A Partnership of Community Banks
                               1998 Annual Report


Table of Contents

Corporate Profile .........................................................    1
Letter to Shareholders ....................................................    2
Financial Highlights ......................................................    5
A Community of Partner Banks ..............................................    6
Partnership: Progress and Preservation ....................................    7
Comprehensive Support, Impressive Benefits ................................    8
Into the Twenty-First Century .............................................   11
Board of Directors ........................................................   12
FLAG Partner Banks ........................................................   14
Management's Discussion
and Analysis of Financial Condition and Results of Operations .............   16
Table of Contents to Consolidated Financial Statements ....................   25
Corporate Information ......................................   Inside Back Cover

<PAGE>

Corporate Profile
-----------------

FLAG Financial Corporation,  headquartered in LaGrange, Georgia, is a multi-bank
holding  company  whose  wholly-owned  subsidiaries  are  First  Flag  Bank,  in
LaGrange,  Georgia,  and Citizens Bank, in Vienna,  Georgia.  Citizens Bank also
includes the operations of Bank of Milan,  Empire Banking  Company and The Brown
Bank,  all three of which operate as divisions of Citizens  Bank.  Through these
subsidiaries,  the Company  provides a broad  range of  financial  products  and
services  to markets  located  throughout  West  Central,  Middle and  Southeast
Georgia.

The Company  currently  serves these  markets  through 23 banking  offices in 10
communities,  and  offers  retail  and  commercial  banking,  mortgage  banking,
appraisal,  insurance,  investment and trust services.  As of December 31, 1998,
FLAG had assets of approximately  $551 million and its common stock is traded on
The Nasdaq Stock Market under the symbol "FLAG"

Mission Statement
-----------------

Our mission is to be a  diversified  provider of  financial  services,  creating
partnerships  that  maximize  value for our  customers,  our  shareholders,  our
employees and our communitites.

[CHART]
Stock Trade Activity
(number of trades)

1994           344

1995           536
              
1996           449

1997           829

1998           1,349
[END CHART]

               
[CHART]
Stock Prices at Year End

94  $5.75

95  $9.17

96  $7.17

97  $14.33

98  $11.50
[END CHART]


[CHART]
Book Value at Year End

94  $5.49

95  $6.24

96  $6.24

97  $6.91

98  $7.30

Stock prices and Book value reflect adjustment for 3-for-2 stock split paid June
3, 1998.
[END CHART]

                        A Partnership of Community Banks
                        --------------------------------
                                        1

<PAGE>

A Partnership of Community Banks
2

To Our Shareholders  

Dear  Shareholders:  

It is a pleasure to report to you the operating  success of your  company,  FLAG
Financial Corporation, for the year 1998. The community bank vision initiated in
late 1997 became a reality with the merger of Middle  Georgia  Bankshares,  Inc.
and FLAG Financial  Corporation on March 31, 1998. From this merger of equals, a
foundation was created to build a new and strategically different FLAG Financial
Corporation.  This initial combination  positioned the organization for enhanced
long-term  growth  and  expansion  of our  franchise.  During  the  year we made
significant progress in both of those areas. Initially, we more than doubled our
asset base,  as well as our number of  branches.  We also  increased  our market
presence,  which was formerly limited to West Central Georgia, to include Middle
and Southeast  Georgia.  The expansion of our franchise adds to the diversity of
our  markets,   provides  us  with  opportunities  to  leverage  investments  in
technology  and people  and  allows us to  demonstrate  that our  philosophy  of
community bank  partnerships  can be  successfully  implemented in many distinct
markets.  Nineteen  ninety-eight  was also a year in  which  we  built  upon the
foundation  established  in 1997.  We completed a major  conversion  of our data
processing  system,  invested heavily in other technologies and strengthened and
expanded our  management  team. In sum, we finished the year well  positioned to
maintain the momentum that we built in the last twelve months.

[PHOTO]
J. Daniel Speight, Jr. and Johns S. Holle
[END PHOTO]

A YEAR OF EXTERNAL EXPANSION...

If there is one thing that 1998 will be  remembered  for, it will likely be that
this was the year in which we proved that the term "community bank  partnership"
was more  than a  concept.  During  the year,  we  successfully  completed  four
community bank partnership mergers.  Early in the year, as mentioned previously,
we  completed  the merger  with Middle  Georgia  Bankshares,  Inc.,  giving FLAG
Financial  Corpor-ation a new presence in Central and South Central Georgia.  In
addition to broadening FLAG Financial Corporation's market presence, this merger
strengthened  our  management  capabilities,  as well as  provided  depth to our
management  team.  Later in the year,  we  completed  mergers  with Three Rivers
Bancshares,  Inc.,  based in Milan,  Georgia;  The Brown Bank,  based in Metter,
Georgia; and Empire Bank Corp., based in Homerville, Georgia.

As a result of these mergers, all of which closed by year-end 1998, we increased
our asset base to more than $550  million,  versus total assets at year-end 1997
(before the  mergers) of $248  million.  (The  pooling of  interests  accounting

                        A Partnership of Community Banks
                        --------------------------------
                                       2

<PAGE>

treatment  that was used for each of these  mergers  requires that the financial
results of those  operations  be included in the years prior to the merger.  For
that reason, our current financial  statements will reflect total assets of $512
million at  year-end  1997.) We also  announced  in late 1998 our  intention  to
acquire  the  Blackshear  branch  of First  Georgia  Bank  and,  in early  1999,
announced our intention to merge with First Hogansville Bankshares,  Inc., based
in Hogansville,  Georgia and Thomaston Federal Savings Bank, based in Thomaston,
Georgia.  We are excited about the addition of these two fine  organizations  as
external  expansion  will  continue to be an  important  component of our growth
plan. As always,  we welcome new community  bank partners and pledge our support
and  commitment to the  principles  of community  banking that have made them so
successful.

 ...COMPLEMENTED  BY INTERNAL  GROWTH 

During 1998, we also opened a Crisp county office in Cordele, Georgia and, after
year end,  announced  that we will be  establishing  an  office  in  Statesboro,
Georgia,  as First  Flag  Bank -  Statesboro.  This  office  will be a branch of
Citizens  Bank and will be the first branch  opened under the First Flag Bank de
novo  strategy.  By  identifying  merger  partners that are located in strategic
markets and  complementing  those efforts by selective de novo branches,  we can
enhance the value and growth potential of our entire franchise.

OUR INVESTMENT IN IN TECHNOLOGY AND PEOPLE

Many of the benefits  that will accrue from these  expansion-related  activities
will ultimately  result from linking our partners to our technological and other
resources.  Realizing the  importance of  technology in our future  success,  we
devoted significant  resources to upgrading our capabilities in 1998. One of the
major  enhancements  was  the  conversion  of  our  data  processing  system  in
preparation for Year 2000 ("Y2K"). This state-of-the art banking system, through
its  relational  database  capabilities,  allows our employees to have immediate
access  to  customer  account  information,  thereby  improving  responsiveness,
overall  service  levels and  cross-selling  opportunities.  Additionally,  this
system has fully integrated teller,  telephone, ATM and internet banking modules
and is Y2K compliant.

[QUOTE]
We welcome new community  bank partners and pledge our support and commitment to
the principles of community banking that have made them so successful.

We also invested in our staff through personnel additions and training programs.
We added several key individuals  with expertise in insurance,  investment,  and
trust services,  which should enhance  noninterest income. We also added a sales
manager who is responsible for the  implementation of a sales culture throughout
our  organization.  All  employees  were  exposed  to  improved  sales  training
techniques  during the year, and we  supplemented  those efforts by implementing
incentive programs that reward successful sales efforts.

                        A Partnership of Community Banks
                        --------------------------------
                                       3
<PAGE>

FINANCIAL RESULTS

Our geographic expansion and enhancements to our technological capabilities have
required large  investments,  not only in terms of time and effort,  but also in
terms of financial  resources.  In fact,  we estimate  that pre-tax  expenses of
approximately  $1 million were incurred in 1998 that related to the transactions
that were closed during the year and to  technological  improvements,  including
our conversion to the new data processing system. Additionally, we increased our
loan loss reserves by approximately $2 million to more  conservatively  position
the Company.  Clearly,  1998's earnings were affected by these investments.  Net
income in 1998 was $2.0 million,  or $0.30 per share,  versus $4.3  million,  or
$0.66 per share in 1997.

While our  expansion  and  investments  affected our  short-term  earnings,  our
resulting larger size and enhanced  technological  capabilities  provide us with
much  greater  opportunities  to leverage our fixed costs  (therefore  enhancing
long-term  efficiency)  and  provide  superior  products  and  services  to  our
customers.  It is these factors,  in our opinion,  that will ultimately increase
our shareholder and franchise value. Reflecting the confidence that the Board of
Directors  has in the steps we are taking and their  commitment  to  shareholder
value, we increased FLAG Financial  Corporation's  cash dividend during the year
and declared a 3-for-2 stock split.  Looking  ahead,  we will continue to manage
the Company with the primary  objective of  maximizing  long-term  earnings.  We
believe this approach is most compatible with shareholder objectives to maximize
long-term value.

[CHART]
Assets*
(in thousands)


94     $381,250

95     $407,361

96     $435,976

97     $512,087

98     $550,782

*Years prior to 1998 restated to reflect acquired companies.
[END CHART]


[CHART]
Stockholders' 
Equity
(in thousands)

94     $34,989

95     $39,563

96     $41,198

97     $45,075

98     $47,865
[END CHART]


LOOKING AHEAD AND  MAINTAIUNING  OUR MOMENTUM
The  investments  we have made over the past year have  positioned us for growth
and will support an organization  considerably  larger than our current size. We
have the senior  management team in place to support such an  organization,  and
our community bank partnership  philosophy provides an excellent vehicle through
which to achieve this growth.

We remain committed to maintaining the momentum that was established in 1998 and
pledge to you,  our  shareholders,  that we will  strive to build the  long-term
value of your investment. Thank you for your confidence and continued support.



/s/John S. Holle                  /s/J. Daniel Speight, Jr.

John S. Holle                     J. Daniel Speight, Jr.    
Chairman of the Board             President and CEO
FLAG Financial Corporation        FLAG Financial Corporation  


TIMELINE OF 1998 PARTNER BANK MERGERS

October 1997
FLAG announced  plans to combine with Middle Georgia  Bankshares,  Inc.,  parent
company of Citizens Bank 
FLAG is a Unitary Thrift Holding Company

January 1998
FLAG  announced  plans to combine with Three  Rivers  Bancshares,  Inc.,  parent
company of Bank of Milan

[Citizens Bank Logo]

March 1998
Completed  merger  with  Middle  Georgia  Bankshares,  Inc.,  parent  company of
Citizens Bank

[Bank of Milan Logo]

May 1998
Completed merger with Three Rivers  Bancshares,  Inc., parent company of Bank of
Milan
FLAG announced plans to combine with The Brown Bank

June 1998
FLAG announced plans to combine with Empire Bank Corp., parent company of Empire
Banking Company
FLAG 3-for-2 Stock Split payable June 3, 1998

September 1998
FLAG announced Letter of Intent to aquire  Blackshear,  Georgia branch office of
First Georgia Bank

[Empire Banking Company Logo]
[The Brown Bank Logo]

December 1998
Completed  merger  with  Empire Bank  Corp.,  parent  company of Empire  Banking
Company
Completed merger with  The Brown Bank

[First Flag Bank LaGrange Logo]

January 1999
FLAG subsidiary,  First Federal Savings Bank of LaGrange,  changed name to First
Flag  Bank  LaGrange  and  instituted  a  charter   conversion  from  a  savings
institution to a State of Georgia commercial bank

Bank of Milan,  Empire  Banking  Company and The Brown Bank merged into Citizens
Bank operating under a State of Georgia commercial bank charter
February 1999

February 1999

FLAG announced  plans to add to franchise with First Flag Bank - Statesboro as a
loan production office (first de novo office establishment)
March 1999

FLAG announced plans to combine with First Hogansville Bankshares,  Inc., parent
company of The Citizens Bank of Hogansville

March 1999
FLAG announced plans to combine with Thomaston Federal Savings Bank

                        A Partnership of Community Banks
                        --------------------------------
                                       4

<PAGE>

Financial Highlights

(in thousands except per share data)

                                       YEAR ENDED DECEMBER 31, 
                                       ----------------------- 
                              1998     1997     1996    1995    1994
                              ----     ----     ----    ----    ----
FOR THE YEAR
Net interest income .....   $22,823   20,106   18,235  16,877    14,400
Provision for loan losses     3,382    1,596    4,475   1,490       634
Noninterest income ......     7,439    6,144    5,216   4,148     3,320
Noninterest expense .....    24,617   18,523   16,825  13,867    11,489
Income taxes ............       303    1,820      451   1,662     1,734
Net earnings ............     1,960    4,311    1,700   4,007     3,863

                                      YEAR ENDED DECEMBER 31, 
                                      ----------------------- 
                              1998     1997     1996    1995     1994
                              ----     ----     ----    ----     ----
PER COMMON SHARE
Basic earnings ..........       .30      .66      .26      .62      .60
Diluted earnings ........       .30      .66      .26      .62      .60
Cash dividends declared .       .20      .13      .13      .13      .12
Book value ..............      7.30     6.91     6.24     6.24    5.49

                                      YEAR ENDED DECEMBER 31,
                                      -----------------------
                              1998     1997     1996    1995      1994
                              ----     ----     ----    ----      ----
AT YEAR END
Loans ...................   377,359  348,774  298,124  265,563  244,949
Earning assets ..........   491,235  461,095  394,116  365,423  350,555
Assets ..................   550,782  512,087  435,976  407,361  381,250
Deposits ................   446,798  412,454  367,036  329,799  296,583
Stockholders' equity ....    47,865   45,075   41,198   39,563   34,989
Common shares outstanding     6,560    6,524    6,516    6,341    6,374

                                       YEAR ENDED DECEMBER 31, 
                                       ----------------------- 
                              1998     1997     1996    1995     1994
                              ----     ----     ----    ----     ----
AVERAGE BALANCES
Loans ...................   383,639  320,737  280,488  261,031  239,456
Earning assets ..........   497,960  418,417  375,995  362,705  342,642
Assets ..................   540,771  464,653  412,784  392,987  363,594
Deposits ................   431,653  384,374  343,052  314,596  291,459
Stockholders' equity ....    46,730   43,245   40,051   37,993   54,212
Weighted average shares
 outstanding.............     6,555    6,519    6,481    6,448    6,406

                                       YEAR ENDED DECEMBER 31,
                                       -----------------------
                              1998     1997     1996     1995     1994
                              ----     ----     ----     ----     ----
KEY PERFORMING RATIOS
Return on average assets.       .36%    .93%      .41%    1.02%    1.06%
Return on average
 stockholder' equity....      4.19%   9.97%     4.24%   10.55%    7.13%
Net interest margin .....      4.64%   4.81%     4.85%    4.65%    4.20%
Dividend payout ratio ...     66.55%  19.47%    48.02%   20.39%   19.20%
Average equity to
 average assets..........      8.64%   9.31%     9.70%    9.67%   14.91%

                        A Partnership of Community Banks
                        --------------------------------
                                       5

<PAGE>

A Community  of Partner Banks

Every  community is  different.  Like people,  each has its own special sense of
history,  character  and  destiny.  One town  could be home to a textile  plant.
Another is surrounded by farmland. Still another is a retail center.

[PHOTO of Porch Scene]

Yet despite these differences,  every town has something in common.  Namely, the
commitment of its founders to build a home that would  endure.  Family farms and
thriving  businesses  were  built on such  commitment.  And  around  them  arose
schools, churches and eventually, an entire community to nurture and protect its
own.

At FLAG Financial  Corporation,  we respect the individuality of every community
we serve. Furthermore, we value its people and the energy and determination they
bring to making it all work, just as generations have done before them.

The commitment of FLAG Financial  Corporation is to offer communities  something
new,  while  preserving the things we value most and how our  partnerships  with
community banks provide the support necessary to give local management more time
to do what they do best:  serve  their  individual  communities  with  undivided
attention.

In a way, FLAG Financial is its own community: a community of partner banks. And
just like communities everywhere,  we look forward to a bright future of service
and growth built on a foundation of enduring relationships. With customers. With
shareholders. With employees. And with the communities we call home.

The LaGrange Community

First Flag Bank LaGrange,  founded in 1927,  now has five branches  serving West
Georgia and East Alabama markets.  Located in Troup County,  First Flag Bank has
strong  ties to the  communities  it  serves.  As an active  participant  in the
community,  bank  employees  commit  their time and talent in numerous  areas of
volunteerism,  from  Chamber of Commerce  projects to support of the United Way,
constantly  giving of themselves to improve the community at large. In 1996, the
bank was selected by the Community Bankers Association of Georgia as the Georgia
Community  Bank of the Year.  This award  emphasizes the commitment of community
banks to excellence through superior quality service.

[QUOTE]
"First  Flag Bank's  long-term  commitment  to quality  customer  and  community
service  has been  enhanced  and  strengthened  with the  support  of the  newly
structured FLAG organization.'
[END QUOTE]

[PHOTO of John S. Holle]

[CAPTION]
John S. Holle
President/CEO
First Flag Bank LaGrange
[END CAPTION]
                        A Partnership of Community Banks
                        --------------------------------
                                       6

<PAGE>

Partnership: Progress &  Preservation

From 1994  through  1997,  FLAG  Financial  Corporation  was  headquartered  and
operated exclusively in LaGrange,  Georgia. In the past year, Flag Financial has
experienced extraordinary growth.  Successfully completing four mergers within a
year is an impressive  accomplishment.  All the same,  some may wonder why these
thriving community banks chose to unite with FLAG.

At FLAG  Financial,  we take a dramatically  different  approach to growth.  Our
philosophy  is to  create a  partnership  with a  community  bank that is more a
merger of equals than an  "acquisition."  Our strategy is not to fix a bank that
is broken,  but to join forces with  successful  banks and build on our combined
strengths.

First and foremost,  that means leaving  current  management and staff in place.
After  all,  they  know the  territory  and they  know the  people.  It is their
personal  dedication  and hard work that make a bank more than a building  and a
community more than a place to live.

[QUOTE]
Our philosophy is to create a partnership with a community bank that is more a 
merger of equals than an "acquisition."
[END QUOTE]

In  addition,   the  President  and  Board  of  our  partner  banks  retain  the
independence they need to provide the services their neighbors want, keeping the
focus of the community bank where it belongs - on the community.

FLAG Financial  functions as a support and service company to its partner banks.
As such,  we provide them with the  resources  and tools  necessary to bring new
products and services to the community. The result? Banks that look the same but
have  undergone  a behind  the scenes  evolution  to  provide  improved  product
delivery.

All of which means a partner bank is more  efficient,  competitive and flexible,
and better prepared to meet the demands of the twenty-first century.

[PHOTO of Michael Guido]

[CAPTION] 
Evangelist,  Michael Guido, brings worldwide recognition to the Metter community
through  international  television  and radio  spots  known as  'Seeds  from the
Sower."
[END CAPTION

[PHOTO of Lafayette Statue]

[CAPTION
The Lafayette Statue - Lafayette a member of General George Washington's staff -
was unveiled in 1975 in honor of his country estate, the chateau de LaGrange and
is in the center of the LaGrange town square.
[END CAPTION]


                        A Partnership of Community Banks
                        --------------------------------
                                       7

<PAGE>

Comprehensive Support, Impressive  Benefits


[PHOTO of Ocmulgee State Park in McRae]

[CAPTION]
The Milan  and McRae  communities  enjoy  golf,  camping  and  picnicing  at the
beautiful Ocmulgee State Park in McRae.
[END CAPTION]

As  regional  banks  continue  to expand,  offering  increasingly  sophisticated
services to more and more markets, mid-sized community banks face a dilemma: How
do they  reach the next level and match the  strength  and  capability  of their
competition? 

