1997 ANNUAL REPORT

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

GENERAL
-------

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

     Because the primary  activity of FLAG is the ownership and operation of the
Bank,  FLAG's  financial  performance  has  been  determined  primarily  by  the
operation of the Bank. Accordingly,  the discussion below relates principally to
the  operation of the Bank. As used herein,  the term "FLAG"  includes FLAG and,
where  appropriate,  the Bank.  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.


CAPITAL ISSUES
--------------

     In October 1995,  FLAG  purchased and retired  128,100 shares of its common
stock in the open market for $12.75 per share.  During  1997 and 1996,  FLAG did
not purchase or issue any shares of its common stock.


PENDING ACQUISITIONS
--------------------

     On October 28, 1997,  the Company  announced the signing of an agreement to
merge with Middle Georgia  Bankshares,  Inc. ("MGB"),  a $120 million asset bank
holding company based in Unadilla, Georgia. The merger agreement provides, among
other things,  for the merger of MGB with and into FLAG and the exchange of each
share  of MGB  common  stock  for  15.75  shares  of FLAG  common  stock.  Total
outstanding  shares  of FLAG  will  increase  from  approximately  2,037,000  to
approximately 3,049,000 at closing.

     Additionally,  on February  12,  1998,  the Company  signed an agreement to
merge with Three  Rivers  Bancshares,  Inc.  ("TRB"),  a $34 million  asset bank
holding company based in Milan,  Georgia.  The merger agreement provides,  among
other things,  for the merger of TRB with and into FLAG and the exchange of each
share of TRB common stock for 48 shares of FLAG common stock.  Total outstanding
shares of the Company will increase by approximately  398,000  additional shares
at closing.

YEAR 2000 ISSUES
----------------

     FLAG is aware of the issues  relating to its  computer  systems as the Year
2000 approaches. 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. The issue is  whether  computer  systems  will  properly  recognize
date-sensitive  information  when the year changes to 2000.  Systems that do not
properly  recognize such  information  could generate  erroneous data or cause a
system to fail.

     FLAG has  appointed  a Year  2000  committee  comprised  of  three  outside
directors and several key senior  executives.  The committee  meets on a monthly
basis to provide  direction  and monitor  the  progress  being made  relating to
FLAG's Year 2000 efforts.

     FLAG managers and supervisors have identified hardware and software used in
their area of responsibility impacted by the Year 2000 issue and have identified
vendors whom FLAG relies upon to provide financial information or services which
may be  impacted  by the Year 2000  issue.  The  Company  has  conducted  a risk
assessment for each product,  and has categorized the risks associated with each
product as  "catastrophic,"  "serious,"  or  "minimal."  FLAG's  overall risk is
considered  to be serious to minimal.  A separate  plan and action date has been
established  for  hardware/software  that  are  considered  critical  to  FLAG's
on-going operations. The next steps in the process will be to develop a test for
the  hardware/software,  to test the  hardware/software  as it becomes Year 2000
compliant, and to document those tests accordingly.

     FLAG plans to convert  from its current NCR Starcom  software  system to an
application system provided by Phoenix  International Ltd., Inc.  ("Phoenix") in
August  1998.  Phoenix  has  represented  in their  contract  with FLAG that the
Phoenix application system is Year 2000 compliant. FLAG will test the system for
Year 2000 Compliance prior to conversion.  The Phoenix  application  system will
include  many  critical   applications,   including  the  general  ledger,  loan
application  system,  deposit  application  system, and accounts  receivable and
payable.  The third party application  system used to process FLAG's payroll has
already been certified as Year 2000 Compliant.

     FLAG is in the initial stages of determining the impact of the Year 2000 on
its larger loan customers.  For those loan customers with a significant  risk to
their  on-going  operations  arising from possible  Year 2000 issues,  FLAG will
monitor and document their Year 2000 compliance  efforts.  The Company is in the
process  of  developing  a  questionnaire  for its  lending  officers  to use in
assessing  the Year 2000 risk for larger loan  customers.  FLAG plans to conduct

                                       5
<PAGE>

Year 2000  seminars  for its  commercial  customers.  FLAG also intends to add a
provision to its standard loan agreement  relating to the  borrower's  Year 2000
compliance.

NET INTEREST INCOME
-------------------

     Net interest income (the  difference  between the interest earned on assets
and the interest paid on deposits and other interest-bearing  liabiities) 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  decreased 2.0% in 1997,  from $8.7 million in 1996 to
$8.5 million in 1997.  Net interest  income  increased 6.0% in 1996  compared to
1995.

     Total  interest  income has  remained  steady  over the past three years at
approximately $18 million. Interest expense decreased approximately 7.0% in 1996
compared to 1995, but increased approximately 2.0% in 1997 compared to 1996. The
interest expense  variances from year to year have been primarily  influenced by
the average balances of interest bearing liabilities (see Tables 1 & 2).

<TABLE>

Table 1   -   Consolidated Average Balances, Interest, and Rates
(dollars in thousands)
<CAPTION>
                                                             Years Ended December 31,
                                    1997                                 1996                             1995
------------------------------------------------------------------------------------------------------------------
                                     Interest Weighted             Interest Weighted           Interest Weighted
                            Average   Income/  Average    Average   Income/  Average   Average  Income/   Average
                            Balance   Expense   Rate      Balance   Expense   Rate     Balance  Expense   Rate

ASSETS
Interest-earning assets:
<S>                         <C>       <C>        <C>     <C>       <C>        <C>      <C>       <C>       <C>
  Loans..................   $155,241  $14,706    9.47%   $151,084  $14,589    9.66%    $146,144  $13,809   9.45%
  Investment securities
   and FHLB stock........     48,002    3,033    6.32      51,256    3,156    6.16       65,246    4,162   6.38
  Interest-bearing deposits
    in other Banks.......      2,515      158    6.28       1,692       90    5.32        2,959      138   4.66
  Federal funds sold.....        667       32    4.80       1,342       77    5.73          333       18   5.41
----------------------------------------------------------------------------------------------------------------
Total interest-
     earning assets......   $206,425  $17,929    8.68%   $205,375  $17,912    8.72%    $214,682  $18,127   8.44%
Other assets.............     25,287                       19,978                        17,013
    Total assets.........   $231,712                     $225,353                      $231,695
                            ========                    =========                      ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
  Interest-bearing demand
     deposits............   $ 41,695   $1,043    2.50%    $38,571   $1,078    2.79%   $  33,425   $1,069   3.20%
  Savings deposits ......     16,233      395    2.43      16,937      408    2.41       16,352      404   2.47
  Other time deposits....    113,896    6,574    5.77     114,371    6,525    5.71      114,793    6,551   5.71
  Federal Funds purchased      1,002       68    6.79         207       12    5.80            -        -      -
  FHLB advances..........     23,086    1,307    5.66      21,531    1,168    5.42       31,962    1,862   5.83
                            --------    -----    ----      ------    -----    ----       ------    -----   ----
     Total interest-
      bearing liabilities   $195,912   $9,387    4.79%   $191,617   $9,191    4.80%    $196,532   $9,886   5.03%
Noninterest bearing
     demand deposits.....      9,743                       11,063                        10,066
Other liabilities........      4,770                        2,490                         4,380
Stockholders' equity.....     21,287                       20,183                        20,717
     Total liabilities and
      stockholders' equity   $231,712                    $225,353                      $231,695
                             ========                    ========                      ========
Net interest income......              $8,542                       $8,721                        $8,241
                                       ======                       ======                        ======
Interest rate spread.....                        3.89%                        3.92%                        3.41%
Net interest margin......                        4.14%                        4.25%                        3.84%
Interest-earning assets/
 interest-bearing liabilities                     105%                         107%                         109%
</TABLE>


                                       6
<PAGE>

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,  1997,  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  $206.4  million in 1997,  versus  $205.4
million in 1996 and $214.7 million in 1995. Average interest-bearing liabilities
were $195.9 million in 1997, versus $191.6 million in 1996 and $196.5 million in
1995. The interest rate spread was 3.89% in 1997, versus 3.92% in 1996 and 3.41%
in 1995,  while the net  interest  margin  was 4.14% in 1997,  4.25% in 1996 and
3.84% in 1995.

     Table 2 shows the change in net interest  income from 1996 to 1997 and from
1995 to 1996 due to changes in volumes and rates.

Table 2 - Rate/Volume Variance Analysis
(dollars in thousands)
                                              Years Ended December 31,
                                 1997 Compared to 1996   1996 Compared to 1995
                              ------------------------  ------------------------

                                Rate/             Net             Rate/     Net
                               Volume   Yield   Change   Volume   Yield   Change
                               ------   -----   ------   ------   -----   ------
Interest income:
 Loans........................  $394   $(277)    $117    $477     $303     $780
 Investment securities
   and FHLB stock ............  (206)     83     (123)   (861)    (145)  (1,006)
 Interest-bearing deposits in
   other banks................   52       16       68     (67)      19      (48)
 Federal funds sold...........  (32)     (13)     (45)     58        1       59
                               -----   ------  ------   ------    -----   ------
    Total interest income.....  $207   $(190)  $   17   $(394)    $179    $(215)
                                ----   ------  ------   ------    ----    ------
Interest expense:
 Interest bearing demand
   deposits. ................. $  78  $(113)  $  (35)    $144   $(135)     $ 9
 Savings deposits.............   (17)     4      (13)      14     (10)       4
 Other time deposits..........   (27)    76       49      (24)     (2)     (26)
 Federal funds purchased......    54      2       56       12       -       12
 FHLB advances................    88     51      139     (566)   (128)    (694)
                                ----  -----    -----     ----- -------    -----
    Total interest expense.... $ 176  $  20   $  196   $ (420)  $(275)  $ (695)
                               -----  -----   ------   -------  ------    -----
Net interest income........... $  32  $(211)  $ (179)  $   26  $  454    $ 480
                               =====  ======  ======   ======  ======    =====

NONINTEREST INCOME
------------------

     Other income  increased to $3.7 in 1997 from $3.3 in 1996 and $2.6 in 1995.
The increases in other income in 1997 and 1996 resulted from increased  gains on
the sale of loans and  increased  fee  income  related  to  transaction  deposit
accounts.

     Gain on sales of loans  increased  to $659,000  in 1997 versus  $588,000 in
1996  and  $56,000  in  1995.  The  increase  in gain on  sales of loans in 1997
primarily resulted from gains on the sale of SBA loans. The increase in gains on
sale of loans in 1996 resulted from increased  mortgage banking activity in 1996
compared to 1995.

     Fees and service charges on deposits increased to $1.8 million in 1997 from
$1.6 million in 1996 and $1.4 million in 1995.


