FLAG FINANCIAL CORP
8-K, 1998-08-25
SAVINGS INSTITUTION, FEDERALLY CHARTERED
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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                    FORM 8-K

                                 CURRENT REPORT

                     PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

         Date of Report (date of earliest event reported): August 19, 1998

                           FLAG Financial Corporation
             (Exact name of registrant as specified in its charter)

         Georgia                    0-24532                    58-2094179
- --------------------------------------------------------------------------------
(State of Incorporation)    (Commission File Number)        (IRS Employer
                                                         Identification Number)

 

     101 North Greenwood St., P.O. Box 3007
               LaGrange, Georgia                                  30240
- --------------------------------------------------------------------------------
    (Address of principal executive offices)                    (Zip code)



       Registrant's telephone number, including area code: (706) 845-5000


<PAGE>

Item 5.      Other Events
- -------      ------------

     The Registrant  executed an Agreement and Plan of Merger dated as of August
19,  1998 with Heart of Georgia  Bancshares,  Inc.,  pursuant  to which Heart of
Georgia Bancshares, Inc., agreed to merge with and into the Registrant. Attached
hereto is a copy of the Agreement and Plan of Merger and Exbibits thereto.


Item 7.      Financial Statements, Pro Forma Financial Information and Exhibits
- -------      ------------------------------------------------------------------

(c)      Exhibits.  The following exhibits are filed as part of this report:

2.1      Agreement  and Plan of Merger  and  Exhibits  thereto  by and  between
         the Registrant and Heart of Georgia Bancshares, Inc. dated as of August
         19, 1998.


                                       2
<PAGE>

                                INDEX OF EXHIBITS

Exhibit
Number                             Description
- ------                             -----------

2.1      Agreement and Plan of Merger and Exhbits thereto by and between the
         Registrant and Heart of Georgia Bancshares, Inc. dated as of August 19,
         1998.






                                    SIGNATURE

     Pursuant to the  requirements of Section 12 of the Securities  Exchange act
of 1934,  the  Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.

Dated:   August 25, 1998


                                            FLAG Financial Corporation



                                            /s/ John S. Holle 
                                            ----------------- 
                                            By John S. Holle
                                            Chairman of the Board



                                       3

<PAGE>




                          AGREEMENT AND PLAN OF MERGER

                                 BY AND BETWEEN

                           FLAG FINANCIAL CORPORATION

                                       AND

                        HEART OF GEORGIA BANCSHARES, INC.


                           Dated as of August 19, 1998

<PAGE>


                                TABLE OF CONTENTS


LIST OF EXHIBITS..............................................................V



AGREEMENT AND PLAN OF MERGER..................................................1



ARTICLE 1. TRANSACTIONS AND TERMS OF THE MERGER...............................2

   1.1        MERGER..........................................................2
   1.2        TIME AND PLACE OF CLOSING.......................................2
   1.3        EFFECTIVE TIME..................................................2




ARTICLE 2. TERMS OF MERGER....................................................2

   2.1        ARTICLES OF INCORPORATION.......................................2
   2.2        BYLAWS..........................................................2
   2.3        DIRECTORS AND OFFICERS..........................................3




ARTICLE 3. MANNER OF CONVERTING SHARES........................................3

   3.1        CONVERSION OF SHARES............................................3
   3.2        ANTI-DILUTION PROVISIONS........................................3
   3.3        SHARES HELD BY HEART OF GEORGIA OR FLAG.........................4
   3.4        DISSENTING SHAREHOLDERS.........................................4
   3.5        FRACTIONAL SHARES...............................................4




ARTICLE 4. EXCHANGE OF SHARES.................................................4

   4.1        EXCHANGE PROCEDURES.............................................4
   4.2        RIGHTS OF FORMER SHAREHOLDERS OF HEART OF GEORGIA...............5




ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF HEART OF GEORGIA.................6

   5.1        ORGANIZATION, STANDING, AND POWER...............................6
   5.2        AUTHORITY OF HEART OF GEORGIA; NO BREACH BY AGREEMENT...........6
   5.3        CAPITAL STOCK...................................................7
   5.4        HEART OF GEORGIA SUBSIDIARIES...................................8

                                       i


   5.5        FINANCIAL STATEMENTS............................................9
   5.6        ABSENCE OF UNDISCLOSED LIABILITIES..............................9
   5.7        ABSENCE OF CERTAIN CHANGES OR EVENTS............................9
   5.8        TAX MATTERS.....................................................9
   5.9        ALLOWANCE FOR POSSIBLE LOAN LOSSES.............................11
   5.10       ASSETS.........................................................11
   5.11       INTELLECTUAL PROPERTY..........................................12
   5.12       ENVIRONMENTAL MATTERS..........................................12
   5.13       COMPLIANCE WITH LAWS...........................................13
   5.14       LABOR RELATIONS................................................14
   5.15       EMPLOYEE BENEFIT PLANS.........................................14
   5.16       MATERIAL CONTRACTS.............................................16
   5.17       LEGAL PROCEEDINGS..............................................17
   5.18       REPORTS........................................................17
   5.19       STATEMENTS TRUE AND CORRECT....................................18
   5.20       ACCOUNTING, TAX AND REGULATORY MATTERS.........................18
   5.21       CHARTER PROVISIONS.............................................18
   5.22       BOARD RECOMMENDATION...........................................18
   5.23       Y-2K...........................................................18




ARTICLE 6. REPRESENTATIONS AND WARRANTIES OF FLAG............................19

   6.1        ORGANIZATION, STANDING, AND POWER..............................19
   6.2        AUTHORITY OF FLAG; NO BREACH BY AGREEMENT......................19
   6.3        CAPITAL STOCK..................................................20
   6.4        FLAG SUBSIDIARIES..............................................20
   6.5        SEC FILINGS, FINANCIAL STATEMENTS..............................21
   6.6        ABSENCE OF UNDISCLOSED LIABILITIES.............................22
   6.7        ABSENCE OF CERTAIN CHANGES OR EVENTS...........................22
   6.8        TAX MATTERS....................................................22
   6.9        ALLOWANCE FOR POSSIBLE LOAN LOSSES.............................23
   6.10       ASSETS.........................................................24
   6.11       INTELLECTUAL PROPERTY..........................................24
   6.12       ENVIRONMENTAL MATTERS..........................................25
   6.13       COMPLIANCE WITH LAWS...........................................25
   6.14       LABOR RELATIONS................................................26
   6.15       EMPLOYEE BENEFIT PLANS.........................................26
   6.16       MATERIAL CONTRACTS.............................................28
   6.17       LEGAL PROCEEDINGS..............................................29
   6.18       REPORTS........................................................29
   6.19       STATEMENTS TRUE AND CORRECT....................................29
   6.20       ACCOUNTING, TAX AND REGULATORY MATTERS.........................30
   6.21       CHARTER PROVISIONS.............................................30
   6.22       BOARD RECOMMENDATION...........................................30
   6.23       Y2K............................................................30

