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

General

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

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

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

Forward-Looking Statements

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

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

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


Operating Results

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

Bennett Funding Group, Inc.

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

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



                                       12
<PAGE>

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

SAIF Assessment

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

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

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

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

Net Interest Income

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

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

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

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

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

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

                                          YEAR ENDED DECEMBER 31,
                                                   1995
                                   ---------------------------------------
                                                    INCOME         WEIGHTED
                                   AVERAGE           OR            AVERAGE
                                   BALANCE         EXPENSE          RATE
                                   ---------------------------------------

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

Interest rate spread .............                                  2.97%

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

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

                                    -----------   ----------     --------
Total interest-
  earning assets .................  $210,575,717  $15,058,490       7.15%
                                    ===========    ==========    ========

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


                                       13
<PAGE>


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

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


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

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

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


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

Provision For Possible Loan Loss

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

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

                                       14
<PAGE>

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

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

Other Income

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

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

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

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


Operating Expenses

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

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

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

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

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

                                       15
<PAGE>

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

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

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

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

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

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

Provision For Income Taxes

The provision for income taxes  increased from $980,639 in 1994 to $1,044,911 in
1995 and decreased to $(311,222) in 1996. The effective actual tax rate for each
of those years (tax provision as a percentage of income before taxes) was 35.7%,
34.0% and (63.7)%, respectively.

Financial Condition

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

Investment and Mortgage-Backed Securities

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

Loans

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

Deposits

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

FHLB Advances

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

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

                                       16
<PAGE>

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

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

Asset-Liability Management

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

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

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

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

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

Liquidity

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

                                       17
<PAGE>

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

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

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

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

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


Capital Adequacy

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

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

Impact of Inflation and Changing Prices

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

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

Statement of Management's Responsibility

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

                                       18
<PAGE>

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

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

Accounting Rule Changes

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

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

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

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

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

                                       19
<PAGE>

             Table of Contents to Consolidated Financial Statements

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

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

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

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

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

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


Independent Auditors' Report


Board of Directors
FLAG Financial Corporation
LaGrange, Georgia


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

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

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


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

Certified Public Accountants


Columbus, Georgia
January 31, 1997

                                       20
<PAGE>
CONSOLIDATED STATEMENTS OF CONDITION

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

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

STOCKHOLDERS' EQUITY

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

                                       21
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
                                               YEAR ENDED DECEMBER 31,
                                          1996          1995           1994
                                          ----          ----           ----
INTEREST INCOME
 Interest and fees on loans .........  $14,039,683   $12,745,773   $11,273,849
 Interest and dividends on
   investments ......................      698,079     1,247,822     1,125,221
 Interest on mortgage-backed
   securities .......................    2,458,011     3,018,244     2,550,982
  Interest on time deposits .........      167,587       156,610       108,438
                                      ------------  ------------  ------------
      Total interest income .........   17,363,360    17,168,449    15,058,490
                                      ------------  ------------  ------------

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

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

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

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

See Notes to Consolidated Financial Statements

                                       22
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (Continued)

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

EARNINGS (LOSS) PER COMMON SHARE:
Net income (loss) ...................      $     (.09)   $      .97   $      .85
                                                  ====         ====         ====
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>


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

See Notes to Consolidated Financial Statements.