NONINTEREST EXPENSES
--------------------

     Other  expenses were $8.6 million in 1997,  versus $9.0 million in 1996 and
$7.1 million in 1995. The increase in other operating expenses from 1995 to 1996
and the decrease in those expenses from 1996 to 1997 was largely attributable to
the one-time SAIF assessment of $1,150,000 which occurred in 1996.

     Salary and  employee  benefits  increased to $4.1 million in 1997 from $3.5
million in 1996 and $3.3 million in 1995.  This  increase in 1997 was  primarily
due to normal  increases  in  compensation  levels  as well as to the  hiring of
several key individuals in mid- and late-1996 and in 1997.

     Occupancy  expenses  increased to $1.4 million in 1997 from $1.2 million in
1996 and $1.0 million in 1995, while other operating  expenses were $3.1 million

                                       7
<PAGE>

in 1997,  versus $4.4 million in 1996 and $2.7 million in 1995.  The increase in
1997 occupancy  expense was the result of a combination  in higher  depreciation
expenses 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.  In addition to the SAIF
special  assessment,  1996  operating  expenses were higher than 1995 because of
expenses  related to the  start-up of a new leasing  operation  and research and
attorney fees related to the Bennett  Funding Group,  Inc.  ("Bennett  Funding")
bankruptcy.


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  increased $7.2 million to $51.7 million at December
31, 1997 from $44.5  million at December 31, 1996.  At December 31, 1997,  $49.1
million,  approximately 95% of investment securities outstanding, was classified
as  available-for-sale,  while the remainder was classified as held-to-maturity.
The overall  increase in the amount of investments  was due to the fact that new
funds  invested  exceeded  calls,  sales,  normal  paydowns and  prepayments  of
securities.  At December 31, 1997, Gross unrealized gains in the total portfolio
amounted to $378,000 and gross unrealized losses amounted to $559,000.

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

Table 3 - Carrying Value of Investments
     (dollars in thousands)

                                                   December 31,
                                        1997           1996           1995
--------------------------------------------------------------------------
Securities held-to-maturity:
   Mortgage-backed securities ...    $   103        $  118       $  131
   Collateralized mortgage
     obligations ................      2,505         3,092        3,766
                                     ------------------------------------
                                       2,608         3,210        3,897
                                     -------------------------------------
Securities Available-for-sale:
  U.S. Treasuries and agencies ..      9,028         3,993        9,244
  Corporate debt securities......      1,000           990            -
  State and municipal............          -           115            -
  Mortgage-backed securities ....     21,788        17,544       17,865
  Collateralized mortgage
    obligations .................     15,854        16,705       22,343
  Equity securities..............      1,413         1,959        5,311
                                   --------------------------------------
                                      49,083        41,306       54,763
                                   --------------------------------------
                 Total...........    $51,691       $44,516      $58,660
                                   ======================================

CARRYING VALUE OF INVESTMENTS
-----------------------------

     The December 31, 1997,  market value of securities  held to maturity,  as a
percentage of amortized cost was 98.5%,  up from 96.9% at December 31, 1996. 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 $10.6 million in 1997 to
$167.8 million from $157.2  million at December 31, 1996.  This increase was the
result of growth in real estate  construction  loans,  real estate mortgages and
lease financings.  As shown in Table 4, real estate construction loans increased
approximately $2.4 million,  real estate mortgages increased  approximately $9.4
million and lease  financings  increased  by  approximately  $1.7  million.  The
decrease in commercial,  financial, and agricultural loans and installment loans
to  individuals  primarily  resulted from the normal  paydown and  prepayment of
these loans.



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 $574,000 in 1997, $3,484,000 in 1996, and $630,000
in 1995.  The large  increase in the provision for loan losses from 1995 to 1996
is directly attributable to Bennett Funding.  Excluding the provision associated
with  Bennett  Funding,  the 1996  provision  for loan  losses  would  have been
$506,000. 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.

     Historically,  the loan portfolio has consisted  primarily of loans secured
by one-to-four  family residential  properties,  and actual losses have not been
significant. The Bank also provides other services and loan products to meet the
growing  financial  needs  of  FLAG's  communities,  including  consumer  loans,
commercial loans, and commercial real estate loans.  Because these loans present

                                       8
<PAGE>

a somewhat  higher  credit risk than loans  secured by  residential  properties,
management has significantly increased the allowance for loan losses compared to
historic levels to reflect the increased potential for future losses.

<TABLE>

Table 4 - Loan Portfolio
(dollars in thousands)
<CAPTION>
                                                                           December 31,
                                          1997             1996              1995                 1994            1993
                                     ----------------------------------------------------------------------------------------
                                             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/agricultural   $9,924    5.9%   $10,209     6.5%   $10,262     6.9%     $5,707    4.0%    $2,497   1.8%
Real estate construction.......     11,590    6.9      9,149     5.8      4,686     3.1       4,163    2.9      3,886   2.9
Real estate mortgage...........    128,539   76.6    119,178    75.8    112,694    75.6     116,362   81.6    114,871  84.6
Installment loans to individuals     8,441    5.0     11,094     7.1     14,732     9.9       8,066    5.7      7,914   5.8
Lease financings...............      9,304    5.5      7,572     4.8      6,654     4.5       8,354    5.9      6,553   4.8
                                  ------------------------------------------------------------------------------------------
     Total loans...............    167,798  100.0%   157,202   100.0%   149,028   100.0%    142,652  100.0%   135,721 100.0%
Less:
Deferred loan fees and discounts       398              (219)              (287)               (309)             (330)
Allowance for loan losses......     (2,254)           (4,339)            (1,339)             (1,244)             (882)
                                   -------            -------            -------             -------          --------
     Total net loans...........   $165,942           $152,644           $147,402            $141,099          $134,509
                                  ========           ========           ========            ========          ========
</TABLE>

Table 5 represents  the  expected  maturities  for  commercial,  financial,  and
agricultural loans and real estate  construction loans at December 31, 1997. The
table also  presents  the rate  structure  for these loans that mature after one
year.

<TABLE>

Table 5  - Loan Portfolio Maturity
(dollars in thousands)
<CAPTION>
                                                                            Rate Structure for Loans
                                                Maturity                    Maturity 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>
Commercial, financial, and     <C>       <C>          <C>      <C>          <C>           <C>
   agricultural...............  $1,577    $3,188       $5,159   $9,924       $4,758        $3,589
Real estate - construction....  10,674       916            -   11,590            -           916
                              --------------------------------------------------------------------
                               $12,251    $4,104       $5,159  $21,514       $4,758        $4,505
                              ====================================================================
</TABLE>

     As shown in Table 6, the year-end  allowance  for loan losses  decreased to
$2,254,000  at December  31, 1997,  from  $4,339,000  at December 31, 1996.  The
allowance for loan losses was  $1,339,000  at December 31, 1995.  The decline in
the allowance  for losses in 1997 was primarily due to a $2,465,000  charge-offs
associated with the Bennett Funding assets. Total charge-offs in 1997, including
those related to Bennett Funding, were $2,713,000, up from $521,000 in 1996, and
$573,000 in 1995. If Bennett  Funding  assets had not been  charged-off to their
net realizable value, 1997 charge-offs would have been  approximately  $248,000.
The allowance for loan losses was 1.36% of net outstanding loans at December 31,
1997,  versus 2.84% of net outstanding  loans at December 31, 1996, and 0.91% of
net outstanding loans at December 31, 1995.

     Management  believes  that the  allowance for loan losses was 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>


ASSET QUALITY
-------------

     At December 31, 1997,  non-performing  assets  (non-accrual loans and other
real estate  owned)  totaled $5.0  million  compared to $7.2 million at year-end
1996.  The  decrease in 1997 is  primarily  due to the  write-off  of the amount
determined to be  uncollectible  from Bennett Funding . As was discussed in last
year's  annual  report,  Bennett  Funding was an  equipment  leasing and finance
company  based  in  Syracuse,  New  York.  For  several  years,  FLAG  Financial
Corporation,  along  with many  other  financial  institutions  and  individuals
throughout the United States,  invested in office  equipment leases sold through
Bennett  Funding.  During 1996,  Bennett Funding filed for Chapter 11 bankruptcy
protection,  and  certain  officers of Bennett  Funding  were  investigated  for

                                       9
<PAGE>

possible wrongdoing,  including but not limited to criminal securities fraud. As
a result of the Chapter 11 bankruptcy  filing,  the collection of cash flows and
the values associated with these leases became less certain, and to reflect this
possible loss in value, FLAG established a specific reserve for possible Bennett
Funding  losses  of  approximately  $3.0  million.  In  addition,  it  was  also
determined  that the $4.5 million in equipment  leases  should be  classified as
"Doubtful," a classification  which generally  requires reserves equal to 50% of
the carrying value of the asset.

Table 6 - Analysis of the Allowance for Loan Losses
(dollars in thousands)
<CAPTION>
                                                     Years Ended December 31,
                                         ---------------------------------------------
                                           1997      1996      1995    1994     1993
                                         ---------------------------------------------
<S>                                      <C>       <C>      <C>      <C>      <C>
Average net loans........................$155,043  151,084  $146,144 $141,640 $139,008
Allowance for loan losses, beginning
  of the period..........................   4,339    1,339     1,244      882      683
Charge-offs for the period:
  Commercial/financial/agricultural......      46        -         -        -        -
  Real estate construction loans ........       -       22        23        2        -
  Real estate mortgage loans.............     105      412       432       35      245
  Installment loans to individuals.......      97       87       118       88      227
  Lease financings.......................   2,465        -         -        -        -
                                         ---------------------------------------------
Total charge-offs........................$  2,713  $   521   $   573  $   125  $   472
                                         ---------------------------------------------
Recoveries for the period:
  Commercial/financial/agricultural......$      1  $     -   $     -  $     -  $     -
  Real estate construction loans.........       -        -         -        1        -
  Real estate mortgage loans.............       5        -         -        -        5
  Installment loans to individuals.......      48       37        38       46       46
  Lease financings.......................       -        -         -        -        -
                                         ---------------------------------------------
     Total recoveries....................$     54  $    37   $    38  $    47  $    51
                                         ---------------------------------------------
       Net charge-offs for the period....   2,659      484       535       78      421
Provision for loan losses................     574    3,484       630      440      620
                                         ---------------------------------------------
Allowance for loan losses, end of period  $ 2,254  $ 4,339   $ 1,339   $1,244   $  882
                                          ============================================
Ratio of allowance for loan losses to
 total net loans outstanding ............   1.36%    2.84%     0.91%    0.88%    0.66%
Ratio of net charge-offs during the
 period to average net loans outstanding
 during the period ......................   1.72%    0.32%     0.37%    0.06%    0.30%
</TABLE>

     In 1997,  management  agreed to a  settlement  with the  Trustee of Bennett
Funding.  In general,  the  agreement  provides  for a sharing of the  cashflows
generated  by  the  leases.   Subsequent   to  year-end   1997,   FLAG  received
approximately $2.0 million from the Trustee.  According to the settlement,  FLAG
will be receiving monthly remittances of cash collected by the Trustee until the
agreement is satisfied. Management believes that all of the remaining unreserved
balance of these leases will be recovered.

