrecognized financial instruments:
   Commitments to extend credit ..............       17,078,000       17,078,000
   Standby letters of credit .................          945,000          945,000


                                       73
<PAGE>

     The  carrying  amount  and  estimated  fair  values of the  Savings  Bank's
     financial instruments at December 31, 1995 are as follows:

                                                                1995
                                                      CARRYING       ESTIMATED
                                                       AMOUNT        FAIR VALUE
Assets:
   Cash and cash equivalents .................     $  7,850,254     $  7,850,254
   Investment securities .....................       15,555,238       15,555,238
   Mortgage-backed securities ................       44,105,262       43,980,419
   Investment in FHLB stock ..................        1,185,900        1,895,900
   Loans receivable - net ....................      147,402,036      150,533,181
   Mortgage servicing rights .................        1,455,983        1,455,983

Liabilities:
   Deposits ..................................      177,848,121      178,820,220
   Advances from Federal Home Loan Bank ......       29,504,167       29,557,382
   Advances from borrowers and advances
     payable to secondary market .............        2,759,982        2,759,982

Unrecognized financial instruments:
   Commitments to extend credit ..............       19,239,000       19,239,000
   Standby letters of credit .................          795,000          795,000

26.  Investment in Subsidiary

     The Savings Bank's wholly-owned subsidiary, Piedmont Mortgage Service, Inc.
     is engaged in  appraisal  services as Piedmont  Appraisal  Company.  During
     1995, the subsidiary also began offering  brokerage services to individuals
     as Piedmont  Investment  Services.  The financial  statements  for Piedmont
     Mortgage Service, Inc. are presented below:

CONDENSED STATEMENTS OF CONDITION
                                                              DECEMBER 31,
                                                          1996            1995
                                                          ----            ----
ASSETS
  Cash on deposit with parent .....................     $ 218,199     $ 198,760
  Accounts receivable .............................        51,009        19,528
  Deferred income taxes ...........................             0        16,607
  Other assets ....................................             0         1,592
                                                        ---------     ---------
     Total assets .................................     $ 269,208     $ 236,487
                                                        =========     =========
LIABILITIES AND STOCKHOLDER'S EQUITY
  LIABILITIES .....................................     $  82,759     $ 100,735
                                                        ---------     ---------
  STOCKHOLDER'S EQUITY
    Capital stock .................................       175,000       175,000
    Retained earnings (accumulated deficit) .......        11,449       (39,248)
                                                        ---------     ---------
       Total stockholder's equity .................       186,449       135,752
                                                        ---------     ---------
       Total liabilities and stockholder's
              equity ..............................     $ 269,208     $ 236,487
                                                        =========     =========


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<PAGE>

CONDENSED STATEMENTS OF INCOME
                                                       YEAR ENDED
                                                       DECEMBER 31,
                                             1996         1995          1994
                                             ----         ----          ----
Interest income ......................    $   1,971     $   1,806     $   1,591
Brokerage commissions ................       78,536        52,216             0
Appraisal fee income .................      221,775       181,403       163,400
Operating expenses ...................     (220,512)     (204,528)     (135,129)
                                          ---------     ---------     ---------
  Net income before income tax
    expense ..........................       81,770        30,897        29,862
  Income tax expense
                                            (31,073)      (11,741)      (11,348)
                                          ---------     ---------     ---------
  Net income .........................    $  50,697     $  19,156     $  18,514
                                          =========     =========     =========

27.  Holding Company

     The Savings Bank became a wholly owned  subsidiary of FLAG effective  March
     1, 1994.  Each share of the Savings  Bank's  common stock  outstanding  was
     converted into one share of FLAG's common stock.

     The  financial  statements  of all prior years have been  restated  for the
     effect  of  the  formation  of the  holding  company.  Condensed  financial
     statements of the subsidiary, the Savings Bank, are presented below:

BALANCE SHEETS
                                                             DECEMBER 31,
                                                       1996              1995
                                                       ----               ----
ASSETS
     Cash ..............................        $     489,869            281,782
     Investment securities .............              188,125                  -
     Investment in subsidiary ..........           19,910,996         20,494,673
     Other assets ......................               36,593             46,864
                                                       ------             ------
          Total assets                          $  20,625,583         20,823,319
                                                 ============       ============
LIABILITIES AND STOCKHOLDERS' EQUITY
     Liabilities - accounts payable and 
          accrued expenses.............               114,389            125,103

     Total stockholders' equity ........           20,511,194         20,698,216
                                                 ------------       ------------
     Total liabilities and stock-
       holders' equity ........................  $ 20,625,583       $ 20,823,319
                                                 ============       ============

STATEMENT OF EARNINGS

                                             FOR THE YEARS ENDED DECEMBER 31,
                                           1996          1995            1994
                                           ----          ----            ----
Income:
  Dividend income from the Bank ....   $  525,008    $ 2,282,699            -
  Interest income ..................            -              -            -
  Other ............................          633              -            -
                                          -------      ---------       -------
     Total income ..................      525,641      2,282,699            -
                                          -------      ---------       -------