Clearly,  FLAG Financial offers an attractive solution.  That is because partner
banks retain their autonomy, and they also receive substantial support from FLAG
which allows them to effectively compete.

What  is  born  of  this  "merger  of  equals"  is  something  we like to call a
SuperCommunity  Bank.  The  SuperCommunity  Bank is,  above all,  efficient  and
profitable.  It emphasizes its community  presence and a sales  mentality  while
centralizing  operations  and  leveraging  economies  of scale.  In  short,  the
SuperCommunity Bank enhances  stockholder value by reducing costs and increasing
productivity.

FLAG Financial  supports  partner banks from the bottom up with a  comprehensive
array  of  services.  For  example,  back  office  functions  are  consolidated,
including financial management,  accounting, purchasing, payroll, training, data
processing,  treasury,  compliance,  asset/liability  management  and  strategic
planning.  All of which results in impressive cost savings and purchasing power.

Milan and McRae Communities

The Bank of Milan was founded in 1906 in Milan, Georgia, and has remained in the
same location, though renovated, for over 90 years. A second branch was added in
McRae in 1995.  Both  branches  are  located in  Telfair  County  where  timber,
peanuts, watermelon and cotton are primary sources of revenue. The Bank of Milan
has played a vital part in the county's  continued  success by its leadership in
education, the Chamber of Commerce and many other local organizations.  Known as
a bank that is a "member  of the  community,"  the Bank of Milan will be serving
their customers for another 90 years.

[QUOTE]
"FLAG has  consolidated  time-consuming  paperwork  which saves us a  tremendous
amount of time,  enabling our limited  personnel to be more  proactive in public
relations and serving our customers"
[END QUOTE]

[PHOTO of J. Preston Martin]

[CAPTION
J. Preston Martin
President/CEO 
Bank of Milan
[END CAPTION]

                        A Partnership of Community Banks
                        --------------------------------
                                       8

<PAGE>

In addition, FLAG offers partner banks broader capabilities and products through
correspondent services and joint ventures,  including insurance,  investment and
trust  services.  We also enhance our partners'  ability to offer  brokerage and
financial  planning.  What is more,  we deliver the  strength of a large  ban's
balance sheet and a wealth of in-house  expertise. 

[CHART of FLAG Support Services]
Bank of Milan
Local Board
Local President

Empire Banking Company
Local Board
Local President

First Flag Bank LaGrange
Local Board
Local President
Separate Charter

Citizens Bank
Local Board
Local President
Separate Charter

The Brown Bank
Local Board
Local President

Flag Financial Support Services
[END CHART]

FLAG Financial also provides essential  technology and information services such
as Wide Area Networks for both  internal  communications  and customer  service,
including  internet banking and e-mail. A centralized data operations center has
been   developed  to  support  each   partner   bank.   The  data  center  is  a
state-of-the-art,  Y2K  compliant  system  utilizing  the Phoenix  International
Banking  System.  Each  partner  bank has either  undergone  or is  scheduled to
convert to this technology. Like most system

Metter, Cobbtown and Reidsville Communities

The Brown Bank was founded in 1946 in  Cobbtown,  Georgia.  In 1994 a branch was
opened in Metter,  which now functions as the main office. Since 1994, The Brown
Bank  increased  assets  from $7 million to $32  million.  Cobbtown,  Metter and
Reidsville  are  primarily  agricultural  towns for which  tobacco and  Vidalia
onions are the main  sources of commerce.  The Brown Bank is a strong  leader in
each community through Civic Clubs, Chambers of Commerce and City Councils.  All
three are successful communities, best exemplified by Metter being recognized by
the  Department  of Community  Affairs as one of ten towns across the state as a
Better Hometown Community.

[QUOTE]
"With  low  unemployment,   it's  extremely  hard  to  find  experienced  middle
management.  FLAG  provides us with the support and expertise we need to provide
better service to our customers."
[END QUOTE]

[PHOTO of Dennis D. Allen]

[CAPTION]
Dennis D. Allen
President/CEO
The Brown Bank
[END CAPTION]

                        A Partnership of Community Banks
                        --------------------------------
                                       9

<PAGE>

[PHOTO of Cotton]

[CAPTION] 
Acres and acres of cotton can be seen throughout Dooly, Macon and Crisp counties
during the months of July, August and September, with harvest time in late fall.
[END CAPTION]

[PHOTO of Lumber]
[CAPTION]
Located in Homerville, the Little Suwannee Lumber Company is one of a handful of
working, non-computerized sawmills in the nation.
[END CAPTION]

conversions, a brief period of transition and adjustment is to be expected. Once
completed, each partner bank will be positioned to offer the highest standard of
customer  service. 

For our partner  banks,  the benefits of uniting with FLAG  Financial has proven
immediate and  substantial.  From human  resources to asset  diversification  to
market expansion, our partners can now stand  shoulder-to-shoulder with regional
banks. Moveover, relieved of the burden of time-consuming administrative duties,
local  management  suddenly  has the  freedom to enhance  personal  service  and
explore  additional  sources  of  revenue.  The  cumulative  result  is  greater
profitability and efficiency,  and a bank which offers more and better financial
services to its customers.

In short,  the community  bank has evolved into a  SuperCommunity  Bank with the
decision-making independence it wants and the complementary support it needs.

Homerville and Waycross Communities

Empire Banking  Company was founded in 1945 in Homerville,  Georgia,  and has an
additional branch in Waycross.  Located in far South Georgia near the Okefenokee
Swamp, these towns thrive on timber production and industry.  Area manufacturers
include  Brockway  Standard  and Lee  Container.  Historically,  Homerville  has
experienced a low unemployment  rate as it relates to other counties  throughout
the state.  As a leader in these  communities,  Empire Banking  Company takes an
active role in education,  the arts and city government.  Every spring, the bank
sponsors the Timberland  Jubilee,  which honors the  contributions  of the local
timber industry.

[QUOTE]
"We will be able to provide our customers with quicker  statement  presentations
through phone  banking and the  internet.  FLAG Tech supplies us with all of the
knowledge and support we need."
[END QUOTE]

[PHOTO of Leonard H. Bateman]

[CAPTION]
Leonard H. bateman
President/CEO
Empire Banking Company
[END CAPTION]

                        A Partnership of Community Banks
                        --------------------------------
                                       10

<PAGE>

Into The Twenty-First  Century


FLAG Financial's primary objective for 1999 and beyond is to continue to build a
network of thriving  community  banks.  Our main goal is to  establish  mutually
beneficial  banking alliances which maximize value for customers,  shareholders,
employees and communities.

Still,  we envision  our  company's  overall  mission to provide  the  products,
services and  investments  which will  complement  our partner banks and deliver
additional returns to our shareholders.

In addition,  we will continue to expand the FLAG Financial  community,  seeking
out strategic  partners in new and diverse markets while  remaining  flexible to
take advantage of unexpected business opportunities.  Furthermore,  we will seek
out  partnerships  with companies that share our philosophy and offer  seasoned,
skillful management.

After all, it was the prospect of  opportunity  which built the  communities  in
which we live. And it is with a similar sense of optimism and confidence that we
look forward to building FLAG Financial  Corporation  well into the twenty-first
century.

Dooly, Macon and Crisp County Communities

Citizens Bank was founded in 1931 in Vienna,  Georgia.  Today,  Citizens has six
additional  offices  in  Middle  Georgia  in  Unadilla,  Byromville,  Pinehurst,
Oglethorpe,  Montezuma and Cordele.  Providing  superior customer service is the
foundation of Citizens' success. The bank plays a vital role in supporting these
agricultural  communities  which thrive on cotton and peanut  farming.  In 1995,
Citizens Bank was selected by the Community  Bankers  Association  of Georgia as
the Georgia Community Bank of the Year. As an example of our commitment to these
communities,  CB Man,  a super  "banking"  hero and the bank's  mascot,  appears
throughout the area  supporting  various  functions and promoting  goodwill from
Citizens Bank and its employees.

[QUOTE]
"Citizens is poised for the future.  With FLAG,  we now have the  administrative
support, the technology,  and the vision to grow and prosper in the twenty-first
century."
[END QUOTE]

[PHOTO of J. Daniel Speight, Jr.]

[CAPTION]
J. Daniel Speight, Jr.
President/CEO
Citizens Bank

                        A Partnership of Community Banks
                        --------------------------------
                                       11

<PAGE>

Our Board Of Directors

[PHOTO of Board of Directors]

[LISTING]
Dennis D. Allen
Senior Vice President
FLAG Financial Corporation
President 
The Brown Bank

Dr. A. Glenn Bailey
Physician
Clark-Holder Clinic

Leonard H. Bateman
Senior Vice President
FLAG Financial Corporation
President  
Empire Banking Company

H. Speer Burdette, III
Vice President, Treasurer and
Managing Officer
J.K. Boatwright & Company, P.C.
Accounting Firm

Patti S. Davis
Senior Vice President
Chief Financial Officer
FLAG Financial Corporation
Senior Vice President
Chief Financial Officer
Citizens Bank

Fred A. Durand, III
President and
Chief Executive Officer
Durand-Wayland, Inc.
Manufacturer of Produce
Sorting and Spray Equipment

John S. Holle
Chairman of the Board
FLAG Financial Corporation
President and Chief
Executive Officer
First Flag Bank LaGrange

James W. Johnson
President
McCranie Motor and 
Tractor Company

Kelly R. Linch
Owner
Linch's, Inc.
Retail Appliances and 
Electronics

J. Preston Martin
Senior Vice President
FLAG Financial Corporation
President 
Bank of Milan

J. Daniel Speight, Jr.
President and Chief
Executive Officer
FLAG Financial Corporation
President and Chief
Executive Officer
Citizens Bank

John W. Stewart, Jr.
President
Stewart Wholesale
Hardware Company

Robert W. Walters
Retired Vice President
The Mill Store, Inc.
Retail and Contract Floor 
Coverings


                        A Partnership of Community Banks
                        --------------------------------
                                       12

<PAGE>

[PHOTO of Board of Directors]

[CAPTION for Board of Directors' Photo]
Back row pictured left to right: 
Dr. Glenn A. Bailey, Robert W. Walters, 
H. Speer Burdette, III, John W. Stewart, Jr., 
J. Preston Martin, James W. Johnson 
and Leonard H. Bateman

Front row pictured left to right:  
Kelly R. Linch, Fred A. Durand, III, 
John S. Holle, J. Daniel Speight, Jr., 
Patti S. Davis and Dennis D. Allen
[END CAPTION]


FLAG Financial Corporation

Dennis D. Allen
President
The Brown Bank

Leonard H. Bateman
President
Empire Banking Company

Gregory S. Callaway
Chief Information Officer

Patti S. Davis
Chief Financial Officer

Rhonda T. Hendrix
Insurance and Investments

Charles O. Hinely
Chief Operating Officer

John S. Holle
Chairman of the Board
FLAG Financial Corporation
President and Chief
Executive Officer
First Flag Bank LaGrange

Susan R. Huckabee
Investor Relations

Lisa G. Lane
Correspondent Services

J. Preston Martin
President
Bank of Milan

Michael S. Moyer
Audit and Compliance

Randall O. Nix
Sales Management
Ellison C. Rudd
Secretary/Treasurer

Raymond C. Smith, Jr.
Human Resources

J. Daniel Speight, Jr.
President and Chief
Executive Officer
FLAG Financial Corporation
President and Chief
Executive Officer
Citizens Bank

Ronald M. Warner
Credit Administration

Mary E. Winks
Consulting

                        A Partnership of Community Banks
                        --------------------------------
                                       13

<PAGE>

FLAG Partner Banks

[MAP of State of Georgia with Counties Screened and Named]

Since 1997, FLAG Financial,  a partnership of community  banks,  has expanded to
include West Central,  Middle and Southeast  Georgia.  FLAG has grown from eight
offices in two  counties  to 23 offices in 10  counties.  FLAG has nine  offices
pending approval which will add six new counties,  resulting in 32 offices in 16
counties.

[MATCHING CODES for Counties and Offices]

1-7       Troup

15,16     Macon

9, 11-14  Dooly

17        Crisp

18-19     Telfair

24        Candler

10        Bulloch

23,25     Tattnall

20        Pierce

22        Ware

21        Clinch

8,29      Muscogee

28        Upson

30        Bibb

31        Russell

32        Lee

                        A Partnership of Community Banks
                        --------------------------------
                                       14

<PAGE>

First Flag Bank LaGrange

1       Main Office
        101 North Greenwood Street
        LaGrange, Georgia  30240

2       Marketplace Office
        908 Hogansville Road
        LaGrange, Georgia  30240

3       Lee's Crossing Office
        1795 West Point Road
        LaGrange, Georgia  30240

4       Vernon Street Drive-up Office
        306 Vernon Street
        LaGrange, Georgia  30240

5       LaFayette Parkway Office
        1417 LaFayette Parkway
        LaGrange, Georgia  30240

FLAG Appraisal Services
       
6       200 Broad Street
        LaGrange, Georgia  30240

FLAG Investment Services
7       101 North Greenwood Street
        LaGrange, Georgia  30240

Piedmont Mortgage Service
8       5669 Whitesville Road, Suite A
        Columbus, Georgia  31904

FLAG Tech
9       2233 Pine Street
        Unadilla, Georgia  31091

First Flag Bank -  Statesboro
10      302 South Zetterower Avenue*
        Statesboro, Georgia  30458

Citizens Bank
11      Vienna Office
        100 Union Street
        Vienna, Georgia  31092

12      Unadilla Office
        2233 Pine Street
        Unadilla, Georgia  31091

13      Byromville Office
        448 Main Street
        Byromville, Georgia  31007

14      Pinehurst Office
        Fullington Avenue
        Pinehurst, Georgia  31070

15      Citizens Bank - Macon County
        102 West Railroad Street
        Montezuma, Georgia  31063

16      Oglethorpe Office
        130 North Sumter Street
        Oglethorpe, Georgia  31068

17      Citizens Bank - Crisp County
        602 East 16th Avenue
        Times Square, Suite G
        Cordele, Georgia  31015

Bank of Milan
18      Milan Office
        Mount Zion Street
        Milan, Georgia  31060

19      McRae Office
        850 East Oak Street
        McRae, Georgia  31055

Empire Banking Company
20      Blackshear Office **
        129 Highway 82
        Blackshear, Georgia  31516

21      Homerville Office
        115 East Dame Avenue
        Homerville, Georgia  31634

22      Waycross Office
        2110 Memorial Drive
        Waycross, Georgia  31501

The Brown Bank  
23      Cobbtown Office
        1 Railroad Street
        Cobbtown, Georgia  30420
        
24      Metter Office
        24-28 North Broad Street
        Metter, Georgia  30439

25      Reidsville Office
        132-A West Brazell Street
        Reidsville, Georgia  30453

The Citizens Bank
26      Main Office **
        111 High Street
        Hogansville, Georgia  30230

27      Ingles Supermarket Office** 
        1890 East Main Street
        Hogansville, Georgia  30230

Thomaston Federal Savings Bank
28      Thomaston Office** 
        206 North Church Street
        Thomaston, Georgia 30286

29      Columbus Office** 
        5617 Princeton Avenue
        Columbus, Georgia  31904

30      Macon Office** 
        130 North Crest Blvd., Suite C
        Macon, Georgia  31201

31      Phenix City Office** 
        712 Thirteenth Street, Suite A
        Phenix City, Alabama  36867

32      Opelika Office** 
        2106 Gateway Drive, Suite C
        Opelika, Alabama  36801

* First Flag Bank -  Statesboro  - Pending  Regulatory  Approval  **  Blackshear
Office - Pending, The Citizens Bank - Pending,  Thomaston Federal Savings Bank -
Pending


                        A Partnership of Community Banks
                        --------------------------------
                                       15

<PAGE>

Management's  Discussion  and  Analysis of  Fnancial  Cndition  and Results of
Ooperations

GENERAL

     FLAG Financial  Corporation  ("FLAG") is a multi-bank  holding company that
owns 100 percent of the common stock of First Flag Bank,  formerly First Federal
Savings Bank of LaGrange  ("First Flag"),  Citizens Bank  ("Citizens"),  Bank of
Milan  ("Milan")  and Empire  Banking  Company  ("Empire"),  (collectively,  the
"Banks").  First  Flag is a  commercial  bank  doing  business  in West  Central
Georgia. Citizens is a commercial bank that serves Dooly, Macon, Crisp, Candler,
Tattnall and surrounding counties in Middle Georgia.  Milan is a commercial bank
that serves  Telfair and  surrounding  counties in Middle  Georgia.  Empire is a
commercial bank serving Clinch, Ware and surrounding  counties in South Georgia.
Effective January 1, 1999, Milan and Empire were merged into Citizens. The Banks
are  full-service,  retail-oriented  community banks primarily engaged in retail
banking,  small  business,  residential  and  commercial  real  estate  lending,
agricultural lending and mortgage banking.

     The following  discussion  focuses on significant  changes in the financial
condition and results of operations of FLAG and the Banks during the three years
ended December 31, 1998. 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

     The following Management's Discussion and Analysis contains forward-looking
statements  under the  Private  Securities  Litigation  Reform  Act of 1995 that
involve risks and  uncertainties.  Although  FLAGbelieves  that the  assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could be  inaccurate,  and  therefore,  no assurance can be made that any of the
forward-looking statements included in this discussion will be accurate. Factors
that  could  cause  actual   results  to  differ  from   results   discussed  in
forward-looking statements include, but are not limited to: economic conditions;
competition  from  other  providers  of  financial  services  offered  by  FLAG;
government regulation; changes in interest rates; material unforeseen changes in
the financial  stability and liquidity of FLAG's borrowers;  material unforeseen
complications  related to the Year 2000 issues for FLAG,  its  customers and its
suppliers;  and other risks  detailed in FLAG's  filings with the Securities and
Exchange  Commission,  all of which are  difficult  to predict  and which may be
beyond  the  control  of  FLAG.   FLAG   undertakes   no  obligation  to  revise
forward-looking  statements to reflect  events or changes after the date of this
discussion or to reflect the occurrence of unanticipated events.

CAPTITAL ISSUES

     Effective June 3, 1998, FLAG declared a 3-for-2 stock split.  All per share
amounts and prices have been  restated to reflect  this stock split as if it had
occurred at the beginning of the earliest period presented.

RESTATEMENT OF FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS

     Effective  March 31, 1998, FLAG completed the acquisition of Middle Georgia
Bankshares,  Inc.,  the parent  company  of the $129  million  Citizens  Bank in
Vienna,  Georgia.  FLAG issued  approximately  1.5 million  shares of its common
stock in connection with this acquisition.

     Effective  May 8, 1998,  FLAG  completed  the  acquisition  of Three Rivers
Bancshares,  Inc., the parent company of the $35 million Bank of Milan in Milan,
Georgia.  FLAG  issued  approximately  597,000  shares  of its  common  stock in
connection with this acquisition.

     Effective  December 11, 1998, FLAG completed the acquisition of Empire Bank
Corp.,  the  parent  company  of the  $70  million  Empire  Banking  Company  in
Homerville,  Georgia. FLAG issued approximately 1.1 million shares of its common
stock in connection with this acquisition.