                                       ii


ARTICLE 7. CONDUCT OF BUSINESS PENDING CONSUMMATION..........................31

   7.1        AFFIRMATIVE COVENANTS OF HEART OF GEORGIA......................31
   7.2        NEGATIVE COVENANTS OF HEART OF GEORGIA.........................31
   7.3        AFFIRMATIVE COVENANTS OF FLAG..................................33
   7.4        NEGATIVE COVENANTS OF FLAG.....................................33
   7.5        ADVERSE CHANGES IN CONDITION...................................33
   7.6        REPORTS........................................................34




ARTICLE 8. ADDITIONAL AGREEMENTS.............................................34

   8.1        REGISTRATION STATEMENT.........................................34
   8.2        NASDAQ LISTING.................................................34
   8.3        SHAREHOLDER APPROVAL...........................................34
   8.4        APPLICATIONS...................................................35
   8.5        FILINGS WITH STATE OFFICES.....................................35
   8.6        AGREEMENT AS TO EFFORTS TO CONSUMMATE..........................35
   8.7        INVESTIGATION AND CONFIDENTIALITY..............................35
   8.8        PRESS RELEASES.................................................36
   8.9        CERTAIN ACTIONS................................................36
   8.10       ACCOUNTING AND TAX TREATMENT...................................37
   8.11       CHARTER PROVISIONS.............................................37
   8.12       AGREEMENTS OF AFFILIATES.......................................37
   8.13       EMPLOYEE BENEFITS AND CONTRACTS................................37
   8.14       INDEMNIFICATION................................................38




ARTICLE 9. CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE.................39

   9.1        CONDITIONS TO OBLIGATIONS OF EACH PARTY........................39
   9.2        CONDITIONS TO OBLIGATIONS OF FLAG..............................40
   9.3        CONDITIONS TO OBLIGATIONS OF HEART OF GEORGIA..................42




ARTICLE 10. TERMINATION......................................................43

   10.1       TERMINATION....................................................43
   10.2       EFFECT OF TERMINATION..........................................44
   10.3       NON-SURVIVAL OF REPRESENTATIONS AND COVENANTS..................44




ARTICLE 11. MISCELLANEOUS....................................................44

   11.1       DEFINITIONS....................................................44
   11.2       EXPENSES.......................................................52
   11.3       BROKERS AND FINDERS............................................53
   11.4       ENTIRE AGREEMENT...............................................53

                                      iii


   11.5       AMENDMENTS.....................................................53
   11.6       WAIVERS........................................................53
   11.7       ASSIGNMENT.....................................................54
   11.8       NOTICES........................................................54
   11.9       GOVERNING LAW..................................................55
   11.10      COUNTERPARTS...................................................55
   11.11      CAPTIONS, ARTICLES AND SECTIONS................................55
   11.12      INTERPRETATIONS................................................55
   11.13      ENFORCEMENT OF AGREEMENT.......................................55
   11.14      SEVERABILITY...................................................55




SIGNATURES TO AGREEMENT AND PLAN OF MERGER


                                       iv

<PAGE>

                                LIST OF EXHIBITS


Exhibit
Number        Description
- ------        -----------

1. Form of Agreement of  Affiliates  of Heart of Georgia  Bancshares,  Inc. (ss.
   8.12, ss. 9.2(f)).

2. Matters  as  to  which  Nelson  Mullins  Riley  &  Scarborough,  L.L.P.  will
   opine.(ss. 9.2(d)).

3. Form of Claims Letter (ss. 9.2(g)).

4. Matters as to which Powell,  Goldstein,  Frazer & Murphy LLP will opine. (ss.
   9.3(d)).


                                       iv


<PAGE>

                          AGREEMENT AND PLAN OF MERGER
                          ----------------------------


     THIS  AGREEMENT  AND PLAN OF MERGER (the  "Agreement")  is made and entered
into as of August 19, 1998, by and between FLAG FINANCIAL  CORPORATION ("FLAG"),
a Georgia  corporation  located  in  LaGrange,  Georgia,  and  HEART OF  GEORGIA
BANCSHARES,  INC. ("HEART OF GEORGIA"),  a Georgia  corporation located in Mount
Vernon, Georgia.

                                    Preamble
                                    --------

         The respective  Boards of Directors of HEART OF GEORGIA and FLAG are of
the opinion that the transactions  described herein are in the best interests of
the Parties to this Agreement and their respective shareholders.  This Agreement
provides for the acquisition of HEART OF GEORGIA by FLAG, pursuant to the merger
of HEART OF GEORGIA with and into FLAG.  At the  effective  time of such merger,
the  outstanding  shares  of the  capital  stock of HEART  OF  GEORGIA  shall be
converted  into the right to receive  shares of the common stock of FLAG (except
as provided herein). As a result,  shareholders of HEART OF GEORGIA shall become
shareholders  of FLAG,  and FLAG shall  conduct the business and  operations  of
HEART OF GEORGIA.  The  transactions  described in this Agreement are subject to
(a)  approval  of the  shareholders  of HEART OF  GEORGIA,  (b)  approval of the
Georgia  Department  of  Banking  and  Finance,  (c)  approval  of the  Board of
Governors  of the  Federal  Reserve,  and  (d)  satisfaction  of  certain  other
conditions  described in this  Agreement.  It is the intention of the Parties to
this Agreement that the merger,  for federal income tax purposes,  shall qualify
as a  "reorganization"  within the  meaning of  Section  368(a) of the  Internal
Revenue Code,  and, for  accounting  purposes,  shall qualify for treatment as a
pooling of interests.

         Certain  terms used in this  Agreement  are  defined  in  Section  11.1
hereof.

         NOW,   THEREFORE,   in  consideration  of  the  above  and  the  mutual
warranties,  representations,  covenants,  and agreements set forth herein,  the
Parties agree as follows:



                                       1
<PAGE>

                                   ARTICLE 1.
                      TRANSACTIONS AND TERMS OF THE MERGER
                      ------------------------------------

     1.1 Merger.  Subject to the terms and conditions of this Agreement,  at the
Effective  Time,  HEART OF GEORGIA  will merge with and into FLAG in  accordance
with the  provisions  of  Section  14-2-1101  of the  GBCC  and with the  effect
provided  in Section  14-2-1106  of the GBCC (the  "Merger").  FLAG shall be the
Surviving  Corporation  resulting  from the  Merger  and  shall  continue  to be
governed by the Laws of the State of Georgia.  The Merger  shall be  consummated
pursuant to the terms of this Agreement,  which has been approved and adopted by
the  respective  Boards of Directors of HEART OF GEORGIA and FLAG,  as set forth
herein.

     1.2  Time  anbd  Place  of  Closing.   The  closing  of  the   transactions
contemplated  hereby  (the  "Closing")  will take place at 9:00 A.M. on the date
that  the  Effective  Time  occurs  (or  the  immediately  preceding  day if the
Effective Time is earlier than 9:00 A.M.), or at such other time as the Parties,
acting through their authorized officers,  may mutually agree. The Closing shall
be held at such location as may be mutually agreed upon by the Parties.