     In 1997, the Bennett Funding  receivables were charged-off by approximately
$2.5 million against the 1996 established reserve.

     There were no commitments to lend additional  funds on nonaccrual  loans at
December 31, 1997. Table 7 summarizes the non-performing  assets for each of the
last five years.


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,  1997.  At December 31,
1997, management was unaware of any known trends,  events, or uncertainties that
will have, or that are reasonably likely to have a material effect on the Bank's
or FLAG's liquidity, capital resources, or operations.


DEPOSITS
--------

     Total deposits remained essentially  unchanged during 1997, totaling $180.7
million at December 31, 1997,  versus $180.7  million at December 31, 1996.  The
maturities  of time  deposits of $100,000 or more issued by the Bank at December
31, 1997, are summarized in Table 8.

     At December 31, 1997,  the Bank was a shareholder  in the Federal Home Loan
Bank of Atlanta  ("FHLBA").  Through this  affiliation,  advances totaling $41.6
million  were  outstanding  at rates  competitive  with  time  deposits  of like

                                       10
<PAGE>

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 7 - Risk Elements
(dollars in thousands)
                                                       December 31,
                                          --------------------------------------
                                           1997    1996    1995    1994    1993
-------------------------------------------------------------------------------
Loans on nonaccrual...................... $4,578  $6,688  $1,394  $2,751  $3,280
Loans past due 90 days and still accruing      -       -       -       -       -
Other real estate owned..................    425     525     801     244     405
Total non-performing assets.............. $5,003  $7,213  $2,195  $2,995  $3,685
                                          ======================================
Total non-performing loans as a
     percentage of net loans.............   2.76%  4.38%   0.95%   1.95%  2.44%


Table 8 - Maturities of Time Deposits Over $100,000
(dollars in thousands)

    Three months or less..................          $14,164
    Over three months through six months..            5,937
    Over six months through twelve months.            9,472
    Over twelve months....................            3,904
                                                   --------
                                                    $33,477
                                                    =======

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,  1997,  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,  1997,  the assets  subject to rate  changes  within one year  exceeded  its
liabilities  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 an increase in net
interest  income if market  interest  rates rise and a decrease in net  interest
income if market interest rates decline.

     Management  carefully  measures and monitors  interest rate sensitivity and
believes that its operating  strategies offer  protection  against interest rate
risk. As required by  regulations of the Office of Thrift  Supervision  ("OTS"),
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 105% in 1997,
107% in 1996, and 109% in 1995.

Table 10 represents the expected  maturity of the total invesment  securities by
maturity date and average  yields based on amortized  cost at December 31, 1997.
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 Bank is  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 Bank's
average  liquidity  in  December  1997 was 7.88% of the  aggregate  of the prior
month's daily average deposits and short-term  borrowings.  The Bank's liquidity
was 9.68% at December 31, 1997, and 7.75% at December 31, 1996.

     The Bank's 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 Bank.  Advances from the FHLBA
were $41,637,000 and $17,371,000, respectively, at December 31, 1997 and 1996.

     Subject to certain limitations, the Bank may borrow funds from the FHLBA in
the form of advances. Credit availability from the FHLBA to the Bank is based on
the Bank's financial and operating condition. Credit availability from the FHLBA
to the Bank was approximately $58.0 million at December 31, 1997. In addition to
creditworthiness,  the Bank must own a minimum  amount of FHLBA  capital  stock.
This minimum is 5.0% of outstanding FHLBA advances. Unused borrowing capacity at
December  31, 1997,  was $16.0  million.  The Bank uses FHLBA  advances for both

                                       11
<PAGE>

long-term and short-term  liquidity needs. Other than normal banking operations,
the Bank has no long-term liquidity needs. The Bank has never been involved with
highly  leveraged  transactions  that  may  cause  unusual  potential  long-term
liquidity needs.

     The  Consolidated  Statements  of Cash  Flows  for the  three  years  ended
December 31, 1997, detail FLAG's sources and uses of funds for those periods.

<TABLE>
Table 9 - Interest Rate Sensitivity Analysis
(dollars in thousands)
<CAPTION>
                                                         December 31, 1997
                                                       Maturing or Repricing in
                                    -----------------------------------------------------
                                              Over 1 Year Over 3 Years
                                     One Year   Through    Through     Over       Over
                                      or Less   3 Years    5 Years    5 Years     Total
                                     ---------  --------  ---------   -------     -----
Interest-earning assets:
 <S>                                   <C>        <C>       <C>        <C>        <C>
 Adjustable rate mortgages.......... $ 61,930   $      -  $      -   $      -   $ 61,930
 Fixed rate mortgages...............   21,061     11,290    10,448     23,810     66,609
 Other loans........................   19,971      7,486     9,939      1,863     39,259
 Investment securities..............   34,798      2,998     1,971     11,924     51,691
 Federal Home Loan Bank stock.......    2,082          -         -          -      2,082
 Interest-bearing deposits
   in other banks...................    3,168          -         -          -      3,168
                                    ----------------------------------------------------
     Total interest-earning assets.. $143,010    $21,774   $22,358    $37,597   $224,739
                                     ---------------------------------------------------
Interest-bearing liabilities:
 Fixed maturity deposits............ $ 86,422    $20,207   $ 3,576    $ 5,523   $115,728
 NOW and money market demand
    accounts........................   20,809      6,576     4,424      9,074     40,883
 Passbook accounts..................    8,508        648       592      5,331     15,079
 Federal funds purchased............       70          -         -          -         70
 FHLB advances......................   40,783        167       167        521     41,638
                                    ----------------------------------------------------
     Total interest-bearing
      liabilities .................. $156,592    $27,598    $8,759    $20,449   $213,398
                                    ----------------------------------------------------

Interest rate sensitivity gap.......$(13,582)  $ (5,824)   $13,599    $17,148  $  11,341
Cumulative interest rate
   sensitivity gap .................$(13,582)  $(19,406)   $(5,807)   $11,341          -
Cumulative interest rate
   sensitivity gap to total assets..   -5.48%     -7.83%    -2.34%       4.57%         -


</TABLE>

CAPITAL RESOURCES AND DIVIDENDS
-------------------------------

     Stockholders' equity at December 31, 1997, increased 8.0% from December 31,
1996. All of this growth  resulted from 1997 earnings.  Dividends of $692,577 or
$0.34 per share were  declared and paid in 1997,  compared to $0.33 per share in
1996.

     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 9.19% for 1997 and 8.96% for 1996.  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 Bank's actual capital levels.  The Bank exceeded all requirements
of a  "well-capitalized"  institution  at December 31, 1997.  The pending merger
(see "Pending Acquisitions") will not significantly reduce FLAG's capital ratios
and  management  will  continue   leveraging   capital  to  increase  return  on
stockholders' equity.

PROVISION FOR INCOME TAXES.
---------------------------

     The  provision  for income taxes was $998,000 in 1997,  versus a benefit of
$311,000 in 1996,  and a provision of $1,045,000 in 1995.  The effective  actual
tax rates for 1997,  1996,  and 1995 (tax  provision as a  percentage  of income
before  taxes)  were 32.9%,  (63.7%),  and 34.0%,  respectively.  The income tax
benefit  recorded in 1996  resulted from the net loss before income taxes during
the year.  Management deemed the items creating the 1996 loss to be temporary in
nature,   therefore   resulting  in  the  recording  of  a  deferred  tax  asset
representing   the  tax  effect  of  future  taxable  benefits  which  could  be
recognized.

                                       12
<PAGE>

<TABLE>
Table 10 - Expected Maturity of Investment Securities
(dollars in thousands)
<CAPTION>

                              -------------------------------------------------------------------------------
                                                  After One But     After Five But
                              Within One Year   Within Five Years  Within Ten Years   After Ten Years   Totals
                               Amount  Yield     Amount  Yield     Amount   Yield    Amount  Yield
                              -------------------------------------------------------------------------------
Securities held-to-maturity:
<S>                           <C>      <C>                                                             <C>
 Mortgage-backed securities ..$  103   6.98%        -     -            -      -          -      -      $  103
 ------------------------------------------------------------------------------------------------------------
 Collateralized mortgage
    obligations ..............     -      -          77   8.85%         -     -        2,428  7.22%     2,505
 ------------------------------------------------------------------------------------------------------------
                                 103   6.98%         77   8.85%         -     -        2,428  7.22%     2,608
 ------------------------------------------------------------------------------------------------------------
Securities available-for-sale:
 U.S. Treasury and agencies ..   998   5.44%      1,008   6.45%     7,022   6.78%          -     -      9,028
 ------------------------------------------------------------------------------------------------------------
 Corporate debt securities ...      -    -        1,000   6.86%         -      -           -     -      1,000
 ------------------------------------------------------------------------------------------------------------
 Equity securities............ 1,413  4.61%           -      -          -      -           -     -      1,413
 ------------------------------------------------------------------------------------------------------------
 Mortgage-backed securities .. 1,264  5.37%       1,882   6.55%     1,814   6.89%     16,828  6.69%    21,788
 ------------------------------------------------------------------------------------------------------------
 Collateralized mortgage
    obligations ..............     -     -        1,272   5.98%     3,858   5.53%     10,724  6.18%    15,854
 ------------------------------------------------------------------------------------------------------------
                               3,675  5.10%       5,162   6.45%    12,694   6.42%     27,552  6.49%    49,083
 ------------------------------------------------------------------------------------------------------------
 Total ...................... $3,778  5.15%      $5,239   6.49%   $12,694   6.42%    $29,980  6.55%   $51,691
 ------------------------------==============================================================================
</TABLE>

Table 11 - Equity Ratios
                                        Years Ended December 31,
                                          1997       1996      1995
-------------------------------------------------------------------
Return on average assets...........       0.88%     -0.08%     0.87%
Return on average equity...........       9.55%     -0.88%     9.78%
Dividend payout ratio..............      34.06%   -377.18%    29.56%
Average equity to average assets...       9.19%      8.96%     8.94%


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 June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting  Comprehensive  Income." SFAS No. 130 establishes  standards
for reporting and display of comprehensive income and its components  (revenues,
expenses,  gains,  and  losses)  in a  full  set  of  general-purpose  financial
statements.  SFAS No.  130  requires  that all  items  that are  required  to be
recognized under accounting  standards as components of comprehensive  income be
reported in a financial  statement that is displayed with the same prominence as
other  financial  statements.  SFAS No. 130 requires that companies (I) classify
items of other comprehensive income by their nature in a financial statement and
(ii) display the accumulated  balance of other  comprehensive  income separately
from retained  earnings and additional  paid-in capital in the equity section of
the statement of financial condition. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997.  Reclassification of financial statements for
earlier periods provided for comprehensive purposes is required.