     Effective  December 31, 1998,  FLAG completed the  acquisition of The Brown
Bank, a $31 million bank in Metter,  Georgia.  FLAG issued approximately 255,000
shares of its common stock in connection with this acquisition.

     These  acquisitions  were  accounted  for  as  pooling  of  interests  and,
accordingly,  the consolidated financial statements and management's  discussion
and  analysis  for all  periods  have been  restated  to include  the  financial
position and results of  operations  as if the  combination  had occurred at the
beginning of the earliest period presented.

PENDING ACQUISITIONS

     On March 12,  1999,  FLAG  announced  the  signing of a letter of intent to
merge with Thomaston  Federal Savings Bank ("TFSB"),  a $53 million asset thrift
based in Thomaston,  Georgia. The letter of intent provides, among other things,
for the merger of TFSB with and into a  wholly-owned  subsidiary of FLAG and the
exchange  of each share of TFSB  common  stock for 1.7275  shares of  FLAGcommon
stock.  Total  outstanding  shares of FLAG will  increase by  approximately  1.1
million  additional shares at closing.

     On February 23, 1999,  FLAG  announced the signing of a letter of intent to
merge with First Hogansville Bankshares,  Inc. ("FHB"), a $31 million asset bank
holding company based in Hogansville,  Georgia.  The merger agreement  provides,
among other things, for the merger of FHB with and into FLAG and the exchange of
each share of FHB  common  stock for 6.08  shares of FLAG  common  stock.  Total
outstanding shares of FLAG will increase by approximately 575,000 additional 
shares at closing.

                                       16
<PAGE>

     On September  30, 1998,  FLAG entered into an agreement to assume  deposits
totaling  approximately  $9.5 million and to purchase  certain  assets  totaling
$60,000  of a branch  banking  facility  of First  Georgia  Bank in  Blackshear,
Georgia.

YEAR 2000 ISSUES

FLAG's State of Readiness

     The directors and management of FLAGrecognize the risks associated with the
Year 2000 issues and  understand  the  importance  of  compliance  within FLAG's
procedures,  as well as the procedures of the various vendors providing services
to the Banks and its  large  customer  borrowing  base.  The Year 2000  issue is
pervasive and complex as virtually every computer  operation will be affected in
some way by the rollover of the two-digit value to 00.

     To monitor and direct the Year 2000 compliance efforts,  FLAG has appointed
a Year 2000 committee  comprised of outside  directors and key senior executives
to meet on a  monthly  basis.The  preliminary  responsibility  of the Year  2000
Committee was to develop a comprehensive  project action plan consisting of five
critical phases.  These phases are: 1.) Develop an ongoing awareness strategy to
ensure that FLAG's directors,  management,  employees and customers are educated
and informed of the Year 2000 issues;  2.)  Identify,  inventory  and assess (a)
hardware and software used in each area of  responsibility  impacted by the Year
2000 issue; (b) vendors upon whom FLAGrelies to provide financial information or
services  which may be  impacted  by the Year 2000  issue;  and (c) each area as
either mission critical,  mission significant or mission optional;  3.) Renovate
or replace  systems and  applications  which are determined to be  non-compliant
with the Year 2000 issue or which are  determined to not have adequate  plans in
place to become  compliant in a timely basis;  4.) Validate the assessed systems
and the  comprehensive  "Business  Resumption  Contingency  Plan" to ensure full
preparation for any Year 2000 issues and have the progress and results  reviewed
by the Year 2000  Committee  and an objective  third party;  and 5.) Implement a
final review and control process to ensure  satisfactory  management  review and
approval  before any Year 2000 specific  changes are put into  production and to
ultimately place the renovated systems into production.

     FLAG has conducted a risk  assessment for each product and  categorized the
risks associated with each product as "catastrophic",  "serious",  or "minimal".
FLAG's overall risks were  considered to be serious to minimal.  A separate plan
of action and dates have been established for hardware/software considered to be
either  critical or significant to FLAG's ongoing  operations.  To address these
procedures, FLAGhas developed a testing strategy, methodology and plan of action
to include documentation of the results for the hardware/software and electronic
components affected by the Year 2000 issue.

     FLAG's two largest  subsidiaries  converted their core  applications to the
Phoenix International, Ltd., Inc. ("Phoenix") application system in August 1998.
The  core  applications  include  the  general  ledger,   loans,   deposits  and
receivables/payables.  Phoenix has represented that their application  system is
Year 2000 compliant.  FLAGdeveloped  its own testing plan for the Phoenix system
and has  substantially  completed this plan and will  continuously  validate its
results. In addition,  FLAG will test each vendor that interfaces with this core
system. FLAG's other subsidiaries are scheduled to be converted during the first
six months of 1999.

     Each of the Banks is monitoring its larger loan customer  compliance issues
in becoming  Year 2000  compliant.  For those  customers  unable or unwilling to
become  Year  2000  compliant,  FLAG's  credit  administration  department  will
evaluate  options to minimize  FLAG's risks  associated  with  continuing  to do
business with these customers on a case by case basis.

The Costs to Address FLAG's Year 2000 Issues

     FLAG has  incurred  approximately  $976,000  in  converting  to the Phoenix
system through December 31, 1998. FLAGexpects to spend an additional $130,000 in
converting its other subsidiaries.  FLAGwould have upgraded its core application
systems if the Year 2000 had not been an issue. FLAGhas also spent an additional
$807,000 as of December  31, 1998 in upgrading  most of its personal  computers.
FLAG expects to spend an  additional  $50,000 in upgrading  additional  personal
computers.  It was  necessary to upgrade the  personal  computers in order to be
compatible  with the  Phoenix  system.  To date,  FLAGhas  spent  $27,000  of an
estimated $235,000 to address other Year 2000 issues.

Most Likely Consequences of Year 2000 Issues

     FLAG expects to identify and resolve all Year 2000 issues that could have a
material impact on its financial  condition or business.  However,  FLAGbelieves
that it is not  possible  to  determine  that all Year  2000  issues  have  been
identified and corrected.  The  applications and number of devices that could be
affected are simply too numerous. Also, FLAGcannot accurately determine how many
problems  related to the Year 2000 issue will occur with its customers,  vendors
and other third parties or the severity,  duration or financial  consequences of
such  problems.  As a result,  FLAGexpects  that it could  possibly  suffer  the
following   consequences:   a   number   of   operational   inefficiencies   and
inconveniences  for FLAG,  its  customers  and its  service  providers  that may
require the time and attention of FLA's employees;  or system malfunctions that
might  require  significant  efforts  by FLAG,  its  customers  and its  service
providers to prevent or alleviate material business disruptions.

                                       17
<PAGE>

TABLE 1

Cnsolidated Average Balances, Interest, and Rates - Taxable Equivalent Basis
(dollars in thousands)

<TABLE>
<CAPTION>

                                                                                   Years Ended December 31, 
                                                                                   ------------------------ 
                                                             1998                       1997                        1996
                                                             ----                       ----                        ----
                                                           Interest Weighted          Interest  Weighted          Interest  Weighted
                                                   Average  Income/  Average  Average  Income/  Average  Average   Income/   Average
                                                   Balance  Expense   Rate    Balance  Expense    Rate   Balance   Expense    Rate
                                                   -------  -------   ----    -------  -------    ----   -------   -------    ----
<S>                                                <C>       <C>     <C>      <C>       <C>      <C>     <C>       <C>       <C>   
ASSETS
Interest-earning assets:
     Loans ......................................  $383,639  38,409  10.01%   $320,737  32,804   10.23%  $280,488   28,908   10.31%
     Taxable investment securities ..............    77,389   4,553   5.88%     77,712   4,862    6.26%    76,521    4,701    6.14%
     Tax-free investment securities .............    10,878     838   7.70%      8,525     625    7.33%     7,643      602    7.88%
     Interest-bearing depositsin other banks ....     7,303     325   4.45%      2,625     198    7.54%     1,881      101    5.37%
     Federal funds sold .........................    18,751     892   4.45%      8,818     451    5.11%     9,462      500    5.28%
                                                     ------     ---   ----       -----     ---    ----      -----      ---    ---- 
          Total interest-earning assets .........   497,960    45,0   9.04%    418,417  38,940    9.31%   375,995   34,812    9.26%
     Other assets ...............................    42,811                     46,236                     36,789
                                                     ------                     ------                     ------
          Total assets ..........................  $540,771                   $464,653                   $412,784
                                                   ========                   ========                   ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
     Interest-bearing demand deposits ...........  $ 47,455     924   1.95%   $ 72,736   1,986    2.73%$   62,063    1,776    2.86%
     Savings deposits ...........................    61,840   1,985   3.21%     24,107     607    2.52%    23,984      603    2.51%
     Other time deposits ........................   273,021  15,820   5.79%    245,513  14,266    5.81%   216,579   12,553    5.80%
     Federal funds purchased ....................     1,238      60   4.85%      1,287      86    6.68%       571       32    5.60%
     FHLB advances and other borrowings .........    55,179   3,120   5.65%     28,810   1,678    5.82%    25,370    1,410    5.56%
                                                     ------   -----   ----      ------   -----    ----     ------    -----    ---- 
          Total interest-bearing liabilities ....   438,733  21,909   4.99%    372,453  18,623    5.00%   328,567   16,374    4.98%
     Noninterest-bearing demand deposits ........    49,337                     42,018                     40,426
     Other liabilities ..........................     5,971                      6,937                      3,740
     Stockholders' equity .......................    46,730                     43,245                     40,051
                                                     ------                     ------                     ------
          Total liabilities and 
               stockholders' equity .............  $540,771                   $464,653                  $ 412,784
                                                   ========                   ========                  =========
      Tax-equivalent adjustment ..................              285                        210                        204
                                                                ---                        ---                        ---
     Net interest income ........................            22,823                     20,107                     18,234
                                                             ======                     ======                     ======
     Interest rate spread .......................                    4.05%                        4.31%                       4.28%
     Net interest margin ........................                    4.64%                        4.86%                       4.90%
     Interest-earning assets/interest-bearing
          liabilities............................                     113%                        112%                        114%
</TABLE>

FLAG's Contingency Plans

     FLAG has developed a separate plan of action  associated  with the risks to
liquidity  directly  resulting  from the Year 2000  issue.  This  plan  includes
estimating extra cash inventories needed, obtaining additional cash inventories,
analyzing  vault  capacities,   security  issues,   insurance   coverage,   cash
replenishment of automated teller machines and evaluating available credit lines
to ensure adequacy.

     As is the case with most financial  institutions,  FLAGis highly  automated
and many of its systems are date sensitive.  For each mission critical  process,
available  options have been  identified  with the most  reasonable  contingency
strategy being chosen. The Year 2000 Committee and the FLAGContingency Committee
are responsible for the  implementation  and validation of the contingency plan.
Appropriate  staff and resources will be available  during key dates within this
project, such as December 30, 1999 through January 3, 2000.

NET INTEREST INCOME

     Net interest income (the  difference  between the interest earned on assets
and the interest paid on deposits and other interest-bearing liabilities) is the
single  largest  component of FLAG's  operating  income.  The  management of net
interest income is of most importance in the banking industry. FLAG manages this
income source while it controls credit, liquidity and interest rate risks.

     Net interest income  increased 13.5% in 1998, from $20.1 million in 1997 to
$22.8 million in 1998. Net interest  income  increased 10.3% in 1997 compared to
1996.

     Total interest income  increased 15.5% in 1998 and 11.9% in 1997.  Interest
expense  increased  approximately  17.6% in 1998 and 13.7% in 1997. The interest
expense  variances  from  year to year  have been  primarily  influenced  by the
average balances of interest-bearing liabilities (see Tables 1 & 2).

                                       17
<PAGE>

TABLE 2

Rate/Volume Variance Analysis - Taxable Euivalent Basis
(dollars in thousands)
<TABLE>
<CAPTION>

                                                                        Years Ended Dcember 31,
                                                          1998 compared to 1997   1997 compared to 1996
                                                   Rate/       Net                Rate/         Net
                                                  Volume      Yield    Change     Volume       Yield   Change
                                                  ------      -----    ------     ------       -----   ------
<S>                                            <C>           <C>       <C>        <C>         <C>       <C>
Interest income:
     Loans ..................................   $ 6,298       (693)     5,605      4,117       (221)     3,896
     Taxable investment securities ..........       (19)      (290)      (309)        75         86        161
     Tax-free investment securities .........       181         32        213         65        (42)        23
     Interest-bearing deposits in other banks       208        (81)       127         56         41         97
     Federal funds sold .....................       473        (32)       441        (33)       (16)       (49)
                                                    ---        ---        ---        ---        ---        --- 
          Total interest income .............     7,141     (1,064)     6,077      4,280       (152)     4,128
                                                  -----     ------      -----      -----       ----      -----
Interest expense:
     Interest-bearing demand deposits .......      (492)      (570)    (1,062)       291        (81)       210
     Savings deposits .......................     1,211        167      1,378          3          1          4
     Other time deposits ....................     1,594        (40)     1,554      1,681         32      1,713
     Federal funds purchased ................        (2)       (24)       (26)        48          6         54
     FHLB advances an other borrowings ......     1,491        (49)     1,442        200         68        268
                                                  -----        ---      -----        ---         --        ---
          Total interest expense ............     3,802       (516)     3,286      2,223         26      2,249
                                                  -----       ----      -----      -----         --      -----
Net interest income .........................   $ 3,339       (548)     2,791      2,057       (178)     1,879
                                                =======       ====      =====      =====       ====      =====
</TABLE>

CONSOLIDATED AVERAGE BALANCES, INTEREST, AND RATES

     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 (i.e., loans and investment securities) and the weighted
average interest rates paid on interest-bearing  liabilities (i.e., deposits and
borrowings) 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 1 presents  for the three  years ended  December  31,  1998,  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.
Average  interest-earning  assets  were  $498.0  million in 1998  versus  $418.4
million  in  1997,  and  $376.0  million  in  1996.   Average   interest-bearing
liabilities were $438.7 million in 1998 versus $372.5 million in 1997 and $328.6
million in 1996. The interest rate spread was 4.05% in 1998 versus 4.31% in 1997
and 4.28% in 1996,  while the net  interest  margin was 4.64% in 1998,  4.86% in
1997 and 4.90% in 1996.

     Table 2 shows the change in net interest  income from 1998 to 1997 and from
1997 to 1996 due to changes in volumes  and rates.  Variances  resulting  from a
combination  of changes in rate and volume are  allocated in  proportion  to the
absolute dollar amounts of the change in each category.

NONINTEREST INCOME

     Other  income  increased  to $7.4 million in 1998 from $6.1 million in 1997
and $5.2  million  in 1996.  The  increases  in  other  income  in 1998 and 1997
resulted from  increased gain on sales of loans and increased fee income related
to transaction deposit accounts.

     Gain on sales of loans  increased  to $885,000  in 1998 versus  $821,000 in
1997 and  $596,000 in 1996.  The  increase in gain on sales of loans in 1998 and
1997 primarily resulted from gains on the sale of government guaranteed loans.

     Fees and service charges on deposits increased to $4.6 million in 1998 from
$4.2 million in 1997 and $3.8 million in 1996.


NONINTEREST EXPENSES

     Salary and employee  benefits  increased to $10.9 million in 1998 from $8.9
million in 1997 and $7.6 million in 1996.  This  increase in 1998 was  primarily
due to normal increases in compensation  levels as well as the hiring of several
key individuals in mid- and late-1997 and in 1998.

     Occupancy  expenses  increased to $3.9 million in 1998 from $3.4 million in
1997 and $2.7 million in 1996.  The increase in 1998  occupancy  expense was the
result of an  increase  in the  number  of branch  locations.  The  increase  in
occupancy expense in 1997 was due to higher depreciation expense and an increase
in maintenance contract expenses,  both of which related to an increase in fixed
assets and the  relocation of the leasing and the deposit  operations  center to
off-premise leased office space at First Flag.

     Other  expenses  were $9.7  million in 1998 versus $6.3 million in 1997 and
$6.6 million in 1996. The increase in other operating expenses from 1998 to 1997
was  due to the  conversion  of  FLAG's  data  processing  systems  and  certain
merger-related expenses.

INVESTMENT SECURITIES

     The   composition  of  the   investment   securities   portfolio   reflects
management's  strategy of maintaining an  appropriate  level of liquidity  while
providing a relatively  stable source of income.  The portfolio  also provides a
balance to  interest  rate risk and credit  risk in other  categories  of FLAG's
balance sheet while  providing a vehicle for the investment of available  funds,
furnishing  liquidity and providing  securities to pledge as required collateral
for certain deposits.

     Investment  securities decreased $12.6 million to $76.5 million at December
31, 1998 from $89.1  million at December 31, 1997.  At December 31, 1998,  $72.3
million,  or  approximately  94%  of  investment  securities  outstanding,   was
classified  as  available-for-sale,   while  the  remainder  was  classified  as
held-to-maturity.  The overall  decrease in the amount of investments was due to
increased  loan demand in 1998,  which  required  available  funds  generated by
investment maturities and paydowns. At December 31, 1998, gross unrealized gains
in the total  portfolio  amounted  to  $3,521,000  and gross  unrealized  losses
amounted to $290,000.

                                       18
<PAGE>

TABLE 3

Carrying Value of Investments
(dollars in thousands)


                                                  December 31,
                                                  ------------
                                             1998      1997      1996
                                             ----      ----      ----
Securities held-to-maturity:
     U.S. Treasuries and agencies ......   $  --     $   200   $  --
     State, county and municipal .......     3,111     3,165       515
     Mortgage-backed securities ........        87       103       118
     Collateralized mortgage obligations     1,037     2,505     3,092
Securities available-for-sale:
     U.S. Treasuries and agencies ......    18,069    28,162    27,499
     Corporate debt securities .........       999     1,000       990
     State, county and municipal .......     8,026     6,767     6,966
     Mortgage-backed securities ........    29,967    30,088    23,833
     Collateralized mortgage obligations    11,520    15,854    16,705
     Equity securities .................     3,710     1,248     2,253
                                             -----     -----     -----
          Total ........................   $76,526   $89,092   $81,971
                                           =======   =======   =======

     Table 3 reflects the carrying amount of the investment securities portfolio
for the past three years.

TABLE 4

Loan Portfolio
(dollars in thousands)

<TABLE>
<CAPTION>

                                                                                December 31,
                                                                                ------------
                                                1998               1997             1996              1995               1994
                                                ----               ----             ----              ----               ----
                                                  Percent            Percent            Percent           Percent           Percent
                                          Amount  of Total   Amount  of Total   Amount  of Total  Amount  of Total  Amount  of Total
                                          ------  --------   ------  --------   ------  --------  ------  --------  ------  --------

<S>                                      <C>        <C>      <C>      <C>       <C>      <C>      <C>       <C>     <C>      <C>  
Commercial, financial and agricultural   $116,133   30.3%    69,916   19.8%     60,778   19.9%    47,844    17.8%   36,667   14.8%
Real estate-construction .............     29,956    7.8%    12,663    3.6%     10,784    3.5%    18,676     6.9%   18,725    7.5%
Real estate-mortgage .................    174,852   45.7%   231,460   65.4%    191,478   62.9%   158,291    58.9%  157,948    63.8
Installment loans to individuals .....     54,312   14.2%    30,375    8.6%     33,744   11.1%    36,603    13.6%   26,017    10.5%
Lease financings .....................      7,674    2.0%     9,308    2.6%      7,723    2.5%     7,404     2.8%    8,354     3.4%
                                            -----    ---      -----    ---       -----    ---      -----     ---     -----     --- 
     Total loans .....................    382,927  100.0%   353,722  100.0%    304,507  100.0%   268,818   100.00% 247,711   100.0%
Less allowance for loan losses .......      5,568             4,948              6,384             3,255            2,762
                                            -----             -----              -----             -----            -----
     Total net loans .................   $377,359           348,774            298,123           265,563          244,949
                                         ========           =======            =======           =======          =======
</TABLE>

CARRYING VALUE OF INVESTMENTS

     The December 31, 1998 market value of securities  held-to-  maturity,  as a
percentage of amortized  cost,  was 103%, up from 101% at December 31, 1997. The
market value of the  securities  held-to-maturity  will change as interest rates
change and such  unrealized  gains and losses will not flow through the earnings
statement unless the related securities become permanently  impaired or they are
called at prices which differ from the carrying value at the time of the call.