     1.3 Effective Time. The Merger and other transactions  contemplated by this
Agreement shall become  effective on the date and at the time the Certificate of
Merger  reflecting the Merger shall become effective with the Secretary of State
of the  State of  Georgia  (the  "Effective  Time").  Subject  to the  terms and
conditions  hereof,  unless  otherwise  mutually  agreed  upon in writing by the
authorized  officers  of each  Party,  the  Parties  shall use their  reasonable
efforts to cause the Effective Time to occur on the fifth business day following
the  last to  occur  of (i) the  effective  date  (including  expiration  of any
applicable  waiting  period)  of the last  required  Consent  of any  Regulatory
Authority having authority over and approving or exempting the Merger,  and (ii)
the earliest  date on which the  shareholders  of HEART OF GEORGIA have approved
this  Agreement  to the extent such  approval is  required  by  applicable  Law;
provided, however, that the date of the Effective Time shall not extend past the
termination date set forth in ss. 10.1(e) hereof.


                                   ARTICLE 2.
                                 TERMS OF MERGER
                                 ---------------

     2.1 Articles of  Incorporation.  The Articles of  Incorporation  of FLAG in
effect  immediately  prior  to the  Effective  Time  shall  be the  Articles  of
Incorporation of the Surviving Corporation until duly amended or repealed.

     2.2 Bylaws. The Bylaws of FLAG in effect immediately prior to the Effective
Time  shall be the Bylaws of the  Surviving  Corporation  until duly  amended or
repealed.

                                       2
<PAGE>

     2.3 Directors and Officers.

     (a) The directors of the Surviving  Corporation  shall be (i) the directors
of FLAG  immediately  prior to the Effective Time and (ii) Donald M. Thigpen and
Robert E. Thigpen Jr.,  together with such additional  persons as may thereafter
be  elected.  Such  persons  shall  serve  as the  directors  of  the  Surviving
Corporation  from and after the Effective Time in accordance  with the Bylaws of
the Surviving Corporation.

     (b) The executive  officers of the Surviving  Corporation  shall be (i) the
executive  officers  of  the  Surviving  Corporation  immediately  prior  to the
Effective  Time and (ii) such  additional  persons as may thereafter be elected.
Such persons shall serve as the executive officers of the Surviving  Corporation
from and after the Effective Time in accordance with the Bylaws of the Surviving
Corporation.


                                   ARTICLE 3.
                           MANNER OF CONVERTING SHARES
                           ---------------------------

     3.1  Conversion of Shares.  Subject to the provisions of this Article 3, at
the  Effective  Time, by virtue of the Merger and without any action on the part
of HEART OF GEORGIA,  or the shareholders of the foregoing,  the shares of HEART
OF GEORGIA shall be converted as follows:

     (a) Each share of capital stock of FLAG issued and outstanding  immediately
prior to the Effective Time shall remain issued and  outstanding  from and after
the Effective Time.

     (b) Each share of HEART OF GEORGIA Common Stock  (excluding  shares held by
any HEART OF  GEORGIA  Entity or any FLAG  Entity,  in each case other than in a
fiduciary capacity or as a result of debts previously contracted,  and excluding
shares held by shareholders  who perfect their statutory  dissenters'  rights as
provided  in  Section  3.4)  issued  and  outstanding  immediately  prior to the
Effective  Time shall cease to be  outstanding  and shall be converted  into and
exchanged  for the right to  receive  2.025  shares of FLAG  Common  Stock  (the
"Exchange Ratio").

     3.2  Anti-Dilution  Provisions.  In the event  FLAG  changes  the number of
shares of FLAG Common Stock issued and  outstanding  prior to the Effective Time
as a result of a stock split, stock dividend,  or similar  recapitalization with
respect  to such  stock and the  record  date  therefor  (in the case of a stock
dividend) or the effective date thereof (in the case of a stock split or similar
recapitalization  for which a record date is not  established)  and prior to the
Effective Time, the Exchange Ratio shall be proportionately adjusted.


<PAGE>

     3.3 Shares Held by HEART OF GEORGIA or FLAG. Each of the shares of HEART OF
GEORGIA  Common Stock held by any HEART OF GEORGIA Entity or by any FLAG Entity,
in each  case  other  than in a  fiduciary  capacity  or as a  result  of  debts
previously  contracted,  shall be canceled and retired at the Effective Time and
no consideration shall be issued in exchange therefor.

                                       3
<PAGE>

     3.4  Dissenting  Shareholders.  Any  holder of  shares of HEART OF  GEORGIA
Common Stock who  perfects  his  dissenters'  rights in  accordance  with and as
contemplated by Article 13, Part 2 of Title 14 of the GBCC, shall be entitled to
receive  the  value  of  such  shares  in cash as  determined  pursuant  to such
provision of law; provided, that no such payment shall be made to any dissenting
shareholder  unless and until such dissenting  shareholder has complied with the
applicable  provisions of the GBCC and  surrendered to FLAG the  certificates or
certificates  representing  the shares for which  payment is being made.  In the
event  that after the  Effective  Time,  a  dissenting  shareholder  of HEART OF
GEORGIA  fails to  perfect,  or  effectively  withdraws  or loses,  his right to
appraisal  of and  payment  for his  shares,  FLAG shall  issue and  deliver the
consideration to which such holder of shares of HEART OF GEORGIA Common Stock is
entitled  under this Article 3 (without  interest) upon surrender by such holder
of the  certificate  or  certificates  representing  shares of HEART OF  GEORGIA
Common Stock held by him. If and to the extent required by applicable Law, HEART
OF GEORGIA will establish (or cause to be established) an escrow account with an
amount  sufficient to satisfy the maximum aggregate payment that may be required
to be paid to  dissenting  shareholders.  Upon  satisfaction  of all  claims  of
dissenting  shareholders,  the remaining escrowed amount,  reduced by payment of
the fees and expenses of the escrow agent, will be returned to FLAG.

     3.5  Fractional  Shares.   Notwithstanding  any  other  provision  of  this
Agreement,  each  holder of shares of HEART OF GEORGIA  Common  Stock  exchanged
pursuant  to the  Merger who would  otherwise  have been  entitled  to receive a
fraction  of a share  of FLAG  Common  Stock  (after  taking  into  account  all
certificates  delivered by such holder) shall  receive,  in lieu  thereof,  cash
(without interest) in an amount equal to such fractional part of a share of FLAG
Common Stock multiplied by the market value of one share of FLAG Common Stock at
the  Effective  Time.  The market value of one share of FLAG Common Stock at the
Effective  Time shall be the last sale price of such common  stock on the Nasdaq
National  Market (as  reported  by The Wall Street  Journal or, if not  reported
thereby,  any other  authoritative  source selected by FLAG) on the last trading
day preceding the Effective  Time. No such holder will be entitled to dividends,
voting rights, or any other rights as a shareholder in respect of any fractional
shares.