     Also,  in June 1997,  the FASB  issued  SFAS No.  131,  "Disclosures  about
Segments of an Enterprise and Related  Information."  SFAS No. 131 specifies the
presentation  and disclosure of operating  segment  information  reported in the
annual  report  and  interim  reports  issued to  stockholders.  SFAS No. 131 is
effective  for fiscal  years  beginning  after  December  15,  1997.  Management
believes that the adoption of these  statements  will have no material impact on
FLAG's financial position, results of operation, or liquidity.



                                       13
<PAGE>



                           FLAG FINANCIAL CORPORATION
                        Consolidated Financial Statements
                        December 31, 1997, 1996 and 1995
                 (with Independent Accountants' Report thereon)


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


The Board of Directors
FLAG Financial Corporation
LaGrange, Georgia


We have audited the  accompanying  consolidated  balance sheet of FLAG Financial
Corporation  and subsidiary as of December 31, 1997, and the related  statements
of operations,  changes in stockholders' equity and cash flows for the year then
ended.  These financial  statements are the responsibility of FLAG's management.
Our responsibility is to express an opinion on these financial  statements based
on our audit. The consolidated  financial statements for the years 1996 and 1995
were audited by other  auditors whose report dated January 31, 1997 expressed an
unqualified opinion on those statements.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion,  the 1997 consolidated  financial  statements  referred to above
present  fairly,  in all  material  respects,  the  financial  position  of FLAG
Financial Corporation and subsidiary as of December 31, 1997, and the results of
their  operations  and their cash flows for the year then ended,  in  conformity
with generally accepted accounting principles.


/s/ Porter Keadle Moore, LLP


Atlanta, Georgia
January 22, 1998


         REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


The Board of Directors
FLAG Financial Corporation
LaGrange, Georgia


We have audited the  accompanying  consolidated  balance sheet of FLAG Financial
Corporation  and subsidiary as of December 31, 1996, and the related  statements
of  operations,  changes  in  stockholders'  equity and cash flows for the years
ended  December  31,  1996  and  1995.   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  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

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

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



Columbus, Georgia
January 31, 1997


                                       14
<PAGE>


                           FLAG FINANCIAL CORPORATION

                           Consolidated Balance Sheets
                           December 31, 1997 and 1996

                                     Assets
                                     ------
                                                        1997            1996
                                                        ----            ----
Cash and due from banks,
 including reserve requirements
 of $848,000 and $826,000 ......................   $  5,733,644       4,757,815
  Interest-bearing deposits ....................      3,168,353       1,327,108
  Investment securities available-for-sale .....     49,083,251      41,306,496
  Investment securities held-to-maturity
     (fair value of $2,569,143 in 1997
      and $3,108,722 in 1996) ..................      2,607,835       3,209,696
  Other investments ............................      3,556,900       3,370,900
  Mortgage loans held for sale .................      3,481,678       1,505,798
  Loans, net ...................................    165,942,045     152,644,436
  Premises and equipment, net ..................      6,449,328       5,417,962
  Mortgage servicing rights ....................      1,174,292       1,703,710
  Accrued interest receivable ..................      2,048,940       1,763,345
  Cash surrender value of life insurance .......      2,114,118       1,910,657
  Other assets .................................      2,624,894       3,039,958
                                                      ---------       ---------

                                                   $247,985,278     221,957,881
                                                   ============     ===========

                      Liabilities and Stockholders' Equity
                      ------------------------------------
Deposits:
  Demand .....................................     $  8,971,567      11,062,348
  Interest-bearing demand ....................       40,882,982      36,986,770
  Savings ....................................       15,079,485      16,514,007
  Time .......................................       82,251,315      83,028,319
  Time, over $100,000 ........................       33,476,509      33,100,319
                                                     ----------      ----------
           Total deposits ....................      180,661,858     180,691,763
                                                    -----------     -----------

Federal funds purchased ......................           70,000       2,210,000
Advances from Federal Home Loan Bank .........       41,637,494      17,370,833
Accrued interest payable .....................          371,066         323,783
Other liabilities ............................        3,182,280         850,308
                                                      ---------         -------
           Total liabilities .................      225,922,698     201,446,687
                                                    ===========     ===========

Stockholders' equity:
    Preferred stock (10,000,000 shares
      authorized; none issued and outstanding)            --              --
    Common stock ($1 par value, 20,000,000
      shares authorized, 2,036,990
      shares issued and outstanding) .........       2,036,990        2,036,990
    Additional paid-in capital ...............       8,037,630        8,037,630
    Retained earnings ........................      12,073,529       10,732,992
    Unrealized loss on securities
      available-for-sale, net of tax .........         (85,569)        (296,418)
                                                       -------         --------
             Total stockholders' equity ......      22,062,580       20,511,194
                                                    ----------       ----------
                                                 $ 247,985,278      221,957,881
                                                 =============      ===========

See accompanying notes to consolidated financial statements.

                                       15
<PAGE>

                           FLAG FINANCIAL CORPORATION

                      Consolidated Statements of Operations
              For the Years Ended December 31, 1997, 1996 and 1995

                                          1997            1996         1995
                                          ----            ----         ----
Interest income:
  Interest and fees on loans .......  $14,705,426    14,588,559    13,808,744
  Interest on investment securities.    3,033,292     3,156,090     4,161,455
  Interest-bearing deposits. .......      190,476       167,587       156,610
                                          -------       -------       -------
    Total interest income ..........   17,929,194    17,912,236    18,126,809
                                       ----------    ----------    ----------
Interest expense:
  Deposits .........................    8,011,567     8,011,016     8,024,187
  Borrowings .......................    1,375,263     1,179,628     1,861,506
                                        ---------     ---------     ---------
    Total interest expense .........    9,386,830     9,190,644     9,885,693
                                        ---------     ---------     ---------
      Net interest income before
        provision for loan losses...    8,542,364     8,721,592     8,241,116

Provision for loan losses ..........      574,000     3,484,529       630,000
                                          -------     ---------       -------
      Net interest income after
        provision for loan losses...    7,968,364     5,237,063     7,611,116
                                        ---------     ---------     ---------
Other income:
  Fees and service charges .........    2,602,468     2,415,810     2,171,617
  Gain on sales of investment
    securities .....................      144,925       219,379       228,215
  Gain on sales of loans ...........      658,723       587,499        55,881
  Gain (loss) on other
    real estate, net ...............      (82,719)      (79,643)       32,764
  Other ............................      334,542       169,662        99,679
                                          -------       -------        ------
      Total other income ...........    3,657,939     3,312,707     2,588,156
                                        ---------     ---------     ---------
Other expenses:
  Salaries and employee benefits....    4,067,287     3,485,457     3,348,125
  Occupancy ........................    1,401,759     1,177,618     1,036,269
  Other operating ..................    3,126,376     4,375,543     2,743,960
                                        ---------     ---------     ---------
      Total other expenses .........    8,595,422     9,038,618     7,128,354
                                        ---------     ---------     ---------
       Earnings (loss) before
        provision (benefit) for
        income taxes ...............    3,030,881     (488,848)    3,070,918

Provision (benefit) for
     income taxes ..................      997,767     (311,222)    1,044,911
                                          -------      --------     ---------
Net earnings (loss) ................    2,033,114     (177,626)    2,026,007
                                        =========      ========     =========
Basic earnings (loss)
  per share.........................         1.00         (.09)         1.02
                                             ====         ====          ====
Diluted earnings (loss)
  per share.........................          .99         (.09)          .98
                                              ===         ====           ===

See accompanying notes to consolidated financial statements.

                                       16
<PAGE>

                           FLAG FINANCIAL CORPORATION

           Consolidated Statements of Changes in Stockholders' Equity
              For the Years Ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                             Net Unrealized
                                                                Loss on
                                                               Securities
                                       Additional            Available-for
                             Common     Paid-in    Retained     -Sale,
                              Stock     Capital    Earnings    Net of Tax     Total
                              -----     -------    --------    ----------     -----

<S>               <C> <C>   <C>         <C>        <C>         <C>          <C>
Balance, December 31, 1994  $2,012,500  7,867,500  11,157,835  (2,026,409)  19,011,426
 Exercise of stock options      26,793     97,605        -          -          124,398
 Issuance of common stock        4,807     54,679        -          -           59,486
 Repurchase of common stock   (128,100)  (500,783) (1,004,389)      -       (1,633,272)
 Change in unrealized
   loss on securities
   available-for-sale             -             -        -      1,709,045    1,709,045
 Net earnings                     -             -   2,026,007       -        2,026,007
 Dividends declared               -             -    (598,874)      -         (598,874)

Balance, December 31, 1995    1,916,000  7,519,001 11,580,579    (317,364)  20,698,216
 Exercise of stock options      120,207    510,422        -         -          630,629
 Issuance of common stock          783      8,207         -         -            8,990
 Change in unrealized
   loss on securities
   available-for-sale             -             -        -         20,946       20,946
 Net loss                         -             -    (177,626)       -        (177,626)
 Dividends declared               -             -    (669,961)       -        (669,961)

Balance, December 31, 1996   2,036,990  8,037,630  10,732,992    (296,418)  20,511,194
 Change in unrealized
   loss on securities
   available-for-sale             -             -           -     210,849      210,849
 Net earnings                     -             -   2,033,114       -        2,033,114
 Dividends declared               -             -    (692,577)      -         (692,577)

Balance, December 31, 1997   $2,036,990  8,037,630  12,073,529    (85,569)  22,062,580

</TABLE>



See accompanying notes to consolidated financial statements.