LOANS

     Gross loans receivable  increased by approximately $29.2 million in 1998 to
$382.9 million from $353.7  million at December 31, 1997.  This increase was the
result of growth in commercial,  financial and agricultural  loans,  real estate
construction loans and installment loans, partially offset by a decrease in real
estate  mortgages  and  lease  financings.  As shown  in  Table  4,  commercial,
financial and agricultural  loans increased  approximately  $46.2 million,  real
estate  construction loans increased  approximately  $17.3 million,  installment
loans increased  approximately  $23.9 million,  real estate mortgages  decreased
approximately $56.6 million and lease financings decreased by approximately $1.6
million.

     Table 5 represents the expected  maturities for  commercial,  financial and
agricultural loans and real estate  construction loans at December 31, 1998. The
table also  presents  the rate  structure  for these loans that mature after one
year.

TABLE 5

Loan Portfolio Maturity
(dollars in thousands)


<TABLE>
<CAPTION>

                                                                            Rate Structure for Loans
                                             Maturity                        Maturing Over One Year
                                             --------                        ----------------------
                                           Over One Year                    Floating or     
                                 One Year     Through    Over Five           Adjustable    Predetermined
                                 or Less     Five Years    Years    Total   Interest Rate       Rate
                                 -------     ----------    -----    -----   -------------       ----
<S>                            <C>          <C>          <C>       <C>        <C>            <C>
Commercial, financial
     and agricultural .........  $58,650       25,846     31,637   116,133     34,059          23,424
Real estate-construction ......   28,212        1,180        564    29,956        303           1,441
                                 $86,862       27,026     32,201   146,089     34,262          24,865
</TABLE>

                                       19
<PAGE>

PROVISION AND ALLOWANCE FOR LOAN LOSSES

     Table 6 presents an analysis of activities in the allowance for loan losses
for the past five years.  An allowance for possible  losses is provided  through
charges to FLAG's  earnings  in the form of a  provision  for loan  losses.  The
provision  for  loan  losses  was  $3,382,000  in 1998,  $1,596,188  in 1997 and
$4,474,529  in 1996.  The increase in the provision in 1998 compared to 1997 was
due to provisions  made for certain  loans to Gulf  Properties  Financial,  Inc.
("Gulf  Properties")  in 1998.  First Flag had provided a warehouse line to Gulf
Properties  with which Gulf  Properties  would  originate loans and sell them to
First Flag.  During 1998,  it was  discovered  that  certain  loans would not be
collectible.  Provisions relating to Gulf Properties totaled $2,000,000 in 1998.
The  large  decrease  in the  provision  for loan  losses  from  1996 to 1997 is
directly  attributable  to Bennett  Funding.  Bennett  Funding was an  equipment
leasing company based in Syracuse,  New York.  First Flag had invested in office
equipment  leases sold through  Bennett  Funding.  During 1996,  Bennett Funding
filed  for  Chapter  11  bankruptcy  protection  and,  accordingly,  First  Flag
recognized a provision of  approximately  $3,000,000.  Excluding  the  provision
associated with Bennett  Funding,  the 1996 provision for loan losses would have
been  $1,496,000.  Management  determines  the level of the  provision  for loan
losses based on outstanding loan balances,  the levels of  nonperforming  assets
and reviews of assets  classified  as  substandard,  doubtful or loss and larger
credits,  together with an analysis of historical loss  experience,  and current
economic  conditions.  The responsible loan officers  conduct these reviews,  as
well as the loan review department.

     Reviews of non-performing,  past due loans and larger credit relationships,
designed  to identify  potential  problem  loans,  as well as to  determine  the
adequacy of the allowance for loan losses, are performed periodically during the
year. These reviews are performed by the responsible  lending officers,  as well
as the  credit  administration  department,  and  consider  such  factors as the
financial  strength  of  borrowers,  the  value of  collateral,  past  loan loss
experience, growth in the loan portfolio and other economic factors.

     As shown in Table 6, the year-end  allowance  for loan losses  increased to
$5.6 million at December 31, 1998,  from $4.9 million at December 31, 1997.  The
allowance for loan losses was $6.4 million at December 31, 1996. The increase in
the  allowance  at  December  31,  1998 was due to the  provision  made for Gulf
Properties. The decline in the allowance for losses in 1997 was primarily due to
a $2.5 million  charge-off  associated with the Bennett  Funding  assets.  Total
charge-offs  were $3.1 million in 1998, $3.3 million in 1997 and $1.4 million in
1996.  The  allowance  for loan  losses  was 1.48% of net  outstanding  loans at
December 31, 1998,  versus 1.42% of net  outstanding  loans at December 31, 1997
and 2.14% of net outstanding loans at December 31, 1996.

     Management believes that the allowance for loan losses is both adequate and
appropriate.  However,  the future  level of the  allowance  for loan  losses is
highly dependent upon loan growth, loan loss experience and other factors, which
cannot be anticipated with a high degree of certainty.

TABLE 6

Analysis of the Allowance for Loan Losses
(dollars in thousands)
<TABLE>
<CAPTION>


                                                       Years Ended December 31,
                                                       ------------------------
                                           1998       1997        1996        1995       1994
                                           ----       ----        ----        ----       ----
<S>                                     <C>         <C>         <C>         <C>         <C>     
Average net loans ...................   $383,639    $320,737    $280,488    $261,031    $239,456
Allowance for loan losses, beginning
      of the period .................      4,948       6,385       3,255       2,762       2,372
Charge-offs for the period:
     Commercial, financial and
          agricultural ..............      1,834         311         745         464         264
     Real estate-construction loans .       --          --            22          23           2
     Real estate-mortgage loans .....        264         225         433         432          36
     Installment loans to individuals        679         264         232         244         119
     Lease financings ...............        314       2,465        --          --          --   
                                             ---       -----                                     
          Total charge-offs .........      3,091       3,265       1,432       1,163         421
                                           -----       -----       -----       -----         ---
Recoveries for the period:
     Commercial, financial and
          agricultural ..............         75           2        --            78          52
     Real estate-construction loans .       --          --          --          --            10
     Real estate-mortgage loans .....         52         105        --          --             5
     Installment loans to individuals        152         125          88          88         110
     Lease financings ...............         50        --          --          --          --
                                              --                                              
          Total recoveries ..........        329         232          88         166         177
                                             ---         ---          --         ---         ---
            Net charge-offs for
                the period ..........      2,762       3,033       1,344         997         244
Provision for loan losses ...........      3,382       1,596       4,474       1,490         634
                                           -----       -----       -----       -----         ---
Allowance for loan losses,
     end of period ..................   $  5,568       4,948       6,385       3,255       2,762
                                        ========       =====       =====       =====       =====
Ratio of allowance for loan losses
      to total net loans outstanding        1.48%       1.42%       2.14%       1.23%       1.13%
Ratio of net charge-offs during the
      period to average net loans
      outstanding during the period .        .72%        .95%        .48%        .38%        .10%

</TABLE>

                                       20
<PAGE>

ASSET QUALITY

     At December 31, 1998,  non-performing assets totaled $10.1 million compared
to $7.4 million at year-end  1997.  The increase in 1998 is primarily due to the
Gulf Properties  loans.  There were no commitments to lend  additional  funds on
nonaccrual  loans at December 31, 1998.  Table 7 summarizes  the  non-performing
assets for each of the last five years.

TABLE 7

Risk Elements
(dollars in thousands)


                                                     Ddecember 31,
                                                     -------------
                                       1998    1997     1996     1995     1994
                                       ----    ----     ----     ----     ----
Loans on nonaccrual ..............   $ 7,489   5,886    8,519    2,991    3,204
Loans past due 90 days
     and still accruing ..........       583     578    1,740      668       13
Other real estate owned ..........     2,028     901      946      892      364
                                       -----     ---      ---      ---      ---
Total non-performing assets ......   $10,100   7,365   11,205    4,551    3,581
                                     =======   =====   ======    =====    =====
Total non-performing loans
      as a percentage of net loans      2.68%   2.11%    3.76%    1.71%    1.46%
                                        ====    ====     ====     ====     ==== 


RISK ELEMENTS

     There may be additional  loans within FLAG's loan portfolio that may become
classified as conditions may dictate;  however,  management was not aware of any
such loans that are  material in amount at December  31,  1998.  At December 31,
1998,  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
Banks' or FLAG's liquidity, capital resources or operations.

DEPOSITS

     Total deposits increased  approximately $34.3 million during 1998, totaling
$446.8  million at December 31, 1998 versus $412.5 million at December 31, 1997.
The  maturities  of time  deposits  of  $100,000  or more issued by the Banks at
December 31, 1998, are summarized in Table 8.

     At December 31, 1998, the Banks were  shareholders in the Federal Home Loan
Bank of Atlanta  ("FHLBA").  Through this  affiliation,  advances totaling $48.4
million  were  outstanding  at rates  competitive  with  time  deposits  of like
maturities.  Management  anticipates  continued  utilization  of this short- and
long-term source of funds to minimize interest rate risk and to fund competitive
fixed rate loans to customers.

TABLE 8

Maturities of Time Deposits Over $100,000
(dollars in thousands)


Three months or less ...................   $27,843
Over three months through six months....    21,021
Over six months through twelve months...    26,637
Over twelve months .....................    10,301
                                            ------
                                           $85,802
                                           =======

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
assets  (primarily  loans and  investment  securities)  has exceeded the average
repricing period of liabilities  (primarily  deposits and  borrowings).  Table 9
provides   information  about  the  amounts  of   interest-earning   assets  and
interest-bearing  liabilities  outstanding  as of December  31,  1998,  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, 1998, the  liabilities  subject to rate changes within one year exceeded its
assets  subject to rate  changes  within  one year.  This  mismatched  condition
subjects  FLAG 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 a decrease in net
interest  income if market  interest  rates rise and an increase in net interest
income if market interest rates decline.

                                       21
<PAGE>

TABLE 9


Interest Rate Sensitivity Analysis
(dollars in thousands)

<TABLE>
<CAPTION>

                                                                  December 31, 1998
                                                                  -----------------
                                                                Maturing or Repricing in
                                                                ------------------------
                                                           Over 1 Year   Over 3 Years
                                                One Year     Through       Through      Over    
                                                or Less      3 Years       5 Years    5 Years      Total
                                                -------      -------       -------    -------      -----
Interest-earning assets:
<S>                                            <C>             <C>            <C>                 <C>    
     Adjustable rate mortgages ..............  $ 93,132        6,601          275        --       100,008
     Fixed rate mortgages ...................    16,894       17,582       23,318      28,075      85,869
     Other loans ............................   119,898       28,430       25,555      29,109     202,992
     Investment securities ..................    61,319        8,748        6,461       6,381      82,909
     Interest-bearing deposits
          in other banks and
          Federal funds sold ................    25,025         --           --          --        25,025
                                                 ------                                            ------
          Total interest-earning assets .....   316,268        61,361      55,609      63,565     496,803
                                                -------        ------      ------      ------     -------
Interest-bearing liabilities:
     Fixed maturity deposits ................   203,035        56,546      15,378       1,621     276,580
     NOW and money market demand accounts ...    91,805         --           --          --        91,805
     Passbook accounts ......................    22,669         --           --          --        22,669
     FHLB advances ..........................     2,616        6,058       10,640      29,084      48,398
                                                  -----        -----       ------      ------      ------
          Total interest-bearing
          liabilities .......................   320,125       62,604       26,018      30,705     439,452
                                                -------       ------       ------      ------     -------
Interest rate sensitivity gap ...............    (3,857)      (1,243)      29,591      32,860      57,351
Cumulative interest rate sensitivity gap ....  $ (3,857)      (5,100)      24,491      57,351
Cumulative interest rate sensitivity gap
          to total assets....................      (.70)%       (.93)%       4.45%      10.41%

</TABLE>


     Management  carefully  measures and monitors  interest rate sensitivity and
believes that its operating  strategies offer  protection  against interest rate
risk. As required by various regulatory  authorities,  FLAG's Board of Directors
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.

     Management  has  maintained  positive  ratios of  average  interest-earning
assets to average interest-bearing  liabilities.  As represented in Table 1 this
ratio,  based on average  balances for the respective  years,  was 113% in 1998,
112% in 1997 and 114% in 1996.

     Table 10 presents the expected maturity of the total investment  securities
by maturity  date and average  yields  based on  amortized  cost at December 31,
1998.  It  should  be  noted  that  the   composition   and   maturity/repricing
distribution of the investment  portfolio is subject to change depending on rate
sensitivity, capital needs and liquidity needs.

LIQUIDITY

     The Banks are required  under federal  regulations  to maintain in cash and
eligible  short-term  investment  securities  a monthly  average  of 5.0% of net
withdrawable  deposits and  borrowings  payable in one year or less.  The Banks'
liquidity was 17.0% at December 31, 1998 and 9.7% at December 31, 1997.

     The Banks' primary sources of liquidity  (funds) are deposit inflows,  loan
repayments, proceeds from sales of loans and securities, advances from 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 Banks. Advances from the FHLBA
were $48.4  million and $47.8  million,  respectively,  at December 31, 1998 and
1997.

     Subject to certain  limitations,  the Banks may borrow funds from the FHLBA
in the form of  advances.  Credit  availability  from the FHLBA to the Banks are
based on the Banks' financial and operating condition.  Credit availability from
the FHLBA to the Banks was approximately  $68.0 million at December 31, 1998. In
addition  to  creditworthiness,  the Banks  must own a  minimum  amount of FHLBA
capital  stock.  This  minimum is 5.0% of  outstanding  FHLBA  advances.  Unused
borrowing capacity at December 31, 1998, was $19.6 million.  The Banks use FHLBA
advances for both long-term and short-term  liquidity  needs.  Other than normal
banking operations,  the Banks have no long-term liquidity needs. The Banks have
never been involved with highly  leveraged  transactions  that may cause unusual
potential long-term liquidity needs.

     The  Consolidated  Statements  of Cash  Flows  for the  three  years  ended
December 31, 1998 detail FLAG's sources and uses of funds for those periods.

CAPITAL RESOURCES AND DIVIDENDS

     Stockholders'  equity at December 31, 1998 increased 6.2% from December 31,
1997.  This growth  resulted  from 1998  earnings and the increase in unrealized
gains on securities available  -for-sale.  Dividends of $1.3 million or $.20 per
share were declared and paid in 1998 compared to $.13 per share in 1997.

     Average  stockholders'  equity as a percent of total average  assets is one
measure used to determine capital strength.  The ratio of average  stockholders'
equity to average  total assets was 8.64% for 1998 and 9.31% for 1997.  Table 11
summarizes these and other key ratios for FLAG for each of the last three years.

     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.  Note  10 to the  Consolidated
Financial  Statements  presents a summary of FDICIA's  capital tiers compared to
FLAG's and the Banks' actual capital levels. The Banks exceeded all requirements
of a  "well-capitalized"  institution at December 31, 1998. The pending  mergers
(see "Pending Acquisitions" will not significantly reduce FLAG's capital ratios
and  management  will  continue   leveraging   capital  to  increase  return  on
stockholders' equity.

                                       22
<PAGE>

TABLE 10

Expected Maturity of Investments
(dollars in thousands)

<TABLE>
<CAPTION>

                                                     After One But    After Five But
                                  Within One Year  Within Five Years Within Ten Years After Ten Years 
                                   Amount  Yield     Amount  Yield    Amount  Yield   Amount  Yield   Totals
                                   ------  -----     ------  -----    ------  -----   ------  -----   ------
Securities held-to-maturity:
<S>                              <C>        <C>      <C>    <C>        <C>     <C>      <C>   <C>    <C>  
State, county and municipals .   $   110    5.38%    826    5.15%      2,014   4.93%    161   5.03%  3,111
Mortgage-backed securities ...        --     --      --       --         --      --      87   6.75%     87
Collateralized mortgage
      obligations ............         4    8.75%     --       --      1,033   7.40%     --     --   1,037
                                       -    ----                       -----   ----                  -----
                                     114    5.50%     826    5.15%     3,047   5.77%    248   5.63%  4,235
                                     ---    ----      ---    ----      -----   ----     ---   ----   -----
Securities available-for-sale:
U.S. Treasury and agencies ...     7,174    5.71%   7,254    5.75%     3,140   6.59%    501   6.00% 18,069
State, county and municipals .       333    5.23%   1,555    4.81%     1,976   4.33%  4,162   5.48%  8,026
Corporate debt securities ....       999    4.70%     --       --        --      --      --     --     999
Equity securities ............     3,710    6.41%     --       --        --      --      --     --   3,710
Mortgage-backed securities ...       173    5.45%   3,108    6.70%     1,690   7.37% 24,996   6.95% 29,967
Collateralized mortgage
      obligations ............       528    6.80%     136    7.00%     7,762   5.90%  3,094   5.70% 11,520
                                     ---    ----      ---    ----      -----   ----   -----   ----  ------
                                  12,917    5.86%  12,053    5.89%    14,568   6.01% 32,753   6.63% 72,291
                                  ------    ----   ------    ----     ------   ----  ------   ----  ------
Total ........................   $13,031    5.86%  12,879    5.84%    17,615   5.96% 33,001   6.60% 76,526
                                 =======    ====   ======    ====     ======   ====  ======   ====  ======
</TABLE>


PROVISION OF RINCOME TAXES

     The provision for income taxes was $303,000 in 1998,  versus  $1,820,000 in
1997 and $451,000 in 1996.  The  effective  actual tax rates for 1998,  1997 and
1996 (tax  provision as a percentage  of income  before taxes) were 13%, 30% and
21%, respectively. These tax rates are lower than the statutory Federal tax rate
of 34% primarily  due to interest  income on tax exempt  securities.  See FLAG's
consolidated financial statements for an analysis of income taxes.

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.

RECENT ACCOUNTING PRONOUNCEMENTS

     In 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  No.  133  ("SFAS No.  133"),  "Accounting  for
Derivative  Instruments  and  Hedging  Activities".  SFAS  No.  133  establishes
accounting  and reporting  standards for hedging  activities  and for derivative
instruments  including derivative  instruments  embedded in other contracts.  It
requires the fair value  recognition  of derivatives as assets or liabilities in
the financial  statements.  SFAS No. 133 is effective for all fiscal quarters in
fiscal years  beginning  after June 15,  1999,  but initial  application  of the
statement  must be made  as of the  beginning  of the  quarter.  At the  date of
initial application,  an entity may transfer any held-to-maturity  security into
the  available-for-sale  or trading categories without calling into question the
entity's  intent to hold  other  securities  to  maturity  in the  future.  FLAG
believes  the  adoption  of SFAS No. 133 will not have a material  impact on its
financial position, results of operations or liquidity.