                                   ARTICLE 4.
                               EXCHANGE OF SHARES
                               ------------------

     4.1 Exchange  Procedures.  Promptly  after the Effective  Time,  FLAG shall
cause the exchange agent selected by FLAG (the "Exchange Agent") to mail to each
holder of record of a certificate or certificates  which  represented  shares of
HEART OF GEORGIA  Common  Stock  immediately  prior to the  Effective  Time (the
"Certificates")  appropriate transmittal materials and instructions (which shall
specify  that  delivery  shall be  effected,  and risk of loss and title to such

                                       4
<PAGE>

Certificates  shall pass, only upon proper delivery of such  Certificates to the
Exchange  Agent).  The  Certificate or  Certificates  of HEART OF GEORGIA Common
Stock so delivered shall be duly endorsed as the Exchange Agent may require.  In
the event of a transfer of ownership of shares of HEART OF GEORGIA  Common Stock
represented by Certificates  that are not registered in the transfer  records of
HEART OF GEORGIA,  the consideration  provided in Section 3.1 may be issued to a
transferee  if the  Certificates  representing  such shares are delivered to the
Exchange Agent,  accompanied by all documents required to evidence such transfer
and by evidence  satisfactory  to the Exchange Agent that any  applicable  stock
transfer taxes have been paid. If any Certificate shall have been lost,  stolen,
mislaid or  destroyed,  upon  receipt of (i) an  affidavit of that fact from the
holder claiming such Certificate to be lost, mislaid, stolen or destroyed,  (ii)
such bond,  security or indemnity as FLAG and the Exchange  Agent may reasonably
require, and (iii) any other documents necessary to evidence and effect the bona
fide  exchange  thereof,  the  Exchange  Agent  shall  issue to such  holder the
consideration into which the shares represented by such lost, stolen, mislaid or
destroyed  Certificate  shall  have  been  converted.  The  Exchange  Agent  may
establish such other reasonable and customary rules and procedures in connection
with its  duties as it may deem  appropriate.  After the  Effective  Time,  each
holder of shares of HEART OF  GEORGIA  Common  Stock  (other  than  shares to be
canceled  pursuant to Section 3.3 or as to which  statutory  dissenters'  rights
have been  perfected as provided in Section 3.4) issued and  outstanding  at the
Effective Time shall surrender the Certificate or Certificates representing such
shares to the Exchange Agent and shall promptly upon surrender  thereof  receive
in exchange  therefor the  consideration  provided in Section 3.1, together with
all undelivered  dividends or  distributions  in respect of such shares (without
interest  thereon)  pursuant  to Section  4.2.  FLAG shall not be  obligated  to
deliver the  consideration to which any former holder of HEART OF GEORGIA Common
Stock is entitled as a result of the Merger  until such holder  surrenders  such
holder's  Certificate or  Certificates  for exchange as provided in this Section
4.1. Any other provision of this Agreement notwithstanding, neither FLAG nor the
Exchange  Agent shall be liable to a holder of HEART OF GEORGIA Common Stock for
any  amounts  paid or  property  delivered  in good  faith to a public  official
pursuant to any applicable abandoned property,  escheat or similar Law. Approval
of this  Agreement  by the  shareholders  of HEART OF GEORGIA  shall  constitute
ratification of the appointment of the Exchange Agent.

     4.2 Rights of Former  Shareholders  of HEART OF GEORGIA.  At the  Effective
Time, the stock transfer books of HEART OF GEORGIA shall be closed as to holders
of HEART OF GEORGIA Common Stock  immediately prior to the Effective Time and no
transfer of HEART OF GEORGIA Common Stock by any such holder shall thereafter be
made or  recognized.  Until  surrendered  for  exchange in  accordance  with the
provisions of Section 4.1, each Certificate  theretofore  representing shares of
HEART OF GEORGIA  Common  Stock  (other than  shares to be canceled  pursuant to
Sections 3.3 and 3.4) shall from and after the Effective  Time represent for all
purposes only the right to receive the consideration  provided in Section 3.1 in
exchange therefor,  subject,  however, to FLAG's obligation to pay any dividends
or make any other  distributions  with a record date prior to the Effective Time
which have been  declared  or made by HEART OF GEORGIA in respect of such shares
of HEART OF GEORGIA Common Stock in accordance  with the terms of this Agreement
and which remain unpaid at the Effective  Time. To the extent  permitted by Law,
former  shareholders  of record of HEART OF GEORGIA  shall be  entitled  to vote
after the Effective Time at any meeting of FLAG shareholders the number of whole

                                       5
<PAGE>

shares of FLAG  Common  Stock into  which  their  respective  shares of HEART OF
GEORGIA  Common  Stock are  converted,  regardless  of whether such holders have
exchanged their Certificates for certificates  representing FLAG Common Stock in
accordance with the provisions of this  Agreement.  Whenever a dividend or other
distribution  is declared by FLAG on the FLAG Common Stock,  the record date for
which is at or after the Effective Time, the declaration shall include dividends
or other  distributions on all shares of FLAG Common Stock issuable  pursuant to
this Agreement,  but no dividend or other distribution payable to the holders of
record of FLAG Common  Stock as of any time  subsequent  to the  Effective  Time
shall be delivered to the holder of any Certificate until such holder surrenders
such  Certificate  for  exchange  as  provided  in Section  4.1.  However,  upon
surrender of such Certificate,  both the FLAG Common Stock certificate (together
with all such undelivered dividends or other distributions without interest) and
any undelivered dividends and cash payments payable hereunder (without interest)
shall be  delivered  and paid with  respect  to each share  represented  by such
Certificate.  No interest  shall be payable  with respect to any cash to be paid
under Section 3.1 of this Agreement  except to the extent required in connection
with the exercise of dissenters' rights.


                                   ARTICLE 5.
               REPRESENTATIONS AND WARRANTIES OF HEART OF GEORGIA
               --------------------------------------------------

     HEART OF GEORGIA hereby represents and warrants to FLAG as follows:

     5.1 Organization,  Standing,  and Power.  HEART OF GEORGIA is a corporation
duly  organized,  validly  existing,  and in good standing under the Laws of the
State of Georgia,  and has the  corporate  power and  authority  to carry on its
business as now  conducted  and to own,  lease and operate its material  Assets.
HEART OF GEORGIA is duly qualified or licensed to transact business as a foreign
corporation  in good  standing in the United  States and  foreign  jurisdictions
where the  character  of its Assets or the  nature or  conduct  of its  business
requires it to be so  qualified or licensed,  except for such  jurisdictions  in
which the failure to be so  qualified  or licensed is not  reasonably  likely to
have,  individually  or in the aggregate,  a HEART OF GEORGIA  Material  Adverse
Effect. The minute book and other organizational  documents for HEART OF GEORGIA
have been made  available  to FLAG for its review and,  except as  disclosed  in
Section 5.1 of the HEART OF GEORGIA Disclosure Memorandum, are true and complete
in all  material  respects  as in  effect as of the date of this  Agreement  and
accurately  reflect in all  material  respects  all  amendments  thereto and all
proceedings of the Board of Directors and shareholders thereof.

     5.2 Authority of HEART OF GEORGIA; No Breach By Agreement.

     (a) HEART OF GEORGIA has the  corporate  power and  authority  necessary to
execute,  deliver,  and  perform its  obligations  under this  Agreement  and to
consummate the transactions  contemplated hereby. The execution,  delivery,  and
performance  of  this  Agreement  and  the   consummation  of  the  transactions
contemplated herein, including the Merger, have been duly and validly authorized
by all  necessary  corporate  action in respect  thereof on the part of HEART OF
GEORGIA,  subject to the approval of this Agreement by the holders of a majority

                                       6
<PAGE>

of the  outstanding  voting  stock  of  HEART  OF  GEORGIA,  which  is the  only
shareholder  vote required for approval of this Agreement,  and  consummation of
the Merger by HEART OF GEORGIA.  Subject to such requisite shareholder approval,
this Agreement  represents a legal,  valid,  and binding  obligation of HEART OF
GEORGIA,  enforceable  against  HEART OF  GEORGIA in  accordance  with its terms
(except  in all  cases  as such  enforceability  may be  limited  by  applicable
bankruptcy,   insolvency,   reorganization,    receivership,    conservatorship,
moratorium,  or similar Laws  affecting the  enforcement  of  creditors'  rights
generally and except that the  availability of the equitable  remedy of specific
performance  or  injunctive  relief is  subject to the  discretion  of the court
before which any proceeding may be brought).