                                       17
<PAGE>

                           FLAG FINANCIAL CORPORATION

                      Consolidated Statements of Cash Flows
              For the Years Ended December 31, 1997, 1996 and 1995

                                            1997           1996          1995
                                            ----           ----          ----
Cash flows from
 operating activities:
  Net earnings (loss) ................ $  2,033,114      (177,626)    2,026,007
  Adjustments to reconcile
   net earnings (loss) to net cash
   provided by operating activities:
     Depreciation, amortization
      and accretion ..................      757,867       703,007       709,943
     Provision for loan losses .......      574,000     3,484,529       630,000
     Provision for deferred taxes ....      978,809    (1,033,206)      (78,049)
     Gains on sales of securities
      available-for-sale .............     (144,925)     (219,379)     (219,067)
     (Gain) loss on sales of loans ...     (658,723)     (587,499)      (55,881)
     (Gain) loss on other real estate        82,719        79,643       (32,518)
     Change in:
       Mortgage loans held for sale ..   (1,317,157)     (887,549)   (1,281,363)
       Other .........................    1,827,301     1,437,864      (214,063)
                                          ---------     ---------      --------
        Net cash provided by
         operating activities ........    4,133,005     2,799,784     1,485,009
                                          ---------     ---------     ---------
Cash flows from
 investing activities:
  Net change in interest-bearing
   deposits ..........................   (1,841,245)     (211,493)     (100,322)
  Proceeds from sales and maturities
   of securities available-for-sale ..    7,406,922    27,254,773    28,648,649
  Proceeds from maturities of
   securities held-to-maturity .......      601,861       687,484     2,780,169
  Proceeds from sale of other
   investments .......................         --            --         318,500
  Purchases of other investments .....     (186,000)     (475,000)     (250,000)
  Purchases of securities
   available for sale ................  (14,827,903)  (13,557,624)  (18,425,216)
  Net change in loans ................  (13,871,609)   (8,726,929)   (6,932,316)
  Proceeds from sales of real estate..         --         516,326       989,228
  Purchases of premises and equipment.   (1,639,920)     (399,668)   (1,060,304)
  Purchase of cash surrender
   value life insurance ..............     (203,461)      (24,002)   (1,782,000)
                                           --------       -------    ----------
       Net cash provided by (used in)
        investing activities .........  (24,561,355)    5,486,853     4,186,388
                                        -----------     ---------     ---------
Cash flows from financing activities:
  Net change in deposits .............      (29,905)       83,660    12,206,992
  Change in federal funds purchased ..   (2,140,000)    2,210,000         --
  Proceeds from FHLB advances ........   40,300,000    16,000,000    67,800,000
  Payments of FHLB advances ..........  (16,033,339)  (28,133,334)  (81,576,389)
  Repurchase of common stock .........         --            --      (1,633,272)
  Proceeds from exercise of
   stock options .....................         --         630,629       124,398
  Proceeds from issuance of
   common stock ......................         --           8,990        59,486
  Cash dividends paid ................     (692,577)     (640,420)     (606,209)
                                           --------      --------      --------
        Net cash provided by (used in)
         financing activities ........   21,404,179    (9,840,475)   (3,624,994)
                                         ----------    ----------    ----------
           Net change in cash and
            cash equivalents .........      975,829    (1,553,838)    2,046,403

Cash and cash equivalents at
  beginning of year ..................    4,757,815     6,311,653     4,265,250
                                          ---------     ---------     ---------
Cash and cash equivalents at
  end of year ........................ $  5,733,644     4,757,815     6,311,653
                                       ============     =========     =========

                                       18
<PAGE>

                           FLAG FINANCIAL CORPORATION

                Consolidated Statements of Cash Flows, continued
              For the Years Ended December 31, 1997, 1996 and 1995

                                            1997          1996          1995
                                            ----          ----          ----
Supplemental disclosures of
 cash flow information:
  Cash paid during the year for:
   Interest ............................ $9,376,744     9,266,251     9,828,527
                                         ==========     =========     =========
   Income taxes ........................ $  686,528     1,016,855     1,204,398
                                         ==========     =========     =========
Supplemental schedule of noncash
 investing and financing activities:
  Real estate acquired
   through foreclosure ................. $  442,652       882,447     1,730,941
                                         ==========       =======     =========
Change in unrealized loss on
 securities available-for-sale,
   net of tax........................... $  210,849        20,946     1,709,045
                                         ==========        ======     =========
Increase (decrease) in
   dividends payable ................... $     --          29,541        (7,335)
                                            ======         ======        ======

See accompanying notes to consolidated financial statements.


                                       19
<PAGE>

                           FLAG FINANCIAL CORPORATION

                   Notes to Consolidated Financial Statements

(1)     Summary of Significant Accounting Policies

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

FLAG is a  unitary  thrift  holding  company  formed  in 1994  and is  primarily
regulated  by the  Office  of Thrift  Supervision  ("OTS").  The Bank  commenced
business in 1927 under a state banking  charter and received its federal banking
charter in 1955.  The Bank is  primarily  regulated  by the OTS and the  Federal
Deposit  Insurance  Corporation  and undergoes  periodic  examinations  by these
regulatory agencies. The Bank provides a full range of commercial,  mortgage and
consumer  banking services  principally in Troup County,  Georgia and has a loan
production facility in Columbus, Georgia.

Piedmont was formed in 1988 as an appraisal service company working  principally
for the Bank and as a brokerage service to individuals.

The accounting  principles followed by FLAG and its subsidiary,  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,
1997 and 1996.  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

                                       20
<PAGE>
                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

(1)     Summary of Significant Accounting Policies, continued

federally  insured  savings  bank.  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.

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 Bank's 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 loan'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
-------
The Bank 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.

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.

                                       21
<PAGE>
                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

(1)     Summary of Significant Accounting Policies, continued

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, 1997 and 1996, no
valuation allowances were required for FLAG's mortgage servicing rights.

FLAG recognized  approximately  $418,000 and $451,000 in servicing assets during
1997 and 1996,  respectively,  and recognized  amortization  expense relating to
servicing  assets of  approximately  $149,000 and $204,000 during 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.

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 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 7. Such a deferred  tax  liability  will only be
recognized  when it becomes  apparent  that  those  temporary  differences  will
reverse in the foreseeable future.

                                       22
<PAGE>

                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

(1)     Summary of Significant Accounting Policies, continued

Net Earnings Per Common Share
-----------------------------
SFAS No. 128 "Earnings  Per Share" became  effective for FLAG for the year ended
December 31, 1997. This new standard specifies the computation, presentation and
disclosure  requirements  for  earnings  per share and is  designed  to simplify
previous  earnings per share  standards and to make  domestic and  international
practices more  compatible.  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.  All earnings per common share amounts have been restated to
conform to the provisions of SFAS No. 128.

SFAS No. 128 requires the  presentation of earnings per common share on the face
of the  statement  of  operations  with and  without  the  dilutive  effects  of
potential common stock issuances from  instruments such as options,  convertible
securities,  and  warrants.   Additionally,   the  new  statement  requires  the
reconciliation  of the amounts used in the  computation of both "basic  earnings
per share" and  "diluted  earnings  per share" for the years ended  December 31,
1997, 1996, and 1995 as follows:

For the Year Ended
   December 31, 1997              Net Earnings    Common Share     Per Share
                                   (Numerator)    (Denominator)      Amount
                                   -----------    -------------      ------

Basic earnings per share ....... $  2,033,114       2,036,990         1.00

Effect of dilutive securities
  - stock options ..............         --            19,576         (.01)
                                       ------          ------         ----

Diluted earnings per share ..... $  2,033,114       2,056,566          .99
                                 ============       =========          ===

For the Year Ended
   December 31, 1996               Net Loss       Common Share     Per Share
                                  (Numerator)     (Denominator)      Amount
                                  -----------     -------------      ------

Basic loss per share ........... $   (177,626)      2,010,798         (.09)

Effect of dilutive securities
  - stock options ..............         --             8,099           --
                                       ------           -----         ------

Diluted loss per share ......... $   (177,626)      2,018,897         (.09)
                                 ============       =========         ====

For the Year Ended
   December 31, 1995              Net Earnings    Common Share     Per Share
                                   (Numerator)    (Denominator)      Amount
                                   -----------    -------------      ------

Basic earnings per share         $  2,026,007       1,990,724         1.02

Effect of dilutive securities
  - stock options                       --             71,773         (.04)
                                      ------           ------         ----

Diluted earnings per share       $  2,026,007       2,062,497          .98
                                 ============       =========          ===

Reclassifications
-----------------
Certain items in the 1996 and 1995 financial  statements have been  reclassified
to conform to the 1997 financial statement presentation.

Recent Accounting Pronouncements
--------------------------------
In June 1997,  the  Financial  Accounting  Standards  Board issued SFAS No. 130,
"Reporting  Comprehensive  Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related  Information".  SFAS No. 130 establishes  standards
for the reporting and display of  comprehensive  income and its  components in a
full set of  general-purpose  financial  statements.  SFAS No. 131 specifies the
presentation  and disclosure of operating  segment  information  reported in the
annual report and interim reports issued to stockholders. The provisions of both
statements  are effective for fiscal years  beginning  after  December 15, 1997.
FLAG  believes  that the adoption of these  statements  will not have a material
impact on FLAG's financial position, results of operations, or liquidity.

                                       23
<PAGE>

(2)     Investment Securities

Investment securities at December 31, 1997 and 1996 are summarized as follows:

                                             December 31, 1997
                                             -----------------
                                              Gross       Gross       Estimated
                               Amortized    Unrealized  Unrealized      Fair
Securities Available-for-Sale    Cost         Gains       Losses        Value
                                 ----         -----       ------        -----
U.S. Treasuries and
    agencies .............   $ 8,969,004      61,703        2,532     9,028,175
Corporate debt securities        989,300      10,700         --       1,000,000
Equity securities ........     1,293,623     121,670        1,817     1,413,476
Mortgage-backed securities    21,746,932     170,149      129,313    21,787,768
Collateralized mortgage
    obligations ..........    16,226,434      11,031      383,633    15,853,832
                              ----------      ------      -------    ----------
                             $49,225,293     375,253      517,295    49,083,251
                             ===========     =======      =======    ==========

                                             December 31, 1997
                                             -----------------
                                              Gross       Gross       Estimated
                               Amortized    Unrealized  Unrealized      Fair
Securities Held-to-Maturity      Cost         Gains       Losses        Value
                                 ----         -----       ------        -----
Mortgage-backed securities.   $  103,140       1,160         --         104,300
Collateralized mortgage
    obligations ...........    2,504,695       2,037       41,889     2,464,843
                               ---------       -----       ------     ---------
                              $2,607,835       3,197       41,889     2,569,143
                              ==========       =====       ======     =========

                                             December 31, 1996
                                             -----------------
                                              Gross       Gross       Estimated
                               Amortized    Unrealized  Unrealized      Fair
Securities Available-for-Sale    Cost         Gains       Losses        Value
                                 ----         -----       ------        -----
U.S. Treasuries and
    agencies ............... $ 4,018,271       2,109       27,409     3,992,971
State, county and municipals     114,695         712         --         115,407
Corporate debt securities ..     980,790       9,100         --         989,890
Equity securities ..........   1,960,918       5,891        7,583     1,959,226
Mortgage-backed securities .  17,577,399     119,818      152,843    17,544,374
Collateralized mortgage
    obligations ............  17,132,514      17,921      445,807    16,704,628
                              ----------      ------      -------    ----------
                             $41,784,587     155,551      633,642    41,306,496
                             ===========     =======      =======    ==========

                                             December 31, 1996
                                             -----------------
                                              Gross       Gross       Estimated
                               Amortized    Unrealized  Unrealized      Fair
Securities Held-to-Maturity      Cost         Gains       Losses        Value
                                 ----         -----       ------        -----

Mortgage-backed securities    $  117,547       1,396         --         118,943
Collateralized mortgage
    obligations ..........     3,092,149       4,099      106,469     2,989,779
                               ---------       -----      -------     ---------
                              $3,209,696       5,495      106,469     3,108,722
                              ==========       =====      =======     =========

                                       24
<PAGE>

                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

(2)     Investment Securities, continued

The amortized cost and estimated fair value of securities available for sale and
securities held to maturity at December 31, 1997, 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.