TABLE 11

Equity Ratios

                                        Years Ended December 31,
                                        ------------------------
                                         1998     1997     1996
                                         ----     ----     ----
Return on average assets .........        .36%     .93%     .41%
Return on average equity .........       4.19%    9.97%    4.24%
Dividend payout ratio ............      66.55%   19.47%   48.02%
Average equity to average assets..       8.64%    9.31%    9.70%

                                       23
<PAGE>

Table of Contents to Consolidated Financial Sstatements

Report of Independent Certified Public Accountants .......   26
Consolidated Balance Sheets ..............................   27
Consolidated Statements of Earnings ......................   28
Consolidated Statements of Comprehensive Income 29
Consolidated Statements of Changes in Stockholders' Equity   30
Consolidated Statements of Cash Flows ....................   31
Notes to Consolidated Financial Statements ...............   33

                                       24
<PAGE>


Report of Independent Certified Public Accountants

The Board of Directors
FLAG Financial Corporation
LaGrange, Georgia

We have audited the accompanying  consolidated  balance sheets of FLAG Financial
Corporation  and  subsidiaries as of December 31, 1998 and 1997, and the related
statements of earnings,  comprehensive  income,  changes in stockholders' equity
and cash flows for each of the three  years in the  period  ended  December  31,
1998. These financial  statements are the  responsibility of FLAG's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.  We did not audit the 1996 consolidated  financial  statements of
FLAG Financial  Corporation  and  subsidiary and the 1997 and 1996  consolidated
financial  statements of Three Rivers  Bancshares,  Inc. and subsidiary,  all of
which were pooled with Middle Georgia Bankshares, Inc. and subsidiary, The Brown
Bank and subsidiary and Empire Banking Corp. and subsidiary in 1998 as explained
in  note  2 to the  consolidated  financial  statements.  Those  statements  are
included in the accompanying consolidated financial statements and reflect total
assets of  $34,548,811  as of December 31, 1997 and net earnings of $662,466 and
$221,184  for the years ended  December 31, 1997 and 1996,  respectively.  Those
statements  were audited by other  auditors whose reports have been furnished to
us and our opinion,  insofar as it relates to these amounts,  is based solely on
the reports of the other auditors.

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,  based on our audits and the  reports  of other  auditors,  the
consolidated  financial  statements  referred to above  present  fairly,  in all
material  respects,  the financial  position of FLAG Financial  Corporation  and
subsidiaries  as of  December  31,  1998  and  1997,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.


                                             /s/Porter Keadle Moore, LLP
                                        

Atlanta, Georgia
January 29, 1999, except for note 18,
  as to which the date is March 12, 1999

                                       26
<PAGE>


Consolidated Balance Sheets 

December 31, 1998 and 1997
<TABLE>
<CAPTION>
                                                              1998            1997
                                                              ----            ----
ASSETS
     <S>                                                  <C>              <C>
     Cash and due from banks, including
      reserve requirements of $1,970,000 and $1,584,000   $ 25,246,090     18,427,230
     Federal funds sold ...............................     23,330,000     10,645,000
                                                            ----------     ----------
     Cash and cash equivalents ........................     48,576,090     29,072,230
     Interest-bearing deposits ........................      1,695,167      3,168,353
     Investment securities
          available-for-sale ..........................     72,291,309     83,119,392
     Investment securities
      held-to-maturity (fair value
      o f$4,361,256 in 1998 and
      $6,031,158 in 1997) .............................      4,234,998      5,972,993
     Other investments ................................      6,382,443      5,933,543
     Mortgage loans held for sale .....................      5,941,739      3,481,678
     Loans, net .......................................    377,359,122    348,773,865
     Premises and equipment, net ......................     14,887,215     14,119,031
     Other assets .....................................     19,413,502     18,445,705
                                                            ----------     ----------
          Total assets ................................   $550,781,585    512,086,790
                                                          ============    ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
     Demand ...........................................   $ 55,744,640     48,471,856
     Interest-bearing demand ..........................     91,804,621     78,272,387
     Savings ..........................................     22,668,610     23,183,721
     Time .............................................    190,778,268    188,931,198
     Time, over $100,000 ..............................     85,802,186     73,594,976
                --------                                    ----------     ----------
          Total deposits ..............................    446,798,325    412,454,138

     Federal funds purchased ..........................           --          170,000
     Advances from Federal Home Loan Bank .............     48,398,478     47,798,059
     Other liabilities ................................      7,720,125      6,589,591
                                                             ---------      ---------
          Total liabilities ...........................    502,916,928    467,011,788
                                                           -----------    -----------

     Stockholders' equity:
     Preferred stock (10,000,000 shares
          authorized; none issued and outstanding) ....           --             --
     Common stock ($1 par value, 20,000,000
          shares authorized, 6,560,004 and
          6,524,239 shares issued and outstanding
          in 1998 and 1997, respectively) .............      6,560,004      6,524,239
     Additional paid-in capital .......................     10,487,618     10,320,527
     Retained earnings ................................     28,886,607     28,231,052
     Accumulated other comprehensive income ...........      1,930,428           (816}
                                                             ---------           ---- 
               Total stockholders' equity .............     47,864,657     45,075,002
                                                            ----------     ----------
               Total liabilities and
                stockholders' equity ..................   $550,781,585    512,086,790
                                                          ============    ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       27
<PAGE>

Consolidated Statements of Earnings

For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
                                                      1998         1997            1996
                                                      ----         ----            ----
Interest Income:
<S>                                               <C>            <C>            <C>       
     Interest and fees on loans ...............   $38,409,086    32,803,344     28,907,264
     Interest on investment securities ........     5,105,986     5,276,961      5,098,080
     Interest-bearing deposits ................       325,199       198,064        101,695
     Federal funds sold .......................       891,775       451,580        500,984
                                                      -------       -------        -------
          Total interest income ...............    44,732,046    38,729,949     34,608,023
                                                   ----------    ----------     ----------
Interest Expense:
     Deposits .................................    18,729,042    16,858,904     14,931,861
     Borrowings ...............................     3,180,425     1,764,773      1,441,442
                                                    ---------     ---------      ---------
          Total interest expense ..............    21,909,467    18,623,677     16,373,303
                                                   ----------    ----------     ----------
          Net interest income before
           provision for loan losses ..........    22,822,579    20,106,272     18,234,720
                                                   ----------    ----------     ----------

Provision for Loan Losses .....................     3,382,000     1,596,188      4,474,529
                                                    ---------     ---------      ---------
          Net interest income after
           provision for loan losses ..........    19,440,579    18,510,084     13,760,191
                                                   ----------    ----------     ----------

Other Income:
     Fees and service charges .................     4,618,598     4,232,022      3,801,862
     Gain on sales of investment
          securities ..........................       290,931       171,161        236,120
     Gain on sales of loans ...................       884,603       821,175        595,535
     Gain (loss) on other real
          estate, net .........................        26,370       (82,719)       (79,643)
     Other ....................................     1,618,109     1,002,357        662,442
                                                    ---------     ---------        -------
          Total other income ..................     7,438,611     6,143,996      5,216,316
                                                    ---------     ---------      ---------

Other Expenses:
     Salaries and employee benefits ...........    10,949,030     8,912,563      7,552,501
     Occupancy ................................     3,930,390     3,350,915      2,660,303
     Other operating ..........................     9,737,392     6,259,666      6,612,567
                                                    ---------     ---------      ---------
          Total other expenses ................    24,616,812    18,523,144     16,825,371
                                                   ----------    ----------     ----------
          Earnings before provision
            for income taxes ..................     2,262,378     6,130,936      2,151,136
Provision for income taxes ....................       302,750     1,820,188        451,333
                                                      -------     ---------        -------
     Net earnings .............................   $ 1,959,628     4,310,748      1,699,803
                                                  ===========     =========      =========
Basic earnings per share ......................   $       .30           .66            .26
                                                  ===========           ===            ===
Diluted earnings per share ....................   $       .30           .66            .26
                                                  ===========           ===            ===

</TABLE>

See accompanying notes to consolidated financial statements 

                                       28
<PAGE>

Consolidated Statements of Comprehensive Income

For the Years Ended December 31, 1998, 1997 and 1996
 
<TABLE>
<CAPTION>

                                                    1998      1997        1996
                                                    ----      ----        ----
<S>                                            <C>          <C>         <C>      
Net earnings ...............................   $ 1,959,628  4,310,748   1,699,803
     Other comprehensive income, net of tax:
     Unrealized gains (losses) on investment
        securities available-for-sale:
          Unrealized gains arising during
           the period, net of tax of
           $1,294,219, $277,094 and $61,559,
           respectively ....................     2,111,621    452,100     100,439
     Less reclassification adjustment for
        gains included in net earnings, net
        of tax of $110,554, $65,041 and
        $89,726, respectively ..............      (180,377)  (106,120)   (146,394)
                                                  --------   --------    -------- 
Other comprehensive income .................     1,931,244    345,980     (45,955) 
                                                 ---------    -------     -------  
Comprehensive income .......................   $ 3,890,872  4,656,728   1,653,848
                                               ===========  =========   =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       29
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity

For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
                                                                                          Accumulated
                                                            Additional                       Other   
                                             Common         Paid-in       Retained        Comprehensive   
                                              Stock         Capital       Earnings            Income       Total
                                              -----         -------       --------            ------       -----
<S>                                        <C>              <C>            <C>             <C>          <C>      
Balance, Cecember 31, 1995,
     as previously stated ..............   $ 2,874,000      6,561,001     11,580,579       (317,364)    20,698,216
   Adjustment to reflect
      pooling of interests .............     3,466,822      3,086,589     12,295,308         16,523     18,865,242
                                             ---------      ---------     ----------         ------     ----------
Balance, Cecember 31, 1995 .............     6,340,822      9,647,590     23,875,887       (300,841)    39,563,458
     Treasury stock activity of
        pooled entity ..................       (43,083)       (19,770)          --             --          (62,853)
     Exercise of stock options .........       180,311        450,318           --             --          630,629
     Issuance of common stock ..........        37,543        191,981           --             --          229,524
     Change in unrealized loss
        on securities available-for-sale          --             --             --          (45,955)       (45,955)
     Net earnings ......................          --             --        1,699,803           --        1,699,803
     Dividends declared ................          --             --         (816,185)          --         (816,185)
                                                                            --------                      -------- 
Balance, December 31, 1996 .............     6,515,593     10,270,119     24,759,505       (346,796)    41,198,421
     Treasury stock activity of
       pooled entity ...................         8,646         50,408           --             --           59,054
     Change in unrealized loss
        on securities available-for-sale          --             --             --          345,980        345,980
     Net earnings ......................          --             --        4,310,748           --        4,310,748
     Dividends declared ................          --             --         (839,201)          --         (839,201)
                                                                            --------                      -------- 
Balance, December 31, 1997 .............     6,524,239     10,320,527     28,231,052           (816)    45,075,002
     Treasury stock activity of
       pooled entity ...................        26,265        103,653           --             --          129,918
     Exercise of  stock options ........         9,500         63,438           --             --           72,938
     Change in unrealized gain (loss)on
        securities available-for-sale ..          --             --             --        1,931,244      1,931,244
     Net earnings ......................          --             --        1,959,628           --        1,959,628
     Dividends declared ................          --             --       (1,304,073)          --       (1,304,073)
                                                                          ----------                    ---------- 
Balance, December 31, 1998 .............   $ 6,560,004     10,487,618     28,886,607      1,930,428     47,864,657
                                           ===========     ==========     ==========      =========     ==========

</TABLE>

See accompanying notes to consolidated financial statements.

                                       30
<PAGE>

Consolidated Statements of Cash Flows

For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
                               
                                                           1998           1997            1996    
                                                           ----           ----            ----    

Cash Flows from Operating Activities:
<S>                                                 <C>                <C>             <C>      
     Net earnings                                   $    1,959,628     4,310,748       1,699,803
     Adjustments to reconcile net earnings
       to net cashprovided by operating activities:
          Depreciation, amortization and accretion       2,391,666     1,825,266       1,573,733
          Provision for loan losses ...............      3,382,000     1,596,188       4,474,529
          Provision for deferred taxes ............      (335,713)       861,873
          Gains on sales of securities ............      (290,931)      (172,438)       (236,120)
          Gain on sales of loans ..................      (884,603)      (825,065)       (595,535)
          (Gain) loss on other real estate ........       (26,370)        64,780          83,565
          Change in:
            Mortgage loans held for sale ..........    (1,575,458)    (1,317,157)       (887,549)
            Other .................................    (3,836,730)     1,185,977       1,692,569
                                                       ----------      ---------       ---------
              Net cash provided by
              operating activities ................       783,489      7,530,172       6,854,002
                                                          -------      ---------       ---------

Cash Flows From Investing Activities:
     Net change in  interest-bearing deposits .....     1,473,186     (1,841,246)        411,725
     Proceeds from sales and maturities
          of securitiesavailable-for-sale .........    60,550,406     58,820,823      37,952,887
     Proceeds from maturities of
           securities held-to-maturity ............     1,696,422        966,861       1,477,484
     Proceeds from sale of other investments ......     5,764,366        225,400            --
     Purchases of other investments ...............    (6,078,968)      (963,595)       (517,810)
     Purchases of securities available-for-sale ...   (46,602,265)   (67,422,382)    (34,024,310)
     Purchases of securities held-to-maturity .....          --             --          (407,039)
     Net change in loans ..........................   (29,887,886)   (51,149,424)    (37,407,101)
     Proceeds from sales of other real estate .....     1,111,560         22,590         599,937
     Purchases of premises and equipment ..........    (3,283,425)    (3,030,277)     (2,141,637)
     Proceeds from sale of premises and equipment .       475,347           --              --
     Purchase of cash surrender value
          of life insurance .......................      (376,919)      (243,652)        (72,962)
     Cash acquired in branch acquisition,
        net of premium paid .......................          --       25,416,547            --
     Other ........................................          --            1,441          90,930
                                                                           -----          ------
          Net cash used in investing activities ...   (15,158,176)   (39,196,914)    (34,037,896)
                                                      -----------    -----------     ----------- 
</TABLE>

                                     31
<PAGE>

Consolidated Statements of Cash Flows (continued)

For the Years Ended December 31, 1998, 1997 and 1996
                               
<TABLE>
<CAPTION>
                                                             1998        1997           1996    
                                                              ----        ----           ----    

Cash Flows From Financing Activities:
<S>                                                       <C>          <C>            <C>       
     Net change in deposits ..........................    34,344,187   16,333,598     34,782,295
     Change in Federal funds purchased ...............      (170,000)  (2,870,000)     3,040,000
     Proceeds from FHLB advances .....................    25,000,006   42,858,772     16,879,346
     Payments of FHLB advances .......................   (24,399,587) (16,033,339)   (28,213,334)
     Proceeds from exercise of stock options .........        72,938         --          630,629
     Proceeds from issuance of common stock ..........          --           --          187,604
     Treasury stock transactions of
          pooled entities ............................       129,918       59,053        (20,933)
     Cash dividends paid .............................    (1,098,915)    (839,201)      (786,644)
     Other ...........................................          --        (16,114)        (4,360)
                                                                          -------         ------ 
          Net cash provided by financing
             activities ..............................    33,878,547   39,492,769     26,494,603
                                                          ----------   ----------     ----------
          Net change in cash and cash equivalents ....    19,503,860    7,826,027       (689,291)
     Cash and cash equivalents at
          beginning of year ..........................    29,072,230   21,246,203     21,935,494
                                                          ----------   ----------     ----------
     Cash and cash equivalents at end of year ........  $ 48,576,090   29,072,230     21,246,203
                                                        ============   ==========     ==========

Supplemental Disclosures of Cash Flow Information:
     Cash paid during the year for:
          Interest ...................................  $ 21,584,257   18,138,346     16,307,618
          Income taxes ...............................  $  1,152,848    1,645,210      1,596,745


Supplemental Schedule of Noncash Investing and 
Financing Activities:
     Real estate acquired through foreclosure ........  $  2,079,371      704,649      1,260,775
     Change in unrealized gain (loss) on
          securities available-for-sale, net of tax ..  $  1,931,244      345,980
     Increase (decrease) in dividends payable ........  $    205,158         --           29,541
     Deposit liabilities assumed in
          branch acquisition .........................  $ 29,083,191         --
     Assets acquired in branch acquisition, other
          than cash and cash equivalents .............  $       --      1,660,756           --

</TABLE>

See accompanying notes to consolidated financial statements.

                                       32
<PAGE>


Notes to Consolidated Financial Statements

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

     The  consolidated   financial  statements  include  the  accounts  of  FLAG
Financial Corporation "FLAG"),  its wholly - owned subsidiaries First Flag Bank,
formerly First Federal Savings Bank of LaGrange  ("First Flag") and First Flag's
wholly-owned  subsidiary Piedmont Mortgage Service, Inc. ("Piedmont"),  Citizens
Bank ("Citizens"), Bank of Milan ("Milan") and Empire Banking Company ("Empire")
("the  Banks",   collectively).   All  significant   intercompany  accounts  and
transactions have been eliminated in consolidation.

     FLAG is a  multi-bank  holding  company  formed in 1994 whose  business  is
conducted  primarily by the Banks.  FLAG is subject to regulation under the Bank
Holding  Company Act of 1956.  The Banks are primarily  regulated by the Georgia
Department  of Banking and Finance  ("DBF")  and the Federal  Deposit  Insurance
Corporation ("FDIC"). The Banks provide a full range of commercial, mortgage and
consumer banking services in West-Central, Middle and South Georgia. Piedmont is
an  appraisal  service  company  working  principally  for  First  Flag and as a
brokerage service to individuals.

     The accounting  principles  followed by FLAG and its subsidiaries,  and the
methods of applying these principles, conform with generally accepted accounting
principles  ("GAAP") and with general practices within the banking industry.  In
preparing financial  statements in conformity with GAAP,  management is required
to make  estimates  and  assumptions  that  affect the  reported  amounts in the
financial  statements.  Actual  results  could differ  significantly  from those
estimates.   Material   estimates  common  to  the  banking  industry  that  are
particularly susceptible to significant change in the near term include, but are
not  limited  to,  the  determination  of the  allowance  for loan  losses,  the
valuation of real estate  acquired in connection  with or in lieu of foreclosure
on loans,  the valuation  allowance for mortgage  servicing rights and valuation
allowances  associated  with the  realization  of deferred  tax assets which are
based on future taxable income.

Cash and Cash Equivalents

     Cash  equivalents  include  amounts due from banks and Federal  funds sold.
Generally, Federal funds are sold for one-day periods.

Investment Securities 

     FLAG  classifies  its  securities  in one  of  three  categories:  trading,
available-for-sale,  or  held-to-maturity.  There were no trading  securities at
December 31, 1998 and 1997. Securities held-to-maturity are those securities for
which FLAG has the ability and intent to hold to maturity.  All other securities
are classified as available-for-sale. Available-for-sale securities are recorded
at fair value.  Held-to-maturity  securities are recorded at cost,  adjusted for
the amortization or accretion of premiums or discounts. Unrealized holding gains
and losses, net of the related tax effect, on securities  available-for-sale are
excluded from earnings and are reported as a separate component of stockholders'
equity until realized.  Transfers of securities  between categories are recorded
at fair value at the date of  transfer.  A decline  in the  market  value of any
available-for-sale  or  held-to-maturity  investment  below  cost that is deemed
other than temporary is charged to earnings and establishes a new cost basis for
the security.  Premiums and discounts are amortized or accreted over the life of
the related  security as an adjustment to the yield.  Realized  gains and losses
are included in earnings and the cost of  securities  sold are derived using the
specific identification method.