                                       23
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS

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

Adjustments to reconcile net income to net cash
 provided by operating activities:
Provision for loan losses .........     3,484,529        630,000        440,000
Provision for depreciation ........       553,996        506,278        424,000
Amortization of premiums/
  discounts on securities .........       236,685        148,757        238,474
Amortization of mortgage
  servicing rights ................       203,666        203,665         69,535
Gain on sales of investment
  securities available-for-sale ...      (206,873)      (133,627)       (23,038)
(Gain) loss on sales of loans .....      (246,800)        42,497           (707)
(Gain) loss on sales of
 mortgage-backed securities
 available-for-sale ...............       (12,506)       (85,440)         2,354
(Gain) loss on sales of real
  estate acquired through
  foreclosure before provision
  for losses ......................        79,643        (32,518)        48,839
(Gain) loss on sales of fixed
  assets ..........................           400         (9,148)       (10,813)
Proceeds from sales of loans ......    48,897,367     48,048,035     53,563,540
Cash value of life insurance ......       (54,655)       (50,000)             0
(Increase) decrease in proceeds
  receivable ......................     1,320,636     (1,359,294)       557,432
(Increase) decrease in accrued
  interest and dividends
  receivable ......................       (12,911)        97,975       (424,998)
Increase in deferred income taxes .    (1,033,206)       (78,049)       (39,525)
(Increase) decrease in estimated
  refundable income taxes .........      (213,385)       (74,024)       130,646
Decrease in deferred origination
  fees/costs ......................       (69,082)       (21,543)       (21,265)
Increase (decrease) in accrued
  interest on savings and
  borrowings ......................       (75,607)        57,166        148,214
Other - net .......................       (72,852)       357,221       (453,328)
                                          -------        -------       --------
    Total adjustments .............    52,779,045     48,247,951     54,649,360
                                       ----------     ----------     ----------
    Net cash provided by
     operating activities .........    52,601,419     50,273,958     56,417,212
                                       ----------     ----------     ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities
  of investment securities
  available-for-sale ..............    16,609,727     18,601,248      7,134,746
Proceeds from sales and
  maturities of mortgage-backed
  securities available-for-sale ...     6,099,005     10,047,401      3,586,660
Maturities of mortgage-backed
  securities held-to-maturity .....             0              0        660,281
Proceeds from sales of
  fixed assets ....................           389         14,000         22,376
Proceeds from sales of
  FHLB stock ......................             0        318,500        370,600
Investment in foreclosed real
  estate ..........................      (238,138)    (1,525,138)      (457,372)
Proceeds from sales of
  foreclosed real estate ..........       516,326        989,228        577,849
Loans originated net of
  principal collected .............   (52,162,523)   (50,339,643)   (32,490,782)
Purchase of investment securities
  available-for-sale ..............    (8,909,864)   (10,024,257)   (23,338,491)

                                       24
<PAGE>
                                                YEAR ENDED DECEMBER 31,
                                          1996            1995          1994
                                          ----            ----          ----
CASH FLOWS FROM INVESTING ACTIVITIES: (Continued)
Purchase of mortgage-backed
  securities available-
  for-sale ........................    (4,647,760)    (9,176,680)   (18,846,976)
Purchase of mortgage-backed
  securities held-to-maturity .....             0              0     (9,149,250)
Purchase of loans .................      (449,683)      (275,601)    (9,890,358)
Investment in limited partnership .      (475,000)      (250,000)      (150,000)
Purchase of FHLB stock ............             0              0       (712,600)
Purchase of fixed assets ..........      (400,457)    (1,065,156)      (841,587)
Investment in mortgage servicing
  rights ..........................      (451,393)       (34,141)    (1,508,846)
Acquisition of cash value of
  life insurance ..................       (24,002)    (1,782,000)             0
                                          -------     ----------              -
    Net cash used in investing
     activities ...................   (44,533,373)   (44,502,239)   (85,033,750)
                                      -----------    -----------    -----------

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

CASH AND CASH EQUIVALENTS:
 Cash and due from banks ....     $     2,527,785  $   4,301,653  $   4,265,250
 Interest bearing deposits ..           3,557,138      1,538,601      1,438,279
 Federal funds sold .........                   0      2,010,000              0
                                                -      ---------              -
   Total cash and cash
     equivalents ............     $     6,084,923  $   7,850,254  $   5,703,529
                                  ===============  =============  =============

See Notes to Consolidated Financial Statements.

                                       25
<PAGE>

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

1.   Nature of Operations

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

2.    Summary of Significant Accounting Policies

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

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


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

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


2.   Summary of Significant Accounting Policies (Continued)

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

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

                                       26
<PAGE>

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


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

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

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

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

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


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

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

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

                                       27
<PAGE>

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


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


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


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


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

     Use of Estimates

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


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


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

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

                                       28
<PAGE>

3.   Investment Securities

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


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


     The   following   is  a   summary   of   maturities   of  debt   securities
     available-for-sale as of December 31, 1996:

                                       SECURITIES
                                   AVAILABLE-FOR-SALE
                                   ------------------
  Amounts maturing in:           AMORTIZED
                                    COST      FAIR VALUE
                                    ----      ----------
    One year or less ........   $        0   $         0
    After one year through
     five years .............    2,980,685     2,984,788
    After five years through
     ten years ..............    2,133,071     2,113,480
    After ten years .........            0             0
                                         -             -
                                $5,113,756    $5,098,268
                                ==========    ==========