                                         Securities              Securities
                                     Available-for-Sale       Held-to-Maturity
                                     ------------------       ----------------
                                   Amortized    Estimated   Amortized  Estimated
                                      Cost     Fair Value      Cost   Fair Value
                                      ----     ----------      ----   ----------
U.S. Treasuries and agencies:
     Within 1 year............    $  999,941      997,410       -         -
     1 to 5 years.............     1,000,000    1,008,428       -         -
     5 to 10 years............     6,969,063    7,022,337       -         -
                                   ---------    ---------     ------    ------
                                   8,969,004    9,028,175       -         -

Equity securities ............     1,293,623    1,413,476       -         -
Corporate debt securities.....       989,300    1,000,000       -         -
Mortgage-backed securities....    21,746,932   21,787,768     103,140   104,300
Collateralized mortgage
    obligations ..............    16,226,434   15,853,832   2,504,695  2,464,843
                                  ----------   ----------   ---------  ---------
                                 $49,225,293   49,083,251   2,607,835  2,569,143
                                 ===========   ==========   =========  =========

There were no sales of securities  held-to-maturity during 1997, 1996, and 1995.
Proceeds from sales of securities available-for-sale during 1997, 1996, and 1995
totalled approximately $7,407,000,  $15,651,000, and $26,468,000,  respectively.
Gross gains of approximately  $140,000,  $250,000, and $246,000 and gross losses
of approximately $13,000,  $31,500, and $28,000 were realized on those sales for
the years ended December 31, 1997, 1996, and 1995, respectively.

Securities and interest-bearing  deposits with a carrying value of approximately
$26,425,000  and $17,920,000 at December 31, 1997 and 1996,  respectively,  were
pledged  to secure  advances  from  FHLB,  U.S.  Government,  and  other  public
deposits.

                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

(3)     Loans

Major  classifications  of loans at December 31, 1997 and 1996 are summarized as
follows:
                                                     1997             1996
                                                     ----             ----

     Commercial, financial and agricultural... $   9,923,944       10,209,043
     Real estate - construction ..............    11,589,408        9,149,042
     Real estate - mortgage ..................   128,539,218      119,178,317
     Installment loans to individuals ........     8,441,194       11,094,228
     Lease financings ........................     9,303,764        7,571,427
                                                   ---------        ---------
          Gross loans ........................   167,797,528      157,202,057

     Less:
       Deferred loan fees - net ...............      398,775         (218,314)
       Allowance for loan losses ..............   (2,254,258)      (4,339,307)
                                                  ----------       ----------
                                               $ 165,942,045      152,644,436
                                               =============      ===========

The Bank  concentrates  its lending  activities in the  origination of permanent
residential  mortgage  loans,  commercial  mortgage loans,  commercial  business
loans,  and consumer  installment  loans. The majority of the Bank's real estate
loans  are  secured  by real  property  located  in Troup  County,  Georgia  and
surrounding counties.

FLAG has recognized  impaired loans of approximately  $8,179,000 and $13,095,000
at December 31, 1997 and 1996,  respectively,  with a total  allowance  for loan

                                       25
<PAGE>

losses related to these loans of $974,000 and $3,775,000, respectively. Interest
income on impaired loans of  approximately  $117,000 and $148,000 was recognized
for cash payments received in 1997 and 1996, respectively.

Activity in the allowance for loan losses is summarized as follows for the years
ended December 31, 1997, 1996, and 1995:

                                               1997        1996         1995
                                               ----        ----         ----
     Balance at beginning of year ........ $ 4,339,307   1,339,393    1,243,623
     Provisions charged to operations ....     574,000   3,484,529      630,000
     Loans charged-off ...................  (2,712,767)   (521,445)    (572,843)
     Recoveries on loans previously
          charged-off.....................      53,718      36,830       38,613
                                                ------      ------       ------
     Balance at end of year .............. $ 2,254,258   4,339,307    1,339,393
                                           ===========   =========    =========

Mortgage  loans  serviced  for  others  are  not  included  in the  accompanying
consolidated  financial statements.  Unpaid principal balances of these loans at
December  31,  1997  and  1996  approximate   $166,823,000   and   $247,963,000,
respectively.  Custodial  escrow  balances  maintained in  connection  with loan
servicing,  and included in demand  deposits,  were  approximately  $618,000 and
$710,000 at December 31, 1997 and 1996, respectively.

Mortgage  loans  secured  by  1-4  family  residences  totalling   approximately
$56,454,000  were pledged as  collateral  for  outstanding  FHLB  advances as of
December 31, 1997.

(4)     Premises and Equipment

Premises and equipment at December 31, 1997 and 1996 are summarized as follows:

                                                     1997          1996
                                                     ----          ----
     Land and land improvements ...............  $ 1,092,951     1,091,577
     Buildings and improvements ...............    4,128,787     4,097,162
     Furniture and equipment ..................    5,415,746     3,870,297
                                                   ---------     ---------
                                                  10,637,484     9,059,036

     Less accumulated depreciation ............    4,188,156     3,641,074
                                                   ---------     ---------
                                                 $ 6,449,328     5,417,962
                                                 ===========     =========

Depreciation expense approximated  $609,000,  $554,000, and $506,000 at December
31, 1997, 1996, and 1995, respectively

(5)     Time Deposits

At December 31, 1997,  contractual maturities of time deposits are summarized as
follows:

     Year ending December 31,
     ------------------------
          1998.................................    $    86,422,095
          1999.................................         12,204,318
          2000.................................          8,002,731
          2001.................................          3,576,000
          202 and thereafter...................          5,522,680
                                                         ---------
                                                   $   115,727,824
                                                   ===============


                                       26
<PAGE>

                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

(6)     FHLB Advances

FHLB advances are collateralized by FHLB stock,  certain investment  securities,
and first  mortgage  loans.  Advances from the FHLB  outstanding at December 31,
1997, mature and bear fixed interest rates as follows:

     Year                                      Amount           Interest Rate
     ----                                      ------           -------------
     1998............................   $     23,700,000        5.74% -5.84%
     2000............................          5,000,000            5.59%
     2002............................          7,000,000            5.53%
     Thereafter......................          5,937,494        5.23% - 6.75%
                                               ---------
                                        $     41,637,494        5.23% - 6.75%
                                        ================

(7)     Income Taxes

The following is an analysis of the  components of income tax expense  (benefit)
for the years ended December 31, 1997, 1996, and 1995:

                                              1997         1996          1995
                                              ----         ----          ----
     Federal
      Current ............................ $  17,000      620,845     1,024,824
      Deferred ...........................   876,700     (841,930)     (101,270)
                                             -------     --------      --------
        Total federal provision (benefit).   893,700     (221,085)      923,554
                                             -------     --------       -------
     State
      Current ............................     1,958       54,171       139,228
      Deferred ...........................   102,109     (144,308)      (17,871)
                                             -------     --------       -------
        Total state provision (benefit)...   104,067      (90,137)      121,357
                                             -------      -------       -------
           Total ......................... $ 997,767     (311,222)    1,044,911
                                           =========     ========     =========

The differences  between income tax expense (benefit) and the amount computed by
applying the statutory  federal income tax rate to earnings before taxes for the
years ended December 31, 1997, 1996, and 1995 are as follows:

                                                  1997       1996        1995
                                                  ----       ----        ----
     Pretax income (loss) at statutory rate.  $ 1,030,499  (166,208)  1,044,112
      Add (deduct):
        State income taxes, net of
          federal effect ...................       68,684   (64,549)     80,096
        Increase in cash surrender value
          of life insurance ................      (43,514)  (16,304)    (17,000)
        Other ..............................      (57,902)  (64,161)    (62,297)
                                                  -------   -------     -------
                                              $   997,767  (311,222)   1,044,911
                                              ===========  ========    =========

                                       27
<PAGE>

                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

The following  summarizes the net deferred tax asset.  The deferred tax asset is
included as a component of other assets at December 31, 1997 and 1996.

                                                     1997       1996
                                                     ----       ----
     Deferred tax assets:
       Allowance for loan losses ............    $ 498,657   1,648,937
       Allowance for other
         real estate owned                          21,208      41,818
       Net deferred loan fees ...............         --        82,959
       Net operating loss carryforwards
         and credits ........................      397,021        --
       Unrealized loss on securities
         available-for-sale .................       56,472     181,675
          Other .............................       14,639        --
                                                    ------      ------
           Total gross deferred tax assets         987,997   1,955,389
                                                   -------   ---------

     Deferred tax liabilities:
       Premises and equipment ...............      209,066     173,425
       Net deferred loan fees ...............      151,375        --
         Other ..............................       20,130      70,526
                                                    ------      ------
           Total gross deferred tax
             liabilities ....................      380,571     243,951
                                                   -------     -------
           Net deferred tax asset ...........    $ 607,426   1,711,438
                                                 =========   =========

(7)     Income Taxes, continued

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, the Bank now computes its tax bad debt reserves under
the rules of IRC section 585, which apply to commercial banks. In years prior to
1996,  the Bank  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  the  Bank  ceases  to  qualify  as a bank  pursuant  to the
provisions of IRC section 585.

(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  1997,  1996,  and 1995,  the Company
contributed approximately $59,000, $49,000, and $48,000,  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,  1996,  and 1995,  FLAG  recognized
$196,000,  $185,000,  and  $182,000,  respectively,  in  expense  related to its
obligations under the plan.

Directors' Retirement Plan
--------------------------
During 1995, FLAG initiated a defined contribution  postretirement  benefit plan
to provide  retirement  benefits to its Board of Directors  and to provide death
benefits for their  designated  beneficiaries.  Under this plan,  FLAG purchased
split-dollar whole life insurance  contracts on the lives of each Director.  The
increase  in cash  surrender  value of the  contracts,  less the Bank's  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

                                       28
<PAGE>
                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

contribute to the plan. At December 31, 1997 and 1996, the cash surrender  value
of the insurance contracts was approximately $2,114,000 and $1,911,000. Expenses
incurred  for benefits  were  approximately  $4,000 and $43,000  during 1997 and
1996, respectively.