Other Investments

     Other  investments  include  Federal Home Loan Bank ("FHLB")  stock,  other
equity securities with no readily determinable fair value and an investment in a
limited  partnership.  An  investment  in FHLB  stock is  required  by law for a
federally  insured savings bank.  Additionally,  FLAG owns a 39.6% interest in a
limited  partnership,  which invests in multi-family  real estate and passes low
income housing credits to the investors.  FLAG  recognizes  these tax credits in
the year received.  These  investments are carried at cost,  which  approximates
fair value.

                                       33
<PAGE>

NOTE 1.  SUMMARY OFSIGNIFICANTACCOUNTINGPOLICIES, continued

Mortgage Loans Held for Sale

     Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of aggregate cost or market value. The amount by which cost
exceeds market value is accounted for as a valuation allowance. Changes, if any,
in the valuation  allowance are included in the determination of net earnings in
the period in which the change  occurs.  Gains and losses from the sale of loans
are determined using the specific identification method.

Loans, Loan Fees and Interest Income

     Loans  that  management  has  the  intent  and  ability  to  hold  for  the
foreseeable  future or until maturity are reported at their  outstanding  unpaid
principal balances, net of the allowance for loan losses, deferred fees or costs
on originated loans and unamortized premiums or discounts on purchased loans.

     Loan fees and certain direct loan origination  costs are deferred,  and the
net fee or cost is recognized in interest  income using the  level-yield  method
over the  contractual  lives of the loans,  adjusted for  estimated  prepayments
based on the Banks' historical prepayment experience.  Commitment fees and costs
relating to  commitments  whose  likelihood of exercise is remote are recognized
over the  commitment  period on a  straight-line  basis.  If the  commitment  is
subsequently  exercised during the commitment period, the remaining  unamortized
commitment  fee at the time of exercise is recognized  over the life of the loan
as an  adjustment to the yield.  Premiums and  discounts on purchased  loans are
amortized over the remaining  lives of the loans using the  level-yield  method.
Fees arising from servicing loans for others are recognized as earned.

     FLAG  considers a loan  impaired  when,  based on current  information  and
events,  it is probable that all amounts due according to the contractual  terms
of the loan agreement  will not be collected.  Impaired loans are measured based
on the present  value of expected  future cash flows,  discounted  at the loan's
effective  interest rate or at the loa's  observable  market price, or the fair
value  of the  collateral  of the  loan  if the  loan is  collateral  dependent.
Interest  income from impaired loans is recognized  using a cash basis method of
accounting during the time within that period in which the loans were impaired.

Leasing

     First Flag  originates  commercial and consumer  leases through its leasing
division.  Interest  income on leases is  recorded  on the  accrual  basis and a
provision for possible losses on leases is recorded as a charge to earnings.

Allowance for Loan Losses 

     The allowance for loan losses is  established  through  provisions for loan
losses  charged to expense.  Loans are charged  against the  allowance  for loan
losses  when  management  believes  that  the  collection  of the  principal  is
unlikely.  The allowance is an amount which, in management's  judgment,  will be
adequate to absorb losses on existing loans that may become  uncollectible.  The
allowance is established through consideration of such factors as changes in the
nature and volume of the portfolio, adequacy of collateral,  delinquency trends,
loan  concentrations,  specific problem loans, and economic  conditions that may
affect the borrower's ability to pay.

     FLAG's  judgment in  determining  the  adequacy of the  allowance  for loan
losses is based on evaluations of the collectibility of loans. These evaluations
take into  consideration such factors as changes in the nature and volume of the
loan portfolio,  current economic  conditions,  overall portfolio  quality,  and
review of specific  problem loans.  In determining the adequacy of the allowance
for loan  losses,  FLAG uses a loan  grading  system  that rates  loans in eight
different categories. Loans are allocated loss ranges based on these categories.
The results of the allocated losses are compared to the recorded  allowance on a
periodic basis and material deficiences are adjusted by increasing the provision
for loan losses.

     Management  believes that the allowance for loan losses is adequate.  While
management  uses  available  information  to recognize  losses on loans,  future
additions  to the  allowance  may be  necessary  based on  changes  in  economic
conditions.  In addition,  various regulatory  agencies,  as an integral part of
their examination process, periodically review FLAG's allowance for loan losses.
Such agencies may require FLAG to recognize  additions to the allowance based on
their  judgments  about  information  available  to  them at the  time of  their
examination.

                                       34
<PAGE>

Other Real Estate Owned

     Real estate  acquired  through  foreclosure is carried at the lower of cost
(defined as fair value at  foreclosure)  or fair value less  estimated  costs to
dispose.  Fair value is defined as the amount that is expected to be received in
a current  sale  between a willing  buyer and  seller  other than in a forced or
liquidation  sale.  Fair values at foreclosure  are based on appraisals.  Losses
arising from the  acquisition of foreclosed  properties are charged  against the
allowance  for loan losses.  Subsequent  writedowns  are provided by a charge to
operations  through the  allowance for losses on other real estate in the period
in which the need arises.

Premises and Equipment

     Premises and  equipment are stated at cost less  accumulated  depreciation.
Major  additions  and  improvements  are  charged  to the asset  accounts  while
maintenance  and repairs  that do not improve or extend the useful  lives of the
assets are expensed currently. When assets are retired or otherwise disposed of,
the cost and related accumulated depreciation are removed from the accounts, and
any gain or loss is reflected in earnings for the period.  Depreciation  expense
is computed using the straight-line  method over the following  estimated useful
lives:

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

Mortgage Servicing Rights 

     FLAG's mortgage banking division accounts for mortgage  servicing rights as
a separate asset regardless of whether the servicing rights are acquired through
purchase  or  origination.   FLAG's  mortgage  servicing  rights  represent  the
unamortized  cost of  purchased  and  originated  contractual  rights to service
mortgages  for  others  in  exchange  for a  servicing  fee and  ancillary  loan
administration  income.  Mortgage servicing rights are amortized over the period
of estimated net servicing income and are  periodically  adjusted for actual and
anticipated prepayments of the underlying mortgage loans. Impairment analysis is
performed  quarterly after stratifying the rights by interest rate.  Impairment,
defined as the excess of the asset's carrying value over its current fair value,
is recognized through a valuation  allowance.  At December 31, 1998 and 1997, no
valuation allowances were required for FLAG's mortgage servicing rights.

     FLAG recognized approximately $750,000,  $418,000 and $451,000 in servicing
assets during 1998,  1997 and 1996,  respectively,  and recognized  amortization
expense  relating to servicing assets of  approximately  $241,000,  $149,000 and
$204,000 during 1998, 1997 and 1996, respectively. The risk characteristics that
FLAG uses to stratify  recognized  servicing  assets for  purposes of  measuring
impairment include the interest rate and term of the underlying loans serviced.

Core  Deposit  Intangible

     During 1997, Citizens entered into a Purchase and Assumption agreement with
Wachovia  Bank of Georgia,  N.A. to acquire  certain  loans,  deposits and other
liabilities of a branch in Montezuma, Georgia and a former branch in Oglethorpe,
Georgia  ("branch   acquisition")   for  a  net  purchase  price   approximating
$2,095,000.  The purchased core deposit  intangible and the associated  expenses
have been  capitalized and are being amortized  using the  straight-line  method
over the 15 year  estimated  average  life of the deposit  base  acquired and is
included as a  component  of other  assets.  Amortization  expense  approximated
$140,000  and  $58,000  for  the  years  ended   December  31,  1998  and  1997,
respectively.

Income  Taxes

     Deferred  tax  assets  and  liabilities  are  recorded  for the  future tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases.  Future tax  benefits,  such as net  operating  loss  carryforwards,  are
recognized to the extent that  realization  of such benefits is more likely than
not.  Deferred tax assets and  liabilities  are measured using enacted tax rates
expected to apply to taxable income in

                                       35
<PAGE>

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,  continued  

the years in which the assets and  liabilities  are  expected to be recovered or
settled.  The effect on deferred tax assets and  liabilities  of a change in tax
rates is  recognized  in income  tax  expense in the period  that  includes  the
enactment date.

     In the event  the  future  tax  consequences  of  differences  between  the
financial  reporting  bases and the tax bases of FLAG's  assets and  liabilities
results in deferred tax assets,  an evaluation of the  probability of being able
to realize the future benefits indicated by such assets is required. A valuation
allowance  is provided  when it is more likely than not that some portion or all
of the deferred tax asset will not be realized.  In assessing the  realizability
of the deferred tax assets,  management  considers  the  scheduled  reversals of
deferred tax  liabilities,  projected  future taxable  income,  and tax planning
strategies.

     A deferred tax  liability is not  recognized  for portions of the allowance
for loan  losses for income tax  purposes in excess of the  financial  statement
balance,  as  described in note 8. Such a deferred  tax  liability  will only be
recognized  when it becomes  apparent  that  those  temporary  differences  will
reverse in the foreseeable future.

  Net Earnings  Per Common Share

FLAG is required to report  earnings per
common  share with and without the dilutive  effects of  potential  common stock
issuances from instruments such as options,  convertible securities and warrants
on the face of the  statements of earnings.  Earnings per common share are based
on the weighted  average number of common shares  outstanding  during the period
while the effects of potential common shares  outstanding  during the period are
included in diluted  earnings per share.  Additionally,  FLAG must reconcile the
amounts used in the  computation of both "basic earnings per share" and "diluted
earnings per share".  Earnings per common share for the years ended December 31,
1998, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>

                                                       Net          Common       Per
                                                     Earnings       Shares       Share
                                                    (Numerator)  (Denominator)   Amount
                                                    -----------  -------------   ------
<S>                                                 <C>           <C>           <C> 
For the year ended December 31, 1998
     Basic earnings per share ....................   $1,959,628    6,554,643      .30
     Effect of dilutive securities - stock options         --         31,665       --
                                                                      ------         
     Diluted earnings per share ..................   $1,959,628    6,586,308      .30
                                                     ==========    =========      ===
For the year ended December 31, 1997
     Basic earnings per share ....................   $4,310,748    6,519,292      .66
     Effect of dilutive securities - stock options         --         29,364       --
                                                                      ------         
     Diluted earnings per share ..................   $4,310,748    6,548,656      .66
                                                     ==========    =========      ===
For the year ended December 31, 1996
     Basic earnings per share ....................   $1,699,803    6,481,022      .26
     Effect of dilutive securities - stock options         --         12,149        -
                                                                      ------         
     Diluted earnings per share ..................   $1,699,803    6,493,171      .26
                                                     ==========    =========      ===
</TABLE>

Recent Accounting Pronouncements

     In 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards ("SFAS") No. 133,  "Accounting  for Derivative
Instruments and Hedging  Activities".  SFAS No. 133  establishes  accounting and
reporting  standards  for  hedging  activities  and for  derivative  instruments
including derivative  instruments  embedded in other contracts.  It requires the
fair value  recognition of derivatives as assets or liabilities in the financial
statements.  SFAS No. 133 is effective  for all fiscal  quarters in fiscal years
beginning after June 15, 1999, but initial  application of the statement must be
made as of the beginning of the quarter. At the date of initial application,  an
entity may transfer any held- to-maturity  security into the  available-for-sale
or trading  categories without calling into question the entity's intent to hold
other  securities to maturity in the future.  FLAG believes the adoption of SFAS
No. 133 will not have a material  impact on its financial  position,  results of
operations or liquidity.

                                       36
<PAGE>

NOTE 2.  BUSINESS COMBINATIONS

     Effective  March 31, 1998,  FLAG acquired,  for  approximately  1.5 million
shares of its  common  stock,  all of the  outstanding  stock of Middle  Georgia
Bankshares, Inc., the holding company of the $129 million Citizens Bank, located
in Vienna,  Georgia.  Effective May 8, 1998,  FLAG acquired,  for  approximately
597,000 shares of its common stock all of the outstanding  stock of Three Rivers
Bancshares,  Inc., the holding company of the $35 million Bank of Milan, located
in Milan, Georgia. Effective December 11, 1998, FLAG acquired, for approximately
1.1 million shares of its common stock,  all of the outstanding  stock of Empire
Bank Corp.,  the  holding  company of the $70 million  Empire  Banking  Company,
located in Homerville,  Georgia. Effective December 31, 1998, FLAG acquired, for
approximately  255,000 shares of its common stock, all of the outstanding  stock
of The Brown Bank  ("Brown"),  a $31 million  bank  located in Metter,  Georgia.
These  acquisitions  were accounted for as pooling of interests and accordingly,
the  consolidated  financial  statements  for all  periods  presented  have been
restated to include the  financial  position and results of operations as if the
combination had occurred on January 1, 1996.

     The following is a reconciliation of the amounts of net interest income and
net earnings previously reported with the restated amounts:

                             1997             1996
                             ----             ----
Net interest income:
     FLAG ...........   $  8,542,364       8,721,592
     Citizens .......      5,623,192       4,667,851
     Milan ..........      1,831,118       1,367,223
     Empire .........      2,615,732       2,269,478
     Brown ..........      1,493,866       1,208,576
                           ---------       ---------
          As restated   $ 20,106,272      18,234,720
                        ============      ==========

Net earnings (loss):
     FLAG ...........   $  2,033,114        (177,626)
     Citizens .......      1,053,118       1,065,064
     Milan ..........        662,466         398,810
     Empire .........        693,347         246,172
     Brown ..........       (131,297)        167,383
                            --------         -------
     As restated ....   $  4,310,748       1,699,803
                        ============       =========

                                       37
<PAGE>


NOTE 3.  INVESTMENT SECURITIES

     Investment  securities  at  December  31, 1998 and 1997 are  summarized  as
follows:

<TABLE>
<CAPTION>
                                                           December 31, 1998
                                                            -----------------
                                                           Gross         Gross        Estimated       
                                           Amortized     Unrealized    Unrealized        Fair    
                                              Cost         Gains         Losses         Value
                                              ----         -----         ------         -----
Securities available-for-sale 
<S>                                        <C>              <C>           <C>         <C>       
     U.S. Treasuries and agencies ......   $17,908,611      180,458       20,399      18,068,670
     State, county and municipals ......     7,794,302      240,154        8,051       8,026,405
     Corporate debt securities .........       997,809          873          --          998,682
     Equity securities .................     1,028,463    2,730,231       48,991       3,709,703
     Mortgage-backed securities ........    29,862,601      195,155       90,391      29,967,365
     Collateralized mortgage obligations    11,594,459       30,792      104,767      11,520,484
                                            ----------       ------      -------      ----------
                                           $69,186,245        3,377      272,599      72,291,309
                                           ===========        =====      =======      ==========
Securities held-to-maturity
     State, county and municipals ......   $ 3,111,584      139,510          --        3,251,094
     Mortgage-backed securities ........        86,778        2,749          872          88,655
     Collateralized mortgage obligations     1,036,636          990       16,119       1,021,507
                                             ---------          ---       ------       ---------
                                           $ 4,234,998      143,249       16,991       4,361,256
                                           ===========      =======       ======       =========

                                                          December 31, 1997
                                                          -----------------
                                                            Gross         Gross       Estimated       
                                            Amortized     Unrealized    Unrealized       Fair    
                                               Cost         Gains         Losses         Value
                                               ----         -----         ------         -----
Securities available-for-sale
     U.S. Treasuries and agencies ......   $28,061,226      135,716       34,916      28,162,026
     State, county and municipals ......     6,677,231      126,077       35,859       6,767,449
     Corporate debt securities .........       989,300       10,700           --       1,000,000
     Equity securities .................     1,124,996      125,370        1,817       1,248,549
     Mortgage-backed securities ........    30,048,443      216,612      177,519      30,087,536
     Collateralized mortgage obligations    16,226,434       11,031      383,633      15,853,832
                                            ----------       ------      -------      ----------
                                           $83,127,630      625,506      633,744      83,119,392
                                           ===========      =======      =======      ==========
Securities held-to-maturity
     U.S. Treasuries and agencies ......   $   199,536          --            36         199,500
     State, county and municipals ......     3,165,622       97,841          948       3,262,515
     Mortgage-backed securities ........       103,140        1,160           --         104,300
     Collateralized mortgage obligations     2,504,695        2,037       41,889       2,464,843
                                             ---------        -----       ------       ---------
                                           $ 5,972,993      101,038       42,873       6,031,158
                                           ===========      =======       ======       =========

</TABLE>

                                       38
<PAGE>


     The   amortized    cost   and   estimated    fair   value   of   securities
available-for-sale  and  securities  held-to-maturity  at December 31, 1998,  by
contractual  maturity,  are shown  below.  Expected  maturities  may differ from
contractual  maturities  because  borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>

                                       Securities Available-   Securities Held-
                                             For-Sale             to-Maturity
                                             --------             -----------
                                  Amortized     Estimated     Amortized   Estimated
                                     Cost       Fair Value      Cost      Fair Value
                                     ----       ----------      ----      ----------
<S>                                 <C>            <C>           <C>        <C>  
U.S. Treasuries and agencies
  and state, county and municipals:
     Within 1 year ...........   $ 7,481,578     7,506,875       109,966    112,096
     1 to 5 years ............     8,729,766     8,809,323       826,293    849,368
     5 to 10 years ...........     4,959,721     5,115,907     2,014,091  2,122,766
     More than 10 years ......     4,531,848     4,662,970       161,234    166,864
                                  ---------     ---------       -------    -------
                                  25,702,913    26,095,075     3,111,584  3,251,094
                                  ==========    ==========     =========  =========

     Equity securities .......     1,028,463     3,709,703          --         --
     Corporate debt securities       997,809       998,682          --         --   
     Mortgage-backed securities
        obligations ..........    11,594,459    11,520,484     1,036,636  1,021,507
                                  ----------    ----------     ---------  ---------
                                 $69,186,245    72,291,309     4,234,998  4,361,256
                                 ===========    ==========     =========  =========

</TABLE>


     There were no sales of securities  held-to-maturity  during 1998,  1997 and
1996. Proceeds from sales of securities available-for-sale during 1998, 1997 and
1996   totalled   approximately   $13,650,000,   $8,356,000   and   $17,805,000,
respectively.  Gross gains of approximately $325,000,  $186,000 and $267,000 and
gross losses of  approximately  $34,000,  $15,000 and $31,000  were  realized on
those sales for the years ended December 31, 1998, 1997 and 1996,  respectively.

     Securities  and   interest-bearing   deposits  with  a  carrying  value  of
approximately  $54,683,000  and  $49,901,000  at  December  31,  1998 and  1997,
respectively,  were pledged to secure  advances from FHLB,  U.S.  Government and
other public deposits.  note 4. Loans Major classifications of loans at December
31, 1998 and 1997 are summarized as follows:

                                               1998              1997
                                               ----              ----
Commercial, financial and agricultural   $ 116,133,182       69,915,736
Real estate-construction .............      29,956,050       12,663,396
Real estate-mortgage .................     174,852,524      231,460,215
Installment loans to individuals .....      54,311,596       30,374,344
Lease financings .....................       7,673,877        9,308,213
                                             ---------        ---------
Gross loans ..........................     382,927,229      353,721,904
Less allowance for loan losses .......      (5,568,107)      (4,948,039)
                                            ----------       ---------- 
                                         $ 377,359,122      348,773,865
                                         =============      ===========

     FLAG  concentrates  its lending  activities in the origination of permanent
residential  mortgage  loans,  commercial  mortgage loans,  agribusiness  loans,
timber loans,  commercial  business loans and consumer  installment  loans.  The
majority of the Banks' real estate loans are secured by real property located in
West Central, Middle and South Georgia.