     (b) Neither  the  execution  and  delivery  of this  Agreement  by HEART OF
GEORGIA,   nor  the  consummation  by  HEART  OF  GEORGIA  of  the  transactions
contemplated  hereby,  nor  compliance  by  HEART  OF  GEORGIA  with  any of the
provisions hereof, will (i) conflict with or result in a breach of any provision
of HEART OF  GEORGIA's  Articles of  Incorporation  or Bylaws,  or the  Charter,
Articles of Incorporation,  or Bylaws of any HEART OF GEORGIA  Subsidiary or any
resolution adopted by the board of directors or the shareholders of any HEART OF
GEORGIA  Entity,  or (ii)  except as  disclosed  in Section  5.2 of the HEART OF
GEORGIA  Disclosure  Memorandum,  constitute  or result in a Default  under,  or
require any Consent  pursuant  to, or result in the  creation of any Lien on any
Asset of any HEART OF GEORGIA Entity under,  any Contract or Permit of any HEART
OF GEORGIA  Entity,  where such  Default or Lien,  or any failure to obtain such
Consent, is reasonably likely to have, individually or in the aggregate, a HEART
OF GEORGIA Material Adverse Effect, or (iii) subject to receipt of the requisite
Consents referred to in Section 9.1(b),  constitute or result in a Default under
or require any Consent  pursuant to any Law or Order  applicable to any HEART OF
GEORGIA Entity or any of their  respective  material Assets  (including any FLAG
Entity or any HEART OF  GEORGIA  Entity  becoming  subject  to or liable for the
payment of any Tax or any of the Assets owned by any FLAG Entity or any HEART OF
GEORGIA Entity being reassessed or revalued by any Taxing authority).

     (c)  Other  than  in  connection  or  compliance  with  the  provisions  of
applicable   federal  banking  laws,  and  other  than  Consents  required  from
Regulatory  Authorities,  and other than notices to or filings with the Internal
Revenue Service or the Pension Benefit Guaranty  Corporation with respect to any
employee benefit plans, or under the HSR Act, and other than Consents,  filings,
or  notifications  which, if not obtained or made, are not reasonably  likely to
have,  individually  or in the aggregate,  a HEART OF GEORGIA  Material  Adverse
Effect,  no notice to,  filing with, or Consent of, any public body or authority
is  necessary  for the  consummation  by HEART OF  GEORGIA of the Merger and the
other transactions contemplated in this Agreement.

     5.3 Capital Stock.

     (a) As of the date of this Agreement, the authorized capital stock of HEART
OF GEORGIA  consists of 1,000,000  shares of HEART OF GEORGIA  Common Stock,  of
which  220,000  shares  are  issued  and  outstanding.  All  of the  issued  and
outstanding  shares of capital  stock of HEART OF GEORGIA  are duly and  validly
issued and outstanding and are fully paid and nonassessable under the GBCC. None
of the  outstanding  shares of capital stock of HEART OF GEORGIA has been issued

                                       7
<PAGE>

in violation of any  preemptive  rights of the current or past  shareholders  of
HEART OF GEORGIA.

     (b)  Except as set forth in  Section  5.3(a),  or as  disclosed  in Section
5.3(b) of the HEART OF  GEORGIA  Disclosure  Memorandum,  there are no shares of
capital stock or other equity securities of HEART OF GEORGIA  outstanding and no
outstanding Equity Rights relating to the capital stock of HEART OF GEORGIA.

     5.4 HEART OF  GEORGIA  Subsidiaries.  HEART OF  GEORGIA  has  disclosed  in
Section 5.4 of the HEART OF GEORGIA  Disclosure  Memorandum  all of the HEART OF
GEORGIA  Subsidiaries  that are  corporations  (identifying  its jurisdiction of
incorporation,  each  jurisdiction  in which the  character of its Assets or the
nature or conduct of its business requires it to be qualified and/or licensed to
transact  business,  and the  number of shares  owned and  percentage  ownership
interest  represented  by such share  ownership) and all of the HEART OF GEORGIA
Subsidiaries  that  are  general  or  limited  partnerships,  limited  liability
companies, or other non-corporate entities (identifying the Law under which such
entity is organized,  each  jurisdiction in which the character of its Assets or
the  nature or  conduct  of its  business  requires  it to be  qualified  and/or
licensed  to  transact  business,  and the amount  and  nature of the  ownership
interest  therein).  Except as  disclosed in Section 5.4 of the HEART OF GEORGIA
Disclosure Memorandum,  HEART OF GEORGIA or one of its wholly-owned Subsidiaries
owns all of the issued and outstanding  shares of capital stock (or other equity
interests)  of each HEART OF  GEORGIA  Subsidiary.  No  capital  stock (or other
equity interest) of any HEART OF GEORGIA Subsidiary is or may become required to
be issued  (other  than to  another  HEART OF  GEORGIA  Entity) by reason of any
Equity  Rights,  and  there  are no  Contracts  by which  any  HEART OF  GEORGIA
Subsidiary  is bound to issue  (other than to another  HEART OF GEORGIA  Entity)
additional  shares of its capital  stock (or other equity  interests)  or Equity
Rights or by which any HEART OF  GEORGIA  Entity is or may be bound to  transfer
any shares of the  capital  stock (or other  equity  interests)  of any HEART OF
GEORGIA Subsidiary (other than to another HEART OF GEORGIA Entity). There are no
Contracts  relating  to the rights of any HEART OF GEORGIA  Entity to vote or to
dispose of any shares of the capital  stock (or other equity  interests)  of any
HEART OF GEORGIA Subsidiary. All of the shares of capital stock (or other equity
interests) of each HEART OF GEORGIA Subsidiary held by a HEART OF GEORGIA Entity
are fully  paid and  (except  pursuant  to 12 U.S.C.  Section  55 in the case of
national  banks and  comparable,  applicable  State Law,  if any, in the case of
State  depository  institutions)  nonassessable  and are  owned by the  HEART OF
GEORGIA Entity free and clear of any Lien. Except as disclosed in Section 5.4 of
the HEART OF GEORGIA Disclosure Memorandum,  each HEART OF GEORGIA Subsidiary is
either a bank,  savings  association  or a corporation,  and is duly  organized,
validly  existing,  and in good standing under the Laws of the  jurisdiction  in
which it is incorporated or organized, and has the corporate power and authority
necessary  for it to own,  lease,  and  operate  its  Assets and to carry on its
business as now conducted. Each HEART OF GEORGIA Subsidiary is duly qualified or
licensed to transact  business as a foreign  corporation in good standing in the
States of the United States and foreign jurisdictions where the character of its
Assets or the nature or conduct of its  business  requires it to be so qualified
or  licensed,  except  for such  jurisdictions  in which  the  failure  to be so
qualified or licensed is not reasonably  likely to have,  individually or in the
aggregate,  a HEART OF GEORGIA  Material  Adverse Effect.  Each HEART OF GEORGIA
Subsidiary  that is a  depository  institution  is an "insured  institution"  as

                                       8
<PAGE>

defined  in  the  Federal  Deposit  Insurance  Act  and  applicable  regulations
thereunder. The minute book and other organizational documents for each HEART OF
GEORGIA Subsidiary have been made available to FLAG for its review,  and, except
as disclosed in Section 5.4 of the HEART OF GEORGIA Disclosure  Memorandum,  are
true and complete in all  material  respects as in effect as of the date of this
Agreement and accurately reflect in all material respects all amendments thereto
and all proceedings of the Board of Directors and shareholders thereof.