Defined Benefit Plan
--------------------
FLAG has a trusteed defined benefit pension plan which covers  substantially all
employees.  The  benefits  are  based  on years of  service  and the  employee's
compensation during the last five years of employment.  FLAG's policy is to fund
pension cost as actuarially  determined on an annual basis.  The plan is subject
to the Employee Retirement Income Security Act of 1974 (ERISA).  FLAG's 1997 and
1996 contribution  exceeded the minimum funding requirements of ERISA. Assets of
the plan are invested primarily in a common trust fund.

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

                                                    1997            1996
                                                    ----            ----
Accumulated benefit obligation
  including vested benefits
  of $1,050,965 and $850,898 ................   $ 1,062,575        872,174
                                                ===========        =======
Projected benefit obligation for
  services rendered to date .................     1,635,798      1,342,926

Plan assets at fair value ...................     1,379,263      1,224,542
                                                  ---------      ---------
Projected benefit obligation in
  excess of plan assets .....................      (256,535)      (118,384)
Unrecognized transition obligation ..........        15,755         17,888
Unrecognized prior service cost .............       141,472        151,530
Unrecognized net loss .......................        (6,457)      (139,286)
                                                     ------       --------
    Accrued pension liability ...............   $  (105,765)       (88,252)
                                                ===========        =======

Net pension expense is summarized as follows:

                                         1997          1996         1995
                                         ----          ----         ----
Service cost - benefits earned        $  93,676       71,238       84,835
Interest cost on projected
  benefit obligation .............      116,072       95,648       98,476
Actual return on plan assets......      (99,024)     (85,327)     (68,476)
Net amortization .................       12,191       12,191       21,401
                                         ------       ------       ------
                                      $ 122,915       93,750      136,236
                                      =========       ======      =======

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 and 1995.  Prior service costs are generally  amortized  over a
period of 17 years.


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 201,250 shares were reserved
for possible  issuance  under the employee plan and 100,625 shares were reserved
under the director plan. The options  generally vest over a four-year period and
expire after ten years.

SFAS No.  123,  "Accounting  for  Stock-Based  Compensation,"  became  effective
January 1, 1996. This statement  encourages,  but does not require,  entities to
compute  the fair value of options  at the date of grant and to  recognize  such
costs as  compensation  expense  immediately  if there is no  vesting  period or
ratably over the vesting period of the options. FLAG has chosen not to adopt the
cost recognition principles of this statement.  No compensation expense has been
recognized  in  1997,  1996, or 1995  related  to the  stock  option  plans. Had

                                       29
<PAGE>

                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

(8)     Employee and Director Benefit Plans, continued

compensation  cost been  determined  based upon the fair value of the options at
the grant  dates  consistent  with the method of the new  statement,  FLAG'S net
earnings  and net  earnings  per share would have been  reduced to the pro forma
amounts indicated below.
                                                         1997           1996
                                                         ----           ----
Net earnings (loss)                 As reported....  $ 2,033,114     (177,626)
                                      Pro forma....  $ 1,963,627     (190,981)

Basic earnings (loss) per share     As reported....  $      1.00         (.09)
                                      Pro forma....  $       .96         (.09)

Diluted earnings (loss) per share   As reported....  $       .99         (.09)
                                      Pro forma....  $       .95         (.09)


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 used for grants in 1997 and 1996, respectively: dividend yield of 2%
and 3%,  respectively;  volatility of .4269 and .2811,  respectively;  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:

                              1997               1996               1995
                              ----               ----               ----
                                 Weighted           Weighted           Weighted
                                  Average            Average            Average
                                  Option             Option             Option
                                   Price              Price              Price
                         Shares  Per Share  Shares  Per Share  Shares  Per Share
                         ------  ---------  ------  ---------  ------  ---------
Outstanding, beginning
  of year..              46,000   $10.02   160,207   $ 6.41    190,750   $ 6.24
Granted during
  the year.........      28,000    11.37     6,000    13.50       --
Cancelled during
  the year.......        (1,250)   11.25      --                (3,750)    5.38
Exercised during
  the year.......          --             (120,207)    5.38    (26,793)    5.38
                         ------           --------             -------
Outstanding, end
  of year........        72,750   $10.52    46,000   $10.02     160,207   $6.41
                         ======             ======              =======
Number of shares
  exercisable....        72,750             46,000              160,207
                         ======             ======              =======

The weighted  average  grant-date fair value of options granted in 1997 and 1996
was  $1.65 and  $1.73,  respectively.  For these  employee  and  director  stock
options,  options  outstanding  at December 31, 1997 are  exercisable  at option
prices  ranging  from  $9.50 to $13.50 as  presented  in the table  above.  Such
options have a weighted average remaining  contractual life of approximately 7.5
years as of December 31, 1997.

(9)     Preferred Stock

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.

(10)    Regulatory Matters

FLAG is 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  actions by
regulators  that, if undertaken,  could have a direct  material effect on FLAG's
financial  statements.  Under capital  adequacy  guidelines  and the  regulatory
framework  for prompt  corrective  action,  FLAG and the Bank must meet specific
capital   guidelines   that  involve   quantitative   measures  of  the  assets,

                                       30
<PAGE>

                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

liabilities,  and certain off-balance sheet items as calculated under regulatory
accounting practices. The 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 FLAG 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)  and of  Tangible  capital to average
assets.  Management believes,  as of December 31, 1997 and 1996, that FLAG meets
all capital adequacy requirements to which it is subject.

As of December  31, 1997 and 1996,  the most  recent  notification  from the OTS
categorized  the Bank as well  capitalized  under the  regulatory  framework for
prompt corrective  action. To be categorized as well capitalized,  the Bank must
maintain minimum total risk-based,  Tier 1 risk-based and Tier 1 leverage ratios
as set forth in the  following  table.  There are no  conditions or events since
that notification that management believes have changed the Bank's category.

The  Bank's  actual  capital  amounts  and  ratios as well as those of FLAG on a
consolidated basis are presented below.

                                                                To Be Well
                                                             Capitalized Under
                                             For Capital     Prompt Corrective
                           Actual         Adequacy Purposes  Action Provisions
                           ------         -----------------  -----------------
                           Amount    Ratio   Amount    Ratio   Amount    Ratio
                           ------    -----   ------    -----   ------    -----
  As of December 31, 1997:
   Total Capital (to Risk
       Weighted Assets)
    FLAG consolidated ..$24,127,000 14.9% 12,941,000 >/=8.0%    N/A       N/A
    Bank ...............$22,408,000 13.9% 12,871,000 >/=8.0% 16,089,000 >/=10.0%

   Tier 1 Capital (to Risk
       Weighted Assets)
    FLAG consolidated ..$22,130,000 13.7%  6,471,000 >/=4.0%    N/A       N/A
    Bank ...............$20,382,000 12.7%  6,436,000 >/=4.0%  9,653,000 >/=6.0%

   Tier 1 Capital (to
      Adjusted Assets)
    FLAG consolidated ..$22,130,000  8.9% 10,283,000 >/=4.0%    N/A       N/A
    Bank ...............$20,382,000  8.3%  9,883,000 >/=4.0% 12,354,000 >/=5.0%

   Tangible Capital (to
      Tangible Assets)
    FLAG consolidated ..$22,130,000  8.9%  3,856,000 >/=1.5%    N/A       N/A
    Bank ...............$20,382,000  8.3%  3,706,000 >/=1.5%  3,706,000  >1.5%

As of December 31, 1996:
  Total Capital (to Risk
      Weighted Assets)
   FLAG consolidated ...$23,704,000 15.8% 12,018,000 >/=8.0%    N/A       N/A
   Bank ................$21,568,000 14.4% 12,000,000 >/=8.0% 15,000,000 >/=10.0%

  Tier 1 Capital (to Risk
      Weighted Assets)
   FLAG consolidated ...$20,918,000 13.9%  6,009,000 >/=4.0%    N/A       N/A
   Bank ................$19,694,000 13.1%  6,000,000 >/=4.0%  9,000,000 >/=6.0%

  Tier 1 Capital (to
      Adjusted Assets)
   FLAG consolidated ...$20,918,000  9.4%  8,916,000 >/=4.0%    N/A       N/A
   Bank ................$19,694,000  8.8%  8,907,000 >/=4.0% 11,134,000 >/=5.0%

  Tangible Capital (to
      Tangible Assets)
   FLAG consolidated ...$20,918,000  9.4%  3,344,000 >/=1.5%    N/A       N/A
   Bank ................$19,694,000  8.8%  3,340,000 >/=1.5%  3,340,000 >/=1.5%

                                       31
<PAGE>

                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

Thrift  regulations  limit  the  amount  of  dividends  the Bank 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
1998, the Bank can pay dividends  totalling  approximately  $4,769,000  plus net
earnings during 1998.

(11)    Commitments and Contingencies

The Bank leases certain banking  facilities  under operating lease  arrangements
expiring  through 2000.  Approximate  future minimum  payments  required for all
operating leases with remaining terms in excess of one year are presented below:

     Year Ending December 31,
     ------------------------
          1998........................     $ 77,000
          1999........................       74,000
          2000........................       65,000
                                             ------
                                           $216,000
                                           ========

Total rent expense was approximately $83,000, $61,000, and $60,000 for the years
ended December 31, 1997, 1996, and 1995, respectively.

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,  standby  letters of credit,  and an interest rate cap agreement.
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
Bank has 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  Bank  evaluates  each  customer's   creditworthiness  on  a
case-by-case  basis. The amount of collateral  obtained,  if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the counterparty.  The Bank's loans are primarily  collateralized by residential
and other real properties,  automobiles,  savings deposits, accounts receivable,
inventory, and  equipment  located  in Troup  County,  Georgia  and  surrounding
counties.

Standby letters of credit are written conditional commitments issued by the Bank
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
Bank  uses 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, 1997 and 1996.

                                       32
<PAGE>

                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

                                                      1997           1996
                                                      ----           ----
    Financial instruments whose contract
     amounts represent credit risk:
          Commitments to originate first
            mortgage loans ................       $17,609,000     9,932,000
          Commitments to extend credit.....       $ 7,845,000     7,146,000
          Standby letters of credit .......       $   990,000       945,000

(12)    Related Party Transactions

At December 31, 1997,  deposits from directors,  executive  officers,  and their
related interests aggregated  approximately $206,000.  These deposits were taken
in the normal course of business at market interest rates.

The Bank conducts transactions with directors and executive officers,  including
companies  in which  they have  beneficial  interest,  in the  normal  course of
business. It is the policy of the Bank that loan transactions with directors and
executive  officers be made 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 1997.