Operating expenses:
  Interest expense .................            -              -             -
  Other ............................      145,445        132,824        16,570
                                          -------        -------        ------
     Total operating expenses ......      145,445        132,824        16,570
                                          -------        -------        ------
     Earnings (loss) before income
       tax benefit and equity in
       undistributed earnings of
       subsidiaries ................      380,196      2,149,875        (16,570)

Income tax benefit .................       50,903         18,500          6,297
                                           ------         ------          -----
     Earnings (loss) before equity 
       in undistributed earnings of
       subsidiaries or dividends
       received in excess of earnings
       of subsidiaries .............      431,099      2,l68,375        (10,273)

Dividends received in excess of 
  earnings (loss) of subsidiaries ..     (608,726)      (142,368)             -

Equity in undistributed earnings
  (loss) of subsidiaries............            -              -       1,778,125
                                         ---------     ---------       ---------
     Net earnings (loss)............  $  (177,627)     2,026,007       1,767,852
                                        ==========     =========       =========


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<PAGE>

Statements of Cash Flows

                                            For the Years Ended December 31,
                                           1996          1995           1994
                                           ----          ----           ----
Cash flows from operating activities:
  Net earnings (loss) ..............   $ (177,627)    $2,026,007     $1,767,852
  Adjustments to reconcile net
   earnings (loss) to net cash
   provided by operating activities:
    Amortization                           14,419         14,419              -
    Dividends received in excess of
      earnings (loss) subsidiaries ..     608,726        142,368              -
    Equity in undistributed earnings
      of subsidiaries ...............           -              -     (1,778,125)
    Change in other assets and
      liabilities ...................     (41,888)       154,585         54,585
                                          -------        -------         ------
          Net cash provided by 
           operating activities .....     403,630      2,337,379        603,750
                                          -------      ---------        -------

Cash flows from investing activities:
  Purchase of securities 
    available-for-sale...............    (194,742)            -              -

Cash flows from financing activities:
  Repurchase of common stock .........          -     (1,633,272)            -
  Exercise of stock options ..........    630,629        124,398             -
  Issuance of common stock ...........      8,990         59,486             -
  Dividends paid......................   (640,420)      (606,209)     (603,750)
                                         --------       --------      -------- 
          Net cash used by financing
            activities ...............       (801)    (2,055,597)     (603,750)
                                         ---------    ----------      -------- 
Net change in cash ...................    208,087        281,782             -

Cash at the beginning of the year ....    281,782              -             -
                                          -------     ----------      --------
Cash at the end of the year ..........   $489,869    $   281,782      $      -
                                          =======     ==========      ========

Supplemental disclosure of noncash
  financing activities - Increase
  (decrease) in dividends payable ....  $  29,541   $    (7,335)     $       -
                                          =======     ==========      ========

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


                                       76
<PAGE>


                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

   (a)    Documents Filed as Part of This Report:

          1.   Financial Statements

               The  consolidated   financial   statements  and  the  independent
               auditors'  report  thereon which are required to be filed as part
               of this report are included in the  Company's  1996 Annual Report
               and  are  included in  Item 8  hereof.  These financial 
               statements are as follows:

               Consolidated  Statements  of  Condition  at December 31, 1996 and
               1995

               Consolidated  Statements of Income for each of the three years in
               the period ended December 31, 1996

               Consolidated  Statements of Stockholders'  Equity for each of the
               three years in the period ended December 31, 1996

               Consolidated Statements of Cash Flows for each of the three years
               in the period ended December 31, 1996

               Notes to Consolidated Financial Statements

          2.   Financial Statement Schedules

               All financial  statement schedules for which provision is made in
               the  applicable  accounting  regulations  of the  Securities  and
               Exchange  Commission have been omitted because such schedules are
               not required under the related  instructions or are  inapplicable
               or because the information  required is included in the financial
               statements or notes thereto incorporated by reference herein.

          3.   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.  The Company will furnish any exhibit
               upon request to Susan R. Huckabee, Investor Relations Department,
               FLAG Financial Corporation, 101 North Greenwood Street, LaGrange,
               Georgia  30240.  There  is a  charge  of $.50  per  page to cover
               expenses of copying and mailing.


                                       77
<PAGE>


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 to 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  10.3b 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 

 16       Letter regarding change in certifying accountant (Exhibit 16 to the 
          Company's Form 8-K/A filed March 12, 1997)

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

 23       Consent of Robinson, Grimes & Company, P.C. 

 (b)      Reports on Form 8-K.

          No  Current  Reports on Form 8-K were  filed by the  Company  with the
          Securities and Exchange  Commission  during the quarter ended December
          31, 1996.

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

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


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<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:  February 17, 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 February 17, 1998.


    Signature                                  Title



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

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

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

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

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

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

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


                                       79
<PAGE>

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

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

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


           
*By:    _____________________________
             John S. Holle
         As Attorney-in-Fact


                                       80
<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)

                                       81
<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 

 16       Letter regarding change in certifying accountant (Exhibit 16 to
          the Company's Form 8-K/A filed March 12, 1997)

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

 23       Consent of Robinson, Grimes & Company, P.C. 



                                       82
<PAGE>