     5.5 Financial Statements. Each of the HEART OF GEORGIA Financial Statements
(including,  in each case,  any related  notes) was prepared in accordance  with
GAAP applied on a consistent  basis  throughout the periods  involved (except as
may be  indicated  in the  notes  to  such  financial  statements),  and  fairly
presented in all material respects the consolidated  financial position of HEART
OF GEORGIA and its  Subsidiaries as at the respective dates and the consolidated
results of operations and cash flows for the periods indicated,  except that the
unaudited  interim  financial  statements  were or are  subject  to  normal  and
recurring year-end adjustments which were not or are not expected to be material
in amount or effect.

     5.6 Absence of Undisclosed Liabilities.  No HEART OF GEORGIA Entity has any
Liabilities  that  are  reasonably  likely  to  have,  individually  or  in  the
aggregate,  a HEART OF GEORGIA Material Adverse Effect, except Liabilities which
are accrued or reserved against in the  consolidated  balance sheets of HEART OF
GEORGIA as of  December  31,  1997 or March 31,  1998,  included in the HEART OF
GEORGIA  Financial  Statements  or reflected in the notes  thereto.  No HEART OF
GEORGIA Entity has incurred or paid any Liability  since March 31, 1998,  except
for such  Liabilities  incurred or paid (i) in the  ordinary  course of business
consistent  with past business  practice and which are not reasonably  likely to
have,  individually  or in the aggregate,  a HEART OF GEORGIA  Material  Adverse
Effect  or  (ii)  in  connection  with  the  transactions  contemplated  by this
Agreement.

     5.7 Absence of Certain Changes or Events.  Since December 31, 1997,  except
as disclosed in the HEART OF GEORGIA Financial Statements delivered prior to the
date of this  Agreement  or as  disclosed in Section 5.7 of the HEART OF GEORGIA
Disclosure  Memorandum,  (i) there have been no events,  changes, or occurrences
which  have  had,  or are  reasonably  likely  to have,  individually  or in the
aggregate, a HEART OF GEORGIA Material Adverse Effect, and (ii) HEART OF GEORGIA
Entities have not taken any action,  or failed to take any action,  prior to the
date of this Agreement, which action or failure, if taken after the date of this
Agreement, would represent or result in a material breach or violation of any of
the covenants and agreements of HEART OF GEORGIA provided in Article 7.

     5.8  Tax Matters.

     (a) All Tax  Returns  required  to be filed by or on behalf of any HEART OF
GEORGIA  Entities  have been timely filed or requests for  extensions  have been
timely  filed,  granted,  and, to the  Knowledge  of HEART OF GEORGIA,  have not
expired for such  periods,  except to the extent that all such failures to file,
taken together,  are not reasonably  likely to have a HEART OF GEORGIA  Material
Adverse  Effect,  and all Tax Returns  filed are  complete  and  accurate in all
material respects. All Taxes shown on filed Tax Returns have been paid. There is

                                       9
<PAGE>

no audit examination, deficiency, or refund Litigation with respect to any Taxes
that is  reasonably  likely  to  result  in a  determination  that  would  have,
individually or in the aggregate,  a HEART OF GEORGIA  Material  Adverse Effect,
except  as  reserved  against  in the  HEART  OF  GEORGIA  Financial  Statements
delivered  prior to the date of this Agreement or as disclosed in Section 5.8 of
the HEART OF GEORGIA Disclosure Memorandum.  All Taxes and other Liabilities due
with respect to completed and settled  examinations or concluded Litigation have
been paid.  There are no Liens  with  respect to Taxes upon any of the Assets of
HEART OF GEORGIA  Entities,  except for any such Liens which are not  reasonably
likely to have a HEART OF GEORGIA  Material  Adverse  Effect or with  respect to
which the Taxes are not yet due and payable.

     (b) None of the HEART OF GEORGIA  Entities  has  executed an  extension  or
waiver of any statute of  limitations on the assessment or collection of any Tax
due (excluding such statutes that relate to years currently under examination by
the Internal Revenue Service or other  applicable  taxing  authorities)  that is
currently in effect.

     (c) The  provision  for any Taxes due or to become due for any of the HEART
OF GEORGIA  Entities for the period or periods through and including the date of
the respective HEART OF GEORGIA  Financial  Statements that has been made and is
reflected on such HEART OF GEORGIA  Financial  Statements is sufficient to cover
all such Taxes.

     (d) Deferred  Taxes of HEART OF GEORGIA  Entities have been provided for in
accordance with GAAP.

     (e) Except as disclosed  in Section 5.8 of the HEART OF GEORGIA  Disclosure
Memorandum,  none  of the  HEART  OF  GEORGIA  Entities  is a  party  to any Tax
allocation or sharing agreement and none of HEART OF GEORGIA Entities has been a
member of an affiliated  group filing a  consolidated  federal income Tax Return
(other than a group the common  parent of which was HEART OF GEORGIA) or has any
Liability  for  Taxes  of any  Person  (other  than  HEART  OF  GEORGIA  and its
Subsidiaries)  under  Treasury  Regulation  Section  1.1502-6  (or  any  similar
provision of state,  local or foreign  Law) as a  transferee  or successor or by
Contract or otherwise.

     (f) Each of the HEART OF GEORGIA  Entities is in compliance  with,  and its
records contain all information and documents  (including properly completed IRS
Forms W-9) necessary to comply with, all  applicable  information  reporting and
Tax withholding  requirements under federal, state, and local Tax Laws, and such
records  identify with  specificity all accounts  subject to backup  withholding
under Section 3406 of the Internal  Revenue Code,  except for such  instances of
noncompliance  and  such  omissions  as  are  not  reasonably  likely  to  have,
individually or in the aggregate, a HEART OF GEORGIA Material Adverse Effect.

     (g) Except as disclosed  in Section 5.8 of the HEART OF GEORGIA  Disclosure
Memorandum,  none of the HEART OF GEORGIA  Entities  has made any  payments,  is
obligated  to make  any  payments,  or is a party  to any  Contract  that  could
obligate it to make any payments that would be  disallowed as a deduction  under
Sections 28OG or 162(m) of the Internal Revenue Code.

                                       10
<PAGE>

     (h)  Exclusive of the Merger,  there has not been an ownership  change,  as
defined in Internal  Revenue Code Section 382(g),  of HEART OF GEORGIA  Entities
that  occurred  during or after any  Taxable  Period in which  HEART OF  GEORGIA
Entities  incurred a net operating  loss that carries over to any Taxable Period
ending after December 31, 1997.