                                       39
<PAGE>

NOTE 4.  LOANS, continued

     FLAG has recognized impaired loans of approximately $3,700,000 and $191,000
at December 31, 1998 and 1997,  respectively,  with a total  allowance  for loan
losses  related  to  these  loans  of  approximately  $2,150,000  and  $191,000,
respectively.  Interest income on impaired loans of  approximately  $150,000 and
$17,000  was   recognized   for  cash  payments   received  in  1998  and  1997,
respectively.

     Activity in the  allowance for loan losses is summarized as follows for the
years ended December 31, 1998, 1997and 1996: 
<TABLE>
<CAPTION>

                                                   1998            1997           1996
                                                   ----            ----           ----
<S>                                            <C>              <C>            <C>      
Balance at beginning of  year ..............   $ 4,948,039      6,384,853      3,254,709
Provisions  charged  to  operations ........     3,382,000      1,596,188      4,474,529
Loans  charged  off ........................    (3,090,614)    (3,265,183)    (1,432,546)
Recoveries on loans  previously  charged off       328,682        232,181         88,161
                                                   -------        -------         ------
Balance at end of year .....................   $ 5,568,107      4,948,039      6,384,853
                                               ===========      =========      =========
</TABLE>

     Mortgage  loans  serviced for others are not  included in the  accompanying
consolidated  financial statements.  Unpaid principal balances of these loans at
December  31,  1998  and  1997  approximate   $213,390,000   and   $166,823,000,
respectively.  Custodial  escrow  balances  maintained in  connection  with loan
servicing,  and included in demand  deposits,  were  approximately  $675,000 and
$618,000 at December 31, 1998 and 1997, respectively. 

     Mortgage  loans secured by 1-4 family  residences  totalling  approximately
$57,393,000  were pledged as  collateral  for  outstanding  FHLB  advances as of
December 31, 1998. 

NOTE 5.  PREMISES AND EQUIPMENT

     Premises  and  equipment at December  31, 1998 and 1997 are  summarized  as
follows:


                                    1998          1997
                                    ----          ----
Land and land improvements ..   $ 1,655,012     1,555,012
Buildings and improvements ..    10,116,781     9,970,968
Furniture and equipment .....    13,758,342    12,049,938
                                 ----------    ----------
                                 25,530,135    23,575,918
Less accumulated depreciation    10,642,920     9,456,887
                                 ----------     ---------
                                $14,887,215    14,119,031
                                ===========    ==========


     Depreciation expense approximated $2,065,000,  $1,630,000 and $1,343,000 at
December  31,  1998,  1997 and  1996,  respectively.  

NOTE 6.  TIME DEPOSITS

     At  December  31,  1998,   contractual  maturities  of  time  deposits  are
summarized as follows:

     Year  ending  December  31,
          1999 ....................   $203,036,225
          2000 ....................     44,656,174
          2001 ....................     11,889,973
          2002 ....................      7,723,513 
          2003 ....................      7,653,430 
          2004  and  thereafter....      1,621,139
                                         ---------
                                      $276,580,454 
                                      ============ 

                                       40

<PAGE>

NOTE 7. FHLB ADVANCES

     Advances FHLB advances are collateralized by FHLB stock, certain investment
securities  and first  mortgage  loans.  Advances from the FHLB  outstanding  at
December 31, 1998 bear fixed and floating  interest  rates ranging from 4.84% to
8.13% and mature as follows:

Year ending December 31,        
          1999.................... $  2,616,254
          2000....................    5,616,254
          2001....................      441,536
          2002....................    7,342,786
          2003....................    3,297,000
          Thereafter..............   29,084,648
                                     ----------
                                    $48,398,478
                                    ===========

NOTE 8.  INCOME TAXES

     The  following  is an  analysis  of the  components  of income tax  expense
(benefit) for the years ended December 31, 1998,  1997 and 1996:

                                      1998           1997          1996
                                      ----           ----          ----
Current ......................   $   638,463        958,315     1,402,326
Deferred .....................      (203,543)       918,373    (1,067,993)
Change in valuation  allowance      (132,170)       (56,500)      117,000
                                    --------        -------       -------
                                 $   302,750      1,820,188       451,333
                                 ===========      =========       =======

     The  differences  between  income tax  expense  and the amount  computed by
applying the statutory  federal income tax rate to earnings before taxes for the
years ended December 31, 1998, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                            1998           1997           1996
                                            ----           ----           ----
<S>                                     <C>              <C>              <C>    
Pretax income at statutory rate .....   $   769,209      2,084,517        731,387
Add (deduct):
     Tax-exempt interest income .....      (322,540)      (290,923)      (173,307)
     State income taxes, net of
          federal effect ............        30,768        164,353
     Increase in cash surrender value
          of life insurance .........       (63,837)       (75,192)       (15,064)
     Nondeductible merger expenses ..       109,131           --             --
     Change in valuation allowance ..      (132,170)       (56,500)       117,000
     Other ..........................       (87,811)        (6,067)      (174,560) 
                                            -------         ------       --------  
                                        $   302,750      1,820,188        451,333
                                        ===========      =========        =======
</TABLE>


                                       41
<PAGE>

NOTE 8.  INCOME TAXES, continued

     The following summarizes the net deferred tax asset. The deferred tax asset
is included as a component of other assets at December 31, 1998 and 1997.

                                                    1998    1997
Deferred tax assets:
     Allowance for loan losses ......................   $1,500,497    1,195,053
     Allowance for other real estate owned ..........       27,647       21,208
     Net operating loss carryforwards and credits ...      192,230      727,740
     Other ..........................................      227,679       73,093
                                                           -------       ------
          Total gross deferred tax assets ...........    1,948,053    2,017,094
          Less: valuation allowance .................         --       (132,170)
                                                                       -------- 
                                                         1,948,053    1,884,924
                                                         =========    =========
Deferred tax liabilities:
     Premises and equipment .........................      593,886      568,472
     Net deferred loan fees .........................       74,773      151,375
     Unrealized gain on securities available-for-sale    1,131,327         --
     Other ..........................................       96,298      317,694
                                                            ------      -------
          Total gross deferred tax liabilities ......    1,896,284    1,037,541
                                                         ---------    ---------
          Net deferred tax asset ....................   $   51,769      847,383
                                                        ==========      =======

     The  Internal  Revenue  Code  ("IRC") was  amended  during 1996 and the IRC
section 593 reserve method for loan losses for thrift institutions was repealed.
Effective  January 1, 1996,  First Flag now  computes  its tax bad debt  reserve
under the rules of IRC section 585,  which apply to commercial  banks.  In years
prior to 1996,  First Flag  obtained tax bad debt  deductions  approximating  $2
million in excess of its financial statement allowance for loan losses for which
no provision for federal income tax was made. These amounts were then subject to
federal  income  tax in future  years  pursuant  to the prior  IRC  section  593
provisions if used for purposes other than to absorb bad debt losses.  Effective
January 1, 1996,  approximately  $2 million of the excess  reserve is subject to
recapture  only if First  Flag  ceases  to  qualify  as a bank  pursuant  to the
provisions  of IRC section 585. 

NOTE 8. EMPLOYEE AND DIRECTOR BENEFIT PLANS

     Defined  Contribution  Plans 

     FLAG has an  established  retirement  plan  qualified  pursuant to Internal
Revenue  Code  section  401(k).  The plan allows  eligible  employees to defer a
portion of their income by making contributions into the plan on a pretax basis.
The plan  provides a matching  contribution  based on a percentage of the amount
contributed  by the employee.  During the years ended 1998,  1997 and 1996,  the
Company contributed approximately $105,000,  $59,000 and $49,000,  respectively,
to this plan.

     FLAG has  established a  profit-sharing  plan for which  substantially  all
employees are eligible. The Board of Directors makes discretionary contributions
up to 15% of eligible compensation. The plan allows participants to direct up to
75% of their account balance and/or  contributions  to be invested in the common
stock of FLAG. The trustee of the plan is required to purchase the FLAG stock at
market  value and may not  acquire  more than 25% of the issued and  outstanding
shares.  During the years  ended  December  31, 1997 and 1996,  FLAG  recognized
$194,000 and $185,000, respectively, in expense related to its obligations under
the plan. FLAG recognized no such expense in 1998.

     The  companies  acquired in 1998  sponsored  certain  defined  contribution
employee  benefit plans that have been  terminated or merged into existing plans
of FLAG.  Under  these  plans,  the  acquired  companies  recognized  expense of
approximately $58,000, $88,000 and $78,000 in 1998, 1997 and 1996, respectively.
These  amounts  are  included  in  the  accompanying   statements  of  earnings.

                                       42
<PAGE>


     Directors'  Retirement Plan

     FLAG sponsors a defined contribution postretirement benefit plan to provide
retirement  benefits to certain of FLAG's and the Banks' Board of Directors  and
executive   officers  and  to  provide  death  benefits  for  their   designated
beneficiaries. Under this plan, split-dollar whole life insurance contracts were
purchased on the lives of certain Directors and executive officers. The increase
in cash  surrender  value of the  contracts,  less  the  Banks'  cost of  funds,
constitutes  FLAG's  contribution  to the  plan  each  year.  In the  event  the
insurance contracts fail to produce positive returns,  FLAG has no obligation to
contribute to the plan. At December 31, 1998 and 1997, the cash surrender  value
of  the  insurance  contracts  was  approximately   $3,971,000  and  $3,514,000,
respectively.  Expenses incurred for benefits were approximately $7,200, $22,000
and $66,000 during 1998, 1997 and 1996, respectively.

     Defined Benefit Plan

     Prior to 1998, FLAG sponsored a trusteed defined benefit pension plan which
covered  substantially  all  employees.  This pension plan was frozen  effective
January 15, 1998 and terminated  effective May 1, 1998 at which time all accrued
benefits became fully vested.  During 1998, FLAGfully funded the liability under
this plan. As of December 31, 1998, approximately $139,000 of assets remained in
this plan.  These assets,  which consist of cash and cash  equivalents,  will be
distributed at the direction of the participants.

     The  following is a  reconciliation  of the funded status of the plan as of
December 31, 1997:

Accumulated benefit obligation including vested
benefits of $1,050,965 ...................................   $ 1,062,575
                                                             ===========
Projected benefit obligation for services rendered to date     1,635,798
Plan assets at fair value ................................     1,379,263
                                                               ---------
Projected benefit obligation in excess of plan assets ....      (256,535)
Unrecognized transition obligation .......................        15,755
Unrecognized prior service cost ..........................       141,472
Unrecognized net loss ....................................        (6,457)
                                                                  ------ 
Accrued pension liability ................................   $  (105,765)
                                                             =========== 


     Net  pension  expense  for the years  ended  December  31, 1997 and 1996 is
summarized as follows:

                                                   1997          1996
                                                   ----          ----
Service cost - benefits earned ..............   $  93,676       71,238
Interest cost on projected benefit obligation     116,072       95,648
Actual return on plan assets ................     (99,024)     (85,327)
Net amortization ............................      12,191       12,191
                                                   ------       ------
                                                $ 122,915       93,750
                                                =========       ======

     The  assumed  rate of return on  assets  was 8% for 1997 and 1996,  with an
assumed discount rate of 8% and an assumed rate of compensation increase of 4.5%
in 1997 and 5.5% in 1996.  Prior service costs were  generally  amortized over a
period of 17 years.

                                       43

<PAGE>


NOTE 9.  EMPLOYEE AND DIRECTORS BENEFIT PLANS, continued

Stock Option Plan

     FLAG has an employee stock  incentive  plan and a director stock  incentive
plan.  The plans were adopted for the benefit of directors  and key officers and
employees  in order that they may  purchase  FLAG stock at a price  equal to the
fair market value on the date of grant.  A total of 525,000 shares were reserved
for possible  issuance  under the employee plan and 165,938 shares were reserved
under the director plan. The options  generally vest over a four-year period and
expire after ten years.

     FLAG is encouraged,  but not required, 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,  and
therefore no  compensation  expense has been  recognized  in 1998,  1997 or 1996
related to the stock option plans. Had  compensation  cost been determined based
upon the fair value of the options at the grant  dates,  FLAG's net earnings and
net  earnings  per share  would  have  been  reduced  to the pro  forma  amounts
indicated below.
 
                                     1998            1997           1996
                                     ----            ----           ----
Net earnings
     As reported ........    $      1,959,628      4,310,748      1,699,803
     Pro forma ..........    $      1,516,077      4,290,038      1,696,464
Basic earnings per share
     As reported .........   $            .30            .66            .26
     Pro forma ...........   $            .23            .66            .26
Diluted earnings per share
     As reported .........   $            .30            .66            .26
     Pro forma ...........   $            .23            .65            .26

     The fair value of each option is  estimated  on the date of grant using the
Black-Scholes   options-pricing   model  with  the  following  weighted  average
assumptions:  dividend yield of 2%; volatility ranging from .4266 to .8531; risk
free interest rate of 6% and an expected life of 5 years.

     A summary of activity in these stock option plans is presented below:
<TABLE>
<CAPTION>


                                         1998              1997             1996
                                         ----              ----             ----
                                          Weighted            Weighted           Weighted
                                           Average             Average            Average
                                           Option              Option             Option
                                           Price               Price              Price
                                 Shares   Per Share  Shares   Per Share  Shares  Per Share
                                 ------   ---------  ------   ---------  ------  ---------
<S>                              <C>        <C>       <C>        <C>     <C>       <C>  
Outstanding, beginning of year   109,125    $ 7.01    69,000     $6.68   240,311   $4.27
Granted during the year ......   445,404     12.97    42,000      7.58     9,000    9.00
Cancelled during the year ....   (6,000)     13.33   (1,875)      7.50       --      --
Exercised during the year ....   (9,500)      7.68     --          --   (180,311)   3.59
                                 ------       ----                      --------    ----
Outstanding, end of year .....   539,029    $11.85   109,125     $7.01    69,000   $6.68
                                 -------    ------   -------     -----    ------   -----
Number of shares exercisable .   312,561             109,125              69,000
                                 =======             =======              ======

</TABLE>

     The weighted average grant-date fair value of options granted in 1998, 1997
and 1996 was  $6.12,  $2.79 and  $2.39,  respectively.  For these  employee  and
director stock options, options outstanding at December 31, 1998 are exercisable
at option prices  ranging from $6.33 to $19.375 as presented in the table above.
Such options have a weighted average remaining contractual life of approximately
8.5 years as of December 31, 1998.

                                       44
<PAGE>

NOTE 10.  STOCKHOLDERS' EQUTIY

     Shares of  preferred  stock may be issued  from time to time in one or more
series as  established  by resolution of the Board of Directors of FLAG, up to a
maximum of 10,000,000 shares. Each resolution shall include the number of shares
issued, preferences, special rights and limitations as determined by the Board.

     On May 18, 1998, FLAG declared a three-for-two stock split, payable on June
3, 1998.  All share and per share  amounts  have been  restated to reflect  this
stock split as if it had occurred on January 1, 1996.


NOTE 11.  REGULATORY MATTERS 

     FLAG and the Banks are subject to various regulatory  capital  requirements
administered  by the Federal banking  agencies.  Failure to meet minimum capital
requirements   can  initiate   certain   mandatory,   and  possibly   additional
discretionary,  action by regulators  that, if  undertaken,  could have a direct
material  effect on the Banks'  financial  statements.  Under  capital  adequacy
guidelines and the regulatory  framework for prompt corrective action, the Banks
must meet specific capital guidelines that involve quantitative  measures of the
Banks' assets,  liabilities,  and certain  off-balance sheet items as calculated
under  regulatory   accounting   practices.   The  Banks'  capital  amounts  and
classification  are also subject to  qualitative  judgements  by the  regulators
about components, risk weightings and other factors.

     Quantitative  measures established by regulation to ensure capital adequacy
require  the Banks to  maintain  minimum  amounts and ratios of total and Tier 1
capital (as defined) to risk-weighted assets (as defined), and of Tier 1 capital
(as defined) to average assets (as defined). Management believes, as of December
31, 1998 that the Banks meet all capital adequacy requirements to which they are
subject.

     Minimum ratios required by the Banks to ensure capital  adequacy are 8% for
total capital to risk weighted  assets and 4% each for Tier 1 capital to average
assets. Minimum ratios required by the Banks to be well capitalized under prompt
corrective action provisions are 10% for total capital to risk-weighted  assets,
6% for Tier 1 capital  to  risk-weighted  assets  and 5% for Tier 1  capital  to
average assets. Minimum amounts required for capital adequacy purposes and to be
well capitalized  under prompt  corrective action provisions are presented below
for FLAG and the Banks. Prompt corrective action provisions do not apply to bank
holding companies. note 11. regulatory matters, continued

                                       45

<PAGE>

<TABLE>
<CAPTION>

                                                                                  To Be Well
                                                                               Capitalized Under
                                                                For Capital    Prompt Corrective
                                                 Actual      Adequacy Purposes Action Provisions
                                                 ------      -----------------------------------
                                           Amount      Ratio  Amount    Ratio  Amount    Ratio
                                           (000's)           (000's)          (000's) 
                                           -------    ------ -------    ----- -------    ------
As of December 31, 1998:
<S>                                       <C>         <C>     <C>        <C>   <C>        <C>
Total Capital (to Risk-Weighted Assets)
     FLAG consolidated .................   $51,390     14.0%  29,386     8.0%    N/A       N/A
     First Flag ........................   $18,418     10.5%  13,967     8.0%  17,459     10.0%
     Citizens ..........................   $13,883      9.9%  11,234     8.0%  14,043     10.0%
     Milan .............................   $ 4,393     13.7%   2,560     8.0%   3,200     10.0%
     Empire ............................   $ 7,734     14.2%   4,345     8.0%   5,432     10.0%
Tier 1 Capital (to Risk-Weighted Assets)
     FLAG consolidated .................   $45,934     12.5%  14,693     4.0%    N/A        N/A
     First Flag ........................   $18,418     10.5%   6,983     4.0%  10,475      6.0%
     Citizens ..........................   $12,134      8.6%   5,617     4.0%   8,426      6.0%
     Milan .............................   $ 3,992     12.5%   1,280     4.0%   1,920      6.0%
     Empire ............................   $ 7,134     13.1%   2,173     4.0%   3,259      6.0%
Tier 1 Capital (to Average Assets)
     FLAG consolidated .................   $45,934      8.4%  21,919     4.0%    N/A        N/A
     First Flag ........................   $18,418      7.0%  10,476     4.0%  13,095      5.0%
     Citizens ..........................   $12,134      7.1%   6,858     4.0%   8,573      5.0%
     Milan .............................   $ 3,992     10.2%   1,571     4.0%   1,963      5.0%
     Empire ............................   $ 7,134     10.3%   2,776     4.0%   3,470      5.0%
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets)
     FLAG consolidated .................   $46,605     13.0%  28,645     8.0%    N/A       N/A
     First Flag ........................   $22,408     13.9%  12,871     8.0%  16,089     10.0%
     Citizens ..........................   $11,171      9.0%   9,905     8.0%  12,381     10.0%
     Milan .............................   $ 3,077     13.8%   1,790     8.0%   2,238     10.0%
     Empire ............................   $ 7,129     14.6%   3,893     8.0%   4,866     10.0%
Tier 1 Capital (to Risk-Weighted Assets)
     FLAG consolidated .................   $42,267     11.8%  14,323     4.0%    N/A        N/A
     First Flag ........................   $20,382     12.7%   6,436     4.0%   9,653      6.0%
     Citizens ..........................   $ 9,590      7.8%   4,953     4.0%   7,429      6.0%
     Milan .............................   $ 2,798     12.5%     895     4.0%   1,343      6.0%
     Empire ............................   $ 6,647     13.7%   1,947     4.0%   2,920      6.0%
Tier 1 Capital (to Average Assets)
     FLAG consolidated .................   $42,267      8.5%  19,854     4.0%    N/A        N/A
     First Flag ........................   $20,382      8.3%   9,883     4.0%  12,354      5.0%
     Citizens ..........................   $ 9,590      6.3%   6,110     4.0%   7,638      5.0%
     Milan .............................   $ 2,798      8.8%   1,270     4.0%   1,587      5.0%
     Empire ............................   $ 6,647     10.4%   2,550     4.0%   3,187      5.0%

</TABLE>


     Banking regulations limit the amount of dividends the Banks can pay to FLAG
without prior regulatory  approval.  These  limitations are a function of excess
regulatory  capital and net earnings in the year the  dividend is  declared.  In
1999, the Banks can pay dividends  totalling  approximately  $2,000,000  without
prior regulatory approval.