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

                                       29
<PAGE>

4.   Mortgage-Backed Securities

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

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

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

                                       30
<PAGE>

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

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

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

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

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

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

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

                                       31
<PAGE>

5.   Loans Receivable

     Loans receivable are summarized as follows:

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

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

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

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

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

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

                                       32
<PAGE>

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

6.   Loans Held for Sale

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

7.   Mortgage Servicing Rights

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

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

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

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

8.   Accrued Interest and Dividends Receivable

     Accrued interest and dividends receivable is summarized as follows:

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

                                       33
<PAGE>

9.   Fixed Assets and Related Depreciation

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

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

10.  Savings Accounts

           Savings accounts are summarized as follows:


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

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

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

     Interest expense on savings accounts is summarized as follows:

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

                                       34
<PAGE>

11.  Advances from Federal Home Loan Bank

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

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

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


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

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

                                       35
<PAGE>

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

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

</TABLE>

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

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

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

                                       36
<PAGE>
13.  Income Taxes

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

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

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

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

                                       37
<PAGE>

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

     Estimated income taxes refundable are summarized as follows:

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

14.  Commitments and Contingencies

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

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

     The Savings  Bank has a profit  sharing  plan for which  substantially  all
     employees  are  eligible.  Contributions  to  the  plan  are  made  at  the
     discretion  of the Board of  Directors  in an amount  not to exceed  15% of
     eligible compensation.  The plan allows participants to direct up to 75% of
     account  balance and/or  contributions  to the plan be invested in stock of
     the Savings  Bank.  The  trustee of the plan is  required  to purchase  the
     Savings  Bank's stock at fair value on the open market and the plan may not
     acquire more than 25% of the issued and outstanding  shares.  Contributions
     of $186,000,  $182,000 and $150,000 were recorded for 1996,  1995 and 1994,
     respectively.
                                       38
<PAGE>

16.  Pension Plan

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

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

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

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

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

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

                                       39
<PAGE>

18.  Stock Options

     Statement  of  Financial  Accounting  Standards  No.  123  "Accounting  for
     Stock-Based Compensation" has certain reporting and disclosure requirements
     regarding stock options issued in fiscal years beginning after December 15,
     1994.  FLAG has no material stock options issued after that date that would
     require disclosure.

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

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

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

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

19.  Flexible Compensation Plan

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

20.  Indexed Retirement Plan

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

                                       40
<PAGE>

21.  Loans to Related Parties

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

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

22.  Supplemental Disclosures of Cash Flow Information

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

     Supplemental schedules of noncash investing and financing activities:

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

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

                                       41
<PAGE>

23.  Operating Leases

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

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

24.  Financial Instruments with Off-Balance-Sheet Risk

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

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

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

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

                                       42
<PAGE>

25.  Fair Value of Financial Instruments

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

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

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

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

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

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

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

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

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

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

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

                                       43
<PAGE>

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

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

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

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

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

                                       44
<PAGE>

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

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

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

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

26.  Investment in Subsidiary

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

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


                                       45
<PAGE>

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

27.  Holding Company

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

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

CONDENSED STATEMENTS OF CONDITION
                                                           DECEMBER 31,
                                                     1996              1995
                                                     ----               ----
Total assets .............................       $221,733,163       $231,944,987
                                                 ============       ============
Total liabilities ........................       $201,822,167       $211,450,315
Total stockholders' equity ...............         19,910,996         20,494,672
                                                 ------------       ------------
Total liabilities and stock-
  holders' equity ........................       $221,733,163       $231,944,987
                                                 ============       ============

    CONDENSED STATEMENTS OF INCOME

                                               YEAR ENDED DECEMBER 31,
                                          1996          1995            1994
                                          ----          ----            ----
Net interest income before provision
  for loan losses ..................   $ 8,172,082   $ 7,282,756   $ 6,836,718
Provision for loan losses ..........    (3,484,529)     (630,000)     (440,000)
Other income .......................     2,992,798     2,459,034     1,879,726
Operating expenses .................    (8,024,388)   (5,908,048)   (5,511,383)
Benefit (provision) for income taxes       260,319    (1,063,411)     (980,639)
                                       -----------   -----------   -----------
         Net income (loss) .........   $   (83,718)  $ 2,140,331   $ 1,784,422
                                       ===========   ===========   ===========

                                       46