     (i) No HEART OF  GEORGIA  Entity  has or has had in any  foreign  country a
permanent  establishment,  as defined in any applicable tax treaty or convention
between the United States and such foreign country.

     (j) All material elections with respect to Taxes affecting HEART OF GEORGIA
Entities have been or will be timely made.

     5.9 Allowance for Possible Loan Losses.  The allowance for possible loan or
credit losses (the  "Allowance")  shown on the  consolidated  balance  sheets of
HEART  OF  GEORGIA  included  in the most  recent  HEART  OF  GEORGIA  Financial
Statements  dated prior to the date of this  Agreement  was,  and the  Allowance
shown on the  consolidated  balance  sheets of HEART OF GEORGIA  included in the
HEART OF GEORGIA Financial Statements as of dates subsequent to the execution of
this Agreement will be, as of the dates thereof, adequate (within the meaning of
GAAP and applicable  regulatory  requirements  or guidelines) to provide for all
known or reasonably  anticipated  losses relating to or inherent in the loan and
lease portfolios  (including  accrued interest  receivables) of HEART OF GEORGIA
Entities  and  other  extensions  of credit  (including  letters  of credit  and
commitments to make loans or extend  credit) by HEART OF GEORGIA  Entities as of
the dates thereof,  except where the failure of such Allowance to be so adequate
is not reasonably likely to have a HEART OF GEORGIA Material Adverse Effect.

     5.10 Assets.

     (a) Except as disclosed in Section 5.10 of the HEART OF GEORGIA  Disclosure
Memorandum or as disclosed or reserved against in the HEART OF GEORGIA Financial
Statements  delivered  prior to the  date of this  Agreement,  HEART OF  GEORGIA
Entities have good and marketable  title, free and clear of all Liens, to all of
their  respective  Assets,  except for any such Liens or other  defects of title
which are not  reasonably  likely to have a HEART OF  GEORGIA  Material  Adverse
Effect.  All tangible  properties used in the businesses of the HEART OF GEORGIA
Entities are usable in the ordinary course of business  consistent with HEART OF
GEORGIA's past practices.

     (b) All Assets  which are  material  to HEART OF  GEORGIA's  business  on a
consolidated  basis,  held  under  leases  or  subleases  by any of the HEART OF
GEORGIA Entities,  are held under valid Contracts  enforceable  against HEART OF
GEORGIA in accordance with their respective terms (except as enforceability  may
be limited by applicable bankruptcy, insolvency, reorganization,  moratorium, or
other Laws affecting the enforcement of creditors'  rights  generally and except
that the  availability  of the  equitable  remedy  of  specific  performance  or
injunctive  relief is subject to the  discretion  of the court  before which any
proceedings may be brought),  and, assuming the  enforceability of such Contract
against the third party thereto, each such Contract is in full force and effect.

                                       11
<PAGE>

     (c) HEART OF GEORGIA  Entities  currently  maintain the insurance  policies
described in Section 5.10(c) of the HEART OF GEORGIA Disclosure Memorandum. None
of the HEART OF GEORGIA  Entities has received written notice from any insurance
carrier  that (i) any policy of  insurance  will be  canceled  or that  coverage
thereunder will be reduced or eliminated,  or (ii) premium costs with respect to
such policies of insurance will be substantially increased.  There are presently
no claims for amounts  exceeding in any  individual  case $25,000  pending under
such  policies of insurance  and no written  notices of claims in excess of such
amounts have been given by any HEART OF GEORGIA Entity under such policies.

     (d) The Assets of the HEART OF GEORGIA Entities include all material Assets
required to operate the  business of the HEART OF GEORGIA  Entities as presently
conducted.

     5.11  Intellectual  Property.  Each HEART OF GEORGIA  Entity  owns or has a
license to use all of the  Intellectual  Property  used by such HEART OF GEORGIA
Entity in the ordinary  course of its business.  Each HEART OF GEORGIA Entity is
the owner of or has a license to any Intellectual Property sold or licensed to a
third  party by such HEART OF GEORGIA  Entity in  connection  with such HEART OF
GEORGIA Entity's business  operations,  and such HEART OF GEORGIA Entity has the
right to convey by sale or license any  Intellectual  Property so  conveyed.  No
HEART OF GEORGIA  Entity is in material  Default  under any of its  Intellectual
Property  licenses.  No proceedings have been instituted,  or are pending or, to
the Knowledge of HEART OF GEORGIA, threatened, which challenge the rights of any
HEART OF GEORGIA  Entity with respect to  Intellectual  Property  used,  sold or
licensed by such HEART OF GEORGIA Entity in the course of its business,  nor has
any person claimed or alleged any rights to such Intellectual  Property.  To the
Knowledge  of HEART OF  GEORGIA,  the  conduct of the  business  of the HEART OF
GEORGIA  Entities  does not  infringe  any  Intellectual  Property  of any other
person.  Except as disclosed in Section 5.11 of the HEART OF GEORGIA  Disclosure
Memorandum,  no  HEART OF  GEORGIA  Entity  is  obligated  to pay any  recurring
royalties to any Person with respect to any such Intellectual Property.

     5.12 Environmental Matters.

     (a) Except as disclosed in Section 5.12 of the HEART OF GEORGIA  Disclosure
Memorandum,  to the Knowledge of HEART OF GEORGIA, each HEART OF GEORGIA Entity,
its Participation  Facilities,  and its Operating Properties are, and have been,
in compliance with all  Environmental  Laws, except for violations which are not
reasonably likely to have,  individually or in the aggregate, a HEART OF GEORGIA
Material Adverse Effect.

     (b)  There  is no  Litigation  pending  or,  to the  Knowledge  of HEART OF
GEORGIA,  threatened,  before any court,  governmental  agency,  or authority or
other  forum in  which  any  HEART OF  GEORGIA  Entity  or any of its  Operating
Properties or  Participation  Facilities (or HEART OF GEORGIA in respect of such
Operating  Property or  Participation  Facility)  has been or,  with  respect to
threatened Litigation, may be named as a defendant (i) for alleged noncompliance
(including by any predecessor)  with any  Environmental  Law or (ii) relating to
the emission,  migration,  release,  discharge,  spillage,  or disposal into the

                                       12
<PAGE>

environment of any Hazardous  Material,  whether or not occurring at, on, under,
adjacent to, or affecting (or potentially  affecting) a site owned,  leased,  or
operated by any HEART OF GEORGIA  Entity or any of its  Operating  Properties or
Participation Facilities or any neighboring property, except for such Litigation
pending or threatened that is not reasonably likely to have,  individually or in
the aggregate, a HEART OF GEORGIA Material Adverse Effect, nor, to the Knowledge
of HEART OF GEORGIA,  is there any reasonable basis for any Litigation of a type
described in this  sentence,  except such as is not  reasonably  likely to have,
individually or in the aggregate, a HEART OF GEORGIA Material Adverse Effect.