                                       46
<PAGE>


NOTE 12.  COMMITMENTS AND CONTINGENCIES

     FLAG has a  partially  self-insured  health  care plan for the  benefit  of
eligible employees and their eligible dependents,  administered by a 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.  FLAG is  responsible  for any  claims  less than  $15,000  per  person
annually.

     FLAG 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 and to
manage its cost of funds.  These financial  instruments  include  commitments to
extend  credit and standby  letters of credit.  These  instruments  involve,  to
varying degrees,  elements of credit risk in excess of the amounts recognized in
the  consolidated  statements of financial  condition.  The contract  amounts of
these instruments reflect the extent of involvement the Banks have in particular
classes of financial instruments.

     Commitments  to originate  first  mortgage  loans and 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 upon,
the  total  commitment   amounts  do  not  necessarily   represent  future  cash
requirements.   The  Banks  evaluate  each  customer's   creditworthiness  on  a
case-by-case  basis. The amount of collateral  obtained,  if deemed necessary by
the Banks upon extension of credit,  is based on management's  credit evaluation
of  the  counterparty.   The  Banks'  loans  are  primarily   collateralized  by
residential and other real properties,  automobiles,  savings deposits, accounts
receivable, inventory and equipment located in Central and South Georgia.

     Standby letters of credit are written conditional commitments issued by the
Banks to  guarantee  the  performance  of a  customer  to a third  party.  Those
guarantees  are  primarily  issued  to  support  public  and  private  borrowing
arrangements.  Most letters of credit extend for less than one year.  The credit
risk  involved  in  issuing  letters of credit is  essentially  the same as that
involved in extending loan facilities to customers.

     FLAG's exposure to credit loss in the event of  nonperformance by the other
party to the financial  instrument for  commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Banks use the same credit  policies in making  commitments  and  conditional
obligations as it does for on-balance sheet instruments.  All standby letters of
credit are secured at December 31, 1998 and 1997.

                                               1998         1997
                                               ----         ----
Financial instruments whose contract 
   amounts represent credit risk:
Commitments to extend credit.............. $75,617,000    59,594,000
Standby letters of credit ................ $   767,000     1,486,000

NOTE 13.  RELATED PARTY TRANSACTIONS

     At December 31, 1998, deposits from directors, executive officers and their
related interests aggregated  approximately $797,000.  These deposits were taken
in the normal course of business at market interest rates.

     FLAG conducts  transactions  with its  directors  and  executive  officers,
including companies in which they have beneficial interest, in the normal course
of business.  It is the policy of FLAG to make loans to directors  and executive
officers on  substantially  the same terms as those  prevailing  at the time for
comparable  loans to other  persons.  The following is a summary of activity for
related party loans for 1998.

Balance at December 31, 1997..... $ 1,311,694
     New loans ..................     318,906
     Repayments .................    (901,902)
Balance at December 31, 1998..... $   728,698

                                       47
<PAGE>


NOTE 14. MISCELLANEOUS OPERATING EXPENSES

     Components  of other  operating  expenses in excess of 1% of  interest  and
other  income  for the  years  ended  December  31,  1998,  1997 and 1996 are as
follows:

                                         1998      1997       1996
                                         ----      ----       ----
Advertising ......................   $  355,458   445,208    349,000
Data processing ..................   $1,312,761   729,330    611,645
Federal deposit insurance premiums   $  288,120   246,686  1,678,115
Telephone ........................   $  588,015   404,280    352,288


NOTE 15. FLAG FINANCIAL CORPORATION
        (Parent Company Only) Financial Information

Balance Sheets 
December 31, 1998 and 1997
 
                                                         1998          1997
                                                         ----          ----
Assets
     Cash ........................................   $   392,796     1,081,780
     Investment securities .......................     3,538,348       942,883
     Investment in subsidiaries ..................    43,820,514    42,048,143
     Equipment, net ..............................       937,892       536,282
     Other assets ................................       271,093       889,276
                                                         -------       -------
        Total assets .............................   $48,960,643    45,498,364
                                                     ===========    ==========
Liabilities and Stockholders' Equity
     Accounts payable and accrued expenses .......   $ 1,095,986       423,362
     Stockholder' equity ........................    47,864,657    45,075,002
                                                      ----------    ----------
        Total liabilities and stockholder' equity   $48,960,643    45,498,364
                                                     ===========    ==========


Statements of Earnings
For the Years Ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                1998           1997         1996
                                                 ----           ----         ----
Income:
<S>                                          <C>              <C>           <C>      
     Dividend income from subsidiaries ...   $ 4,132,982      1,537,690     1,364,766
     Interest income .....................        23,438          7,357          --
     Other ...............................     1,472,914        147,890       136,757
                                               ---------        -------       -------
          Total income ...................     5,629,334      1,692,937     1,501,523
                                               ---------      ---------     ---------
Operating expenses:
     Interest expense ....................        32,933          1,333           347
     Other ...............................     4,555,443        595,309       430,074
                                               ---------        -------       -------
          Total operating expenses .......     4,588,376        596,642       430,421
                                               ---------        -------       -------
          Earnings before income tax
            benefit and equity in
            undistributed earnings of
            subsidiaries .................     1,040,958      1,096,295     1,071,102
Income tax benefit .......................     1,074,699        154,263        97,907
                                               ---------        -------        ------
     Earnings before equity in
     undistributed earnings of
     subsidiaries or dividends received
     in excess of earnings of subsidiaries     2,115,657      1,250,558     1,169,009
Dividends received in excess of
     earnings of subsidiaries ............      (156,029)          --            --   
Equity in undistributed earnings
   of subsidiaries .......................          --        3,060,189       530,794
                                                              ---------       -------
     Net earnings ........................   $ 1,959,628      4,310,747     1,699,803
                                             ===========      =========     =========
</TABLE>

                                       48
<PAGE>

Statements of Cash Flows

For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>

                                                                 1998           1997           1996
                                                                 ----           ----           ----
Cash flows from operating activities:
<S>                                                          <C>              <C>            <C>      
     Net earnings ........................................   $ 1,959,628      4,310,748      1,699,803
     Adjustments to reconcile net earnings to
          netcash provided by operating activities:
Depreciation and amortization ............................       124,713         26,588         26,588
          Gain on sale of investment securities ..........       (28,580)          --             --
          Dividends received in excess of earnings
                of subsidiaries ..........................       156,029           --             --
          Equity in undistributed earnings of subsidiaries          --       (3,060,189)      (530,794)
          Change in other assets and liabilities .........     1,085,649         90,214       (149,876)
                                                               ---------         ------       -------- 
               Net cash provided by operating activities .     3,297,439      1,367,361      1,045,721
                                                               ---------      ---------      ---------
Cash flows from investing activities:
     Purchase of investment securities ...................      (273,941)      (502,665)      (214,752)
     Purchase of equipment ...............................      (526,323)      (536,282)          --
     Investment in subsidiaries ..........................    (2,554,157)          --         (985,255)
     Proceeds from sale of investment securities .........       264,057           --           25,000
                                                                 -------                        ------
               Net cash used in investing activities .....    (3,090,364)    (1,038,947)    (1,175,007)
                                                              ----------     ----------     ---------- 
Cash flows from financing activities:
     Treasury stock transactions of pooled entities ......       129,918         59,054        (62,853)
     Repayment of long-term debt .........................          --             --          (80,000)
     Exercise of stock options ...........................        72,938           --          630,629
     Proceeds from issuance of common stock ..............          --             --          229,524
     Dividends paid ......................................    (1,098,915)      (839,201)      (786,644)
                                                              ----------       --------       -------- 
          Net cash used in financing activities ..........      (896,059)      (780,147)       (69,344)
                                                                --------       --------        ------- 
     Net change in cash ..................................      (688,984)      (451,733)      (198,630)
     Cash at beginning of year ...........................     1,081,780      1,533,513      1,732,143
                                                               ---------      ---------      ---------
     Cash at end of year .................................   $   392,796      1,081,780      1,533,513
                                                             ===========      =========      =========

</TABLE>

                                       49
<PAGE>

NOTE 16.  QUARTERLY OPERATING RESULTS (UNAUDITED)

     The  following  is  a  summary  of  the  unaudited  condensed  consolidated
quarterly  operating  results of FLAG for the years ended  December 31, 1998 and
1997 (amounts in thousands):

<TABLE>
<CAPTION>
                                                1998                                      1997
                                                ----                                      ----
                                            Quarter ended                             Quarter ended
                                Dec. 31   Sept. 30    June 30  March 31   Dec. 31  Sept. 30   June 30   March 31
                                -------   --------    -------  --------   -------  --------   -------   --------
<S>                             <C>         <C>        <C>       <C>       <C>        <C>       <C>       <C>  
Interest income .............   $11,109     11,189     11,129    10,844    11,030     9,787     8,998     8,914
Interest expense ............     5,488      5,600      5,486     5,322     5,183     4,857     4,368     4,216
                                  -----      -----      -----     -----     -----     -----     -----     -----
Net interest income .........     5,621      5,589      5,643     5,522     5,847     4,930     4,630     4,698
Provision for loan losses ...     2,621        252        257       252       684       259       344       309
                                  -----        ---        ---       ---       ---       ---       ---       ---
Net interest income after
  provision for loan losses .     3,000      5,337      5,386     5,270     5,163     4,671     4,286     4,389
Noninterest income ..........     1,910      1,724      1,728     2,386     1,553     1,708     1,258     1,625
Noninterest expense .........     6,758      6,754      5,447     5,519     5,808     4,594     4,195     3,926
                                  -----      -----      -----     -----     -----     -----     -----     -----
Earnings (loss) before
  income taxes ..............    (1,848)       307      1,667     2,137       908     1,785     1,349     2,088
Provision (benefit) for
  income taxes ..............      (758)       (46)       453       654       294       497       377       652
                                   ----        ---        ---       ---       ---       ---       ---       ---
Net earnings (loss) .........   $(1,090)       353      1,214     1,483       614     1,288       972     1,436
                                =======        ===      =====     =====       ===     =====       ===     =====
Net earnings (loss) per share   $  (.17)       .05        .19       .23       .09       .20       .15       .22
                                =======        ===        ===       ===       ===       ===       ===       ===
Weighted average
  shares outstanding ........     6,560      6,556      6,552     6,533     6,524     6,525     6,517     6,516

</TABLE>

                                       50
<PAGE>

NOTE 17.  FAIR  VALUE OF FINANCIAL INSTRUMENTS

     FLAG is  required  to  disclose  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 FLAG'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 FLAG or its
subsidiary,  but rather a  good-faith  estimate  of the  increase or decrease in
value of  financial  instruments  held by FLAG since  purchase,  origination  or
issuance.

     Cash and Cash Equivalents and Interest-Bearing Deposits

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

     Securities Held-to-Maturity and Securities Available-for-Sale

     Fair    values   for    securities    held-to-maturity    and    securities
available-for-sale are based on quoted market prices.

     Other Investments

     The carrying value of other investments approximates fair value.

     Loans and Mortgage Loans Held for Sale

     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.

     Cash Surrender Value of Life Insurance

     The carrying value of cash surrender  value of life insurance  approximates
fair value.

     Deposits

     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 the Federal Home Loan Bank

     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.

     Commitments to Originate First Mortgage Loans, Commitments to Extend Credit
and Standby Letters of Credit

     Because  commitments  to originate  first  mortgage  loans,  commitments to
extend credit and standby letters of credit are made using variable  rates,  the
contract value is a reasonable estimate of fair value.

                                       51
<PAGE>

NOTE 17.  FAUR VALUE OF FINANCIAL INSTRUMENTS, continued

Limitation

     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 FLAG's entire  holdings of a particular  financial
instrument.  Because  no  market  exists  for a  significant  portion  of FLAG'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.

     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  the  mortgage  banking  operation,
deferred  income  taxes,  premises  and  equipment  and  purchased  core deposit
intangible. 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  FLAG's   financial
instruments at December 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                     1998                     1997
                                                     ----                     ----
                                         Carrying      Estimated       Carrying      Estimated
                                          Amount       Fair Value       Amount       Fair Value
                                          ------       ----------       ------       ----------
Assets:
<S>                                   <C>              <C>            <C>            <C>       
     Cash and cash equivalents ....   $ 48,576,090     48,576,090     29,072,230     29,072,230
     Interest-bearing deposits ....      1,695,167      1,695,167      3,168,353      3,168,353
     Investment securities ........     76,526,307     76,652,565     89,092,385     89,150,550
     Other investments ............      6,382,443      6,382,443      5,933,543      5,933,543
     Mortgage loans held for sale .      5,941,739      5,941,739      3,841,678      3,841,678
     Loans, net ...................    377,359,122    378,406,348    348,773,865    350,283,093
     Mortgage servicing rights ....      1,683,291      1,683,291      1,174,292      1,174,292
     Cash surrender value of
      life insurance ..............      4,241,531      4,241,531      3,864,612      3,864,612
Liabilities:
     Deposits .....................    446,798,325    448,387,104    412,454,138    413,865,828
     Federal funds purchased ......           --             --          170,000        170,000
     Advances from the Federal
      Home Loan Bank ..............     48,398,478     47,118,704     47,798,059     47,087,598
Unrecognized financial instruments:
     Commitments to extend credit .     75,617,000     75,617,000     59,594,000     59,594,000
     Standby letters of credit ....        767,000        767,000      1,486,000      1,486,000

</TABLE>

     NOTE 18.  SUBSEQUENTEVENTS On February 23, 1999,  FLAGannounced the signing
of a letter of intent to merge with First Hogansville  Bankshares,  Inc. ("FHB")
and on March 12, 1999,  FLAGannounced the signing of a letter of intent to merge
with Thomaston Federal Savings Bank ("TFSB").  FHB is a one bank holding company
based in Hogansville,  Georgia with assets totaling  approximately  $31 million.
TFSB is a thrift based in Thomaston,  Georgia with assets totaling approximately
$53 million.  These mergers are subject to the approval of applicable regulatory
authorities and  shareholders and are expected to be accounted for as pooling of
interests. FLAG is expected to issue approximately 1.7 million additional shares
of its common stock in connection with these mergers.

                                       52
<PAGE>

Corporate Information 

Corporate Headquarters
FLAG Financial Corporation
101 North Greenwood Street
LaGrange, Georgia  30240
(706) 845-5001

Corporate Mailing Address
FLAG Financial Corporation
P.O. Box 3007
LaGrange, Georgia  30241

Notice of 1999 Annual Meeting
The Annual Meeting of Shareholders of FLAG Financial Corporation will be held on
Wednesday, April 21, 1999 at 2:00 p.m. at the Corporate Headquarters,  101 North
Greenwood Street, LaGrange, Georgia.

Independent Auditors
Porter Keadle Moore, LLP
235 Peachtree Street
Suite 1800
Atlanta, Georgia  30303

Legal Counsel
Powell, Goldstein, Frazer 
& Murphy LLP
Sixteenth Floor
191 Peachtree Street, N.E.
Atlanta, Georgia  30303

Shareholder  Services 
Shareholders who desire to change the name,  address or ownership of FLAG Common
Stock, to report lost certificates or to consolidate accounts should contact the
Transfer Agent:

Reliance Trust Company
Investor Services
3384 Peachtree Road, Suite 900
Atlanta, Georgia  30326
(770) 938-6400
(800) 241-5568

Stock Exchange Listing
FLAG Financial Corporation 
Common Stock is traded and 
quoted on The Nasdaq Stock Market under the symbol "FLAG."

Shareholders of Record
FLAG Financial  Corporation had 6,560,004 shares of Common Stock outstanding and
858 shareholders of record as of December 31, 1998.

Investor Relations
Shareholders,  analysts, investors, the news media and others desiring a copy of
the FLAG Financial  Corporation 1998 Annual Report or 1998 Annual Report on Form
10-K  as  filed  with  the  Securities  and  Exchange  Commission,  supplemental
quarterly  information or general  information about the Company may obtain such
information without charge by contacting:

FLAG Financial Corporation
Investor Relations Department
101 North Greenwood Street
LaGrange, Georgia  30240
(706) 845-5140

Market Makers
Herzog, Heine, Geduld, Inc.
525 Washington Boulevard
Newport Tower
10th Floor
Jersey City, New Jersey  07310

Interstate/Johnson Lane Corporation
121 West Trade Street
Interstate Tower - 12th Floor
Charlotte, North Carolina  28789

Morgan Keegan & Company, Inc.
50 Front Street
15th Floor
Memphis, Tennessee  38103

The Robinson-Humphrey 
Company, Inc.
3333 Peachtree Road, N.E.
11th Floor
Atlanta, Georgia  30326

Sterne, Agee & Leach, Inc.
950 East Paces Ferry Road
Suite 1580
Atlanta, Georgia  30326

Dividend Payment Dates
Subject to approval of the Board of Directors,  quarterly  dividend payments are
made on the first business day of January, April, July and October.

Dividend Reinvestment and Stock Purchase Plan
FLAG Financial  Corporation  offers a Dividend  Reinvestment  Plan for automatic
reinvestment of dividends in the Common Stock of the Company.  FLAG Common Stock
may also be purchased with optional cash payments. In order to purchase stock by
making  optional cash payments,  shareholders  must be  participants in the FLAG
Dividend Reinvestment Plan.

For more  information  concerning this convenient and economical way to purchase
additional  Common  Stock and to receive a brochure  describing  the plan and an
authorization card, contact:

FLAG Financial Corporation
Investor Relations Department
101 North Greenwood Street
LaGrange, Georgia  30240
(706) 845-5140

Stock Prices and Dividends

The  following  table sets forth the high and low  closing  sales  prices of the
Company's Common Stock, as reported by Nasdaq, for each quarter for the past two
fiscal  years and the cash  dividends  per share of the Common Stock paid by the
Company during such fiscal quarters.

                                               Cash
                                             Dividends
Quarter Ended           High         Low     Per Share
-------------           ----         ---     ---------
March 31, 1997          $8.67       $6.83     $0.04
June 30, 1997           $9.75       $7.50     $0.03  
September 30, 1997      $11.00      $9.33     $0.03          
December 31, 1997       $14.33     $11.00     $0.03

March 31, 1998          $14.33     $11.92     $0.04                 
June 30, 1998           $19.00     $12.67     $0.05          
September 30, 1998      $19.38     $12.75     $0.05
December 31, 1998       $14.63     $10.25     $0.06

High  and low  closing  sales  prices  and  cash  dividends  per  share  reflect
adjustment for the 3-for-2 stock split paid June 3, 1998.

                               Inside Back Cover

<PAGE>



101 North Greenwood Street
LaGrange, Georgia  30240
(706) 845-5001
Fax (706) 845-5156


                                   Back Cover