     Balance at December 31, 1996..........    $ 1,647,900
     New loans ............................        203,318
     Repayments ...........................       (238,749)
                                                  --------
     Balance at December 31, 1997..........    $ 1,612,469
                                                ===========


(13)    Miscellaneous Operating Expenses

Components  of other  operating  expenses in excess of 1% of interest  and other
income for the years ended December 31, 1997, 1996, and 1995 are as follows:

                                               1997        1996         1995
                                               ----        ----         ----
     Advertising ........................   $ 265,131     210,190     178,394
     Data processing expense ............   $ 488,703     520,762     480,209
     Federal deposit insurance premiums..   $ 185,970   1,666,101     459,581

(14)    FLAG Financial Corporation (Parent Company Only) Financial Information

                                 Balance Sheets

                           December 31, 1997 and 1996

                                     Assets
                                     ------
                                              1997          1996
                                              ----          ----
     Cash ...........................     $   263,101       489,869
     Investment securities ..........         622,128       188,125
     Investment in subsidiary........      20,891,126    19,910,996
     Equipment, net .................         536,282          --
     Other assets ...................          19,025        36,593
                                               ------        ------
                                          $22,331,662    20,625,583
                                          ===========    ==========

                      Liabilities and Stockholders' Equity
                      ------------------------------------

     Accounts payable and
       accrued expenses...............        269,082       114,389

     Stockholders' equity............      22,062,580    20,511,194
                                           ----------    ----------
                                          $22,331,662    20,625,583
                                          ===========    ==========

                                       33
<PAGE>

                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

                             Statements of Operations

              For the Years Ended December 31, 1997, 1996 and 1995

                                               1997         1996       1995
                                               ----         ----       ----
      Income:
        Dividend income from the Bank     $  1,305,000    525,008   2,282,699
        Interest income                          7,357       -           --
        Other                                   17,699        633        --
                                                ------        ---      ------
          Total income                       1,330,056    525,641   2,282,699
                                             ---------    -------   ---------
       Operating expenses:
        Interest expense                         1,333       -            -
        Other                                  212,196    145,445     132,824
                                               -------    -------     -------
       Total operating expenses                213,529    145,445     132,824
                                               -------    -------     -------
        Earnings before income tax benefit
        and equity in undistributed
        earnings of subsidiary               1,116,527    380,196   2,149,875

       Income tax benefit                       65,964      50,90      18,500
                                                ------      -----      ------
         Earnings before equity in
          undistributed earnings of
          subsidiary or dividends
          received in excess of
          earnings of subsidiary             1,182,491    431,099   2,168,375

       Dividends received in excess
        of earnings (loss)
        of subsidiary                             -      (608,725)   (142,368)

       Equity in undistributed earnings
        of subsidiary                          850,623       --          --
                                               -------     ------      ------
           Net earnings (loss)            $  2,033,114   (177,626)  2,026,007
                                          ============   ========   =========

                            Statements of Cash Flows

              For the Years Ended December 31, 1997, 1996 and 1995

                                                1997        1996         1995
                                                ----        ----         ----
Cash flows from operating activities:
  Net earnings (loss) ....................  $ 2,033,114   (177,627)   2,026,007
  Adjustments to reconcile net
   earnings (loss) to net cash
   provided by operating activities:
     Amortization ........................       14,420     14,419       14,419
     Dividends received in excess of
      (earnings) loss of subsidiaries ....        --       608,726      142,368
     Equity in undistributed earnings
       of subsidiaries ...................     (850,623)      --           --
     Change in other assets
       and liabilities....................      157,850    (48,986)     154,585
                                                -------    -------      -------
       Net cash provided by
        operating activities .............    1,354,761    396,532    2,337,379
                                              ---------    -------    ---------

 Cash flows from investing activities:
   Purchase of securities
     svailable-for-sale...................      352,670   (194,742)        --
   Purchase of equipment .................     (536,282)      --           --
                                               --------     ------       ------
       Net cash used in
        investing activities .............     (888,952)  (194,742)        --
                                               --------   --------       ------

Cash flows from financing activities:
  Repurchase of common stock .............        --           --     1,633,272)
  Exercise of stock options ..............        --       637,727      124,398
  Issuance of common stock ...............        --         8,990       59,486
  Dividends paid .........................     (692,577)  (640,420)    (606,209)
                                               --------   --------     --------
       Net cash provided by (used in)
        financing activities .............     (692,577)     6,297   (2,055,597)
                                               --------      -----   ----------

Net change in cash .......................     (226,768)   208,087      281,782

Cash at beginning of year ................      489,869    281,782         --
                                                -------    -------       ------
Cash at end of year ......................  $   263,101    489,869      281,782
                                            ===========    =======      =======

                                       34
<PAGE>

                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

(15)    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.

(15)    Fair Value of Financial Instruments, continued

Cash and Cash Equivalents
-------------------------
For cash,  due from banks,  federal funds sold,  interest-bearing  deposits with
other banks, and proceeds  receivable from secondary market, 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.

FHLB Advances
-------------
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.

                                       35
<PAGE>
                           FLAG FINANCIAL CORPORATION

              Notes to Consolidated Financial Statements, continued

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.

Limitations
-----------
Fair value  estimates  are made at a specific  point in time,  based on relevant
market  information  and  information  about  the  financial  instrument.  These
estimates do not reflect any premium or discount that could result from offering
for  sale  at  one  time  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,  and  premises  and  equipment.  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.

(15)    Fair Value of Financial Instruments, continued

The carrying amount and estimated fair values of FLAG's financial instruments at
December 31, 1997 and 1996 are as follows:

                                           1997                    1996
                                           ----                    ----
                                   Carrying   Estimated    Carrying   Estimated
                                    Amount    Fair Value    Amount    Fair Value
                                    ------    ----------    ------    ----------
Assets:
  Cash and cash equivalents .....$ 3,679,456   3,679,456   2,527,785   2,527,785
   Interest-bearing deposits ....  5,222,541   5,222,541   3,557,138   3,557,138
   Investment securities ........ 51,691,086  51,652,394  44,516,192  44,415,218
   Other investments ............  3,556,900   3,556,900   3,370,900   3,370,900
   Mortgage loans held for sale..    881,254     881,254     343,677     343,677
   Loans, net ...................165,942,045 166,715,631 152,644,436 154,718,806
   Mortgage servicing rights ....  1,174,292   1,174,292   1,703,710   1,703,710
   Cash surrender value of life
     insurance...................  2,114,118   2,114,118   1,910,657   1,910,657

Liabilities:
   Deposits .....................180,661,858 180,817,190 180,691,763 181,213,971
   Federal funds purchased ......     70,000      70,000   2,210,000   2,210,000
   FHLB advances ................ 41,637,494  40,927,033  17,370,833  17,370,833
Unrecognized financial
 instruments:
   Commitments to originate first
     mortgage loans ............. 17,609,000  17,609,000   9,932,000  9,932,000
   Commitments to extend credit .  7,845,000   7,845,000   7,146,000  7,146,000
   Standby letters of credit ....    990,000     990,000     945,000    945,000

                                       36
<PAGE>

                           FLAG FINANCIAL CORPORATION

Notes to Consolidated Financial Statements, continued

(16)   Business Combination

On October 28, 1997, the Board of Directors of FLAG approved a merger  agreement
whereby FLAG and Middle  Georgia  Bankshares,  Inc. would combine and FLAG would
become a multi-bank holding company.  Middle Georgia, a one-bank holding company
headquartered in Unadilla, Georgia, is the parent company of Citizens Bank which
has  seven  offices   throughout  Dooly  and  Macon  counties.   Middle  Georgia
shareholders would receive 1,012,284 shares of FLAG stock.

The Agreement is subject to approval of applicable  regulatory  authorities  and
shareholders  and will be  accounted  for as a pooling  of  interests.  As such,
historical financial information presented in future reports will be restated to
include Middle Georgia.

The  following  summarized  operating  data  gives  effect to the  merger had it
occurred January 1, 1995:

                                          As of and for the year ended (000's):
                                             1997         1996          1995
                                             ----         ----          ----
     Total assets ...................      376,728       321,730       315,196
     Shareholders' equity ...........       33,260        30,580        29,849
     Net earnings ...................        3,086           887         3,140
     Basic earnings per share .......         1.01          0.29          1.23

                                       37
<PAGE>


Market Makers

Herzog, Heine, Geduld, Inc.
525 Washington Boulevard
Newport Tower
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.
One Buckhead Plaza
Suite 1600
3060 Peachtree Road, N.W.
Atlanta, Georgia 30305

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

General Counsel

John M. Wyatt
16 North LaFayette Square
LaGrange, Georgia 30240

Special Counsel

Alston & Bird LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309

Independent Auditors

Porter Keadle Moore, LLP
235 Peachtree Street, N.E.
Suite 1800
Atlanta, Georgia 30303

Transfer Agent

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, N.E.
Suite 900
Atlanta, Georgia 30326
1-800-241-5568

1998 Annual Meeting

The Annual Meeting of Shareholders of FLAG Financial Corporation will be held on
Wednesday,  May 13, 1998,  at 2:00 p.m. at the Main Office of the  Company,  101
North Greenwood Street, LaGrange, Georgia 30240.

                                       39
<PAGE>

Investor Relations

Shareholders,  analysts,  investors, the news medida, and others desiring a copy
of the FLAG  Financial  Corporation  1997 Annual Report or 1997 Annual Report on
Form 10-K as filed  with the  Securities  and  Exchange  Commission,  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
  1-706-845-5000

Dividend Reinvestment Plan

FLAG Financial  Corporation  offers a Dividend  Reinvestment  Plan for automatic
reinvestment  of  dividends  in the  common  stock  of  the  Company.  For  more
information concerning this convenient and economical way to purchase additional
common stock and to receive an authorization form, contact:

  FLAG Financial Corporation
  Investor Relations Department
  101 North Greenwood Street
  LaGrange, Georgia 30240
  1-706-845-5000

Stock Exchange Listing

The Company's  common stock is traded and quoted on the Nasdaq  National  Market
under the symbol "FLAG".

Shareholders of Record

FLAG Financial  Corporation  has 2,036,990  shares of common stock  outstanding.
There were approximately __ holders of record of the common stock as of December
31, 1997.

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, 1996             $14.50           $12.83            $0.075
June 30, 1996              $13.50           $12.00            $0.085
September 30, 1996         $12.75           $9.50             $0.085
December 31, 1996 $11.75            $12.50           $0.085

March 31, 1997             $13.00           $10.25            $0.085
June 30, 1997              $14.63           $11.25            $0.085
September 30, 1997         $16.50           $14.00            $0.085
December 31, 1997 $21.50            $16.50           $0.085

                                       40
<PAGE>