     (c) Except as disclosed in Section 5.12 of the HEART OF GEORGIA  Disclosure
Memorandum,  during the period of (i) any HEART OF GEORGIA Entity's ownership or
operation  of any of their  respective  current  Assets,  or (ii)  any  HEART OF
GEORGIA Entity's  participation in the management of any Participation  Facility
or any Operating Property, to the Knowledge of HEART OF GEORGIA, there have been
no  emissions,  migrations,  releases,  discharges,  spillages,  or disposals of
Hazardous Material in, on, at, under,  adjacent to, or affecting (or potentially
affecting) such properties or any neighboring properties, except such as are not
reasonably likely to have,  individually or in the aggregate, a HEART OF GEORGIA
Material  Adverse  Effect.  Except as  disclosed in Section 5.12 of the HEART OF
GEORGIA Disclosure  Memorandum,  prior to the period of (i) any HEART OF GEORGIA
Entity's ownership or operation of any of their respective  current  properties,
(ii) any  HEART OF  GEORGIA  Entity's  participation  in the  management  of any
Participation  Facility or any Operating Property,  to the Knowledge of HEART OF
GEORGIA,  there  were  no  releases,  discharges,  spillages,  or  disposals  of
Hazardous Material in, on, under, or affecting any such property,  Participation
Facility or  Operating  Property,  except such as are not  reasonably  likely to
have,  individually  or in the aggregate,  a HEART OF GEORGIA  Material  Adverse
Effect.

     5.13  Compliance  with Laws. Each HEART OF GEORGIA Entity has in effect all
Permits  necessary for it to own,  lease,  or operate its material Assets and to
carry on its business as now conducted,  except for those Permits the absence of
which are not reasonably  likely to have,  individually  or in the aggregate,  a
HEART OF GEORGIA  Material  Adverse  Effect,  and, to the  Knowledge of HEART OF
GEORGIA,  there has  occurred  no  Default  under any such  Permit,  other  than
Defaults  which  are not  reasonably  likely  to  have,  individually  or in the
aggregate,  a HEART OF GEORGIA Material  Adverse Effect.  Except as disclosed in
Section 5.13 of the HEART OF GEORGIA Disclosure Memorandum, none of the HEART OF
GEORGIA Entities:

     (a)  is in  Default  under  any  of  the  provisions  of  its  Articles  of
Incorporation or Bylaws (or other governing instruments);

     (b) is in Default  under any Laws,  Orders,  or Permits  applicable  to its
business or employees conducting its business, except for Defaults which are not
reasonably likely to have,  individually or in the aggregate, a HEART OF GEORGIA
Material Adverse Effect; or

     (c) since January 1, 1995, or as of the date of organization, if later, has
received any written  notification or written  communication  from any agency or
department of federal, state, or local government or any Regulatory Authority or
the staff  thereof  (i)  asserting  that any HEART OF  GEORGIA  Entity is not in
compliance with any of the Laws or Orders which such  governmental  authority or

                                       13
<PAGE>

Regulatory Authority enforces,  where such noncompliance is reasonably likely to
have,  individually  or in the aggregate,  a HEART OF GEORGIA  Material  Adverse
Effect,  (ii)  threatening  to revoke any Permits,  the  revocation  of which is
reasonably likely to have,  individually or in the aggregate, a HEART OF GEORGIA
Material Adverse Effect, or (iii) requiring any HEART OF GEORGIA Entity to enter
into or consent to the issuance of a cease and desist order,  formal  agreement,
directive,  commitment,  or memorandum of  understanding,  or to adopt any Board
resolution or similar undertaking, which restricts materially the conduct of its
business or in any material manner relates to its capital  adequacy,  its credit
or reserve policies, its management, or the payment of dividends.  Copies of all
material reports,  correspondence,  notices and other documents  relating to any
inspection, audit, monitoring or other form of review or enforcement action by a
Regulatory Authority have been made available to FLAG.

     5.14  Labor  Relations.  No HEART OF GEORGIA  Entity is the  subject of any
Litigation  asserting that it or any other HEART OF GEORGIA Entity has committed
an unfair labor practice (within the meaning of the National Labor Relations Act
or  comparable  state law) or seeking to compel it or any other HEART OF GEORGIA
Entity to  bargain  with any labor  organization  as to wages or  conditions  of
employment,  nor is  any  HEART  OF  GEORGIA  Entity  party  to  any  collective
bargaining  agreement,  nor is there any strike or other labor dispute involving
any HEART OF GEORGIA Entity, pending or threatened, or to the Knowledge of HEART
OF  GEORGIA,  is there any  activity  involving  any HEART OF  GEORGIA  Entity's
employees  seeking to certify a  collective  bargaining  unit or engaging in any
other organization activity.

     5.15 Employee Benefit Plans.

     (a) HEART OF GEORGIA has  disclosed in Section 5.15 of the HEART OF GEORGIA
Disclosure Memorandum,  and has delivered or made available to FLAG prior to the
execution of this  Agreement  copies in each case of, all  pension,  retirement,
profit-sharing,  deferred compensation,  stock option, employee stock ownership,
severance  pay,  vacation,  bonus,  or other  incentive  plan, all other written
employee programs,  arrangements, or agreements, all medical, vision, dental, or
other health plans,  all life insurance  plans,  and all other employee  benefit
plans or fringe benefit plans,  including  "employee benefit plans" as that term
is defined in Section 3(3) of ERISA, currently adopted, maintained by, sponsored
in whole or in part by,  or  contributed  to by any HEART OF  GEORGIA  Entity or
ERISA Affiliate (as defined in  subparagraph  (c) below) thereof for the benefit
of employees, retirees, dependents, spouses, directors, independent contractors,
or other beneficiaries and under which employees, retirees, dependents, spouses,
directors,  independent  contractors,  or other  beneficiaries  are  eligible to
participate  (collectively,  "HEART OF GEORGIA  Benefit  Plans").  Each HEART OF
GEORGIA  Benefit Plan which is an "employee  pension benefit plan," as that term
is defined  in  Section  3(2) of ERISA,  is  referred  to herein as an "HEART OF
GEORGIA  ERISA Plan." Each HEART OF GEORGIA  ERISA Plan which is also a "defined
benefit  plan" (as  defined in Section  4140 of the  Internal  Revenue  Code) is
referred  to herein as an "HEART OF GEORGIA  Pension  Plan." No HEART OF GEORGIA
Pension Plan is or has been a  multiemployer  plan within the meaning of Section
3(37) of ERISA.

                                       14
<PAGE>

     (b)  All  HEART  OF  GEORGIA  Benefit  Plans  are in  compliance  with  the
applicable  terms of ERISA,  the Internal Revenue Code, and any other applicable
Laws  the  breach  or  violation  of  which  are  reasonably   likely  to  have,
individually or in the aggregate,  a HEART OF GEORGIA  Material  Adverse Effect.
Each HEART OF GEORGIA ERISA Plan which is intended to be qualified under Section
401(a) of the  Internal  Revenue  Code has  received a  favorable  determination
letter from the Internal Revenue Service,  and HEART OF GEORGIA has no Knowledge
of any  circumstances  likely  to  result in  revocation  of any such  favorable
determination  letter. To the Knowledge of HEART OF GEORGIA, no HEART OF GEORGIA
Entity has engaged in a transaction with respect to any HEART OF GEORGIA Benefit
Plan that,  assuming the taxable  period of such  transaction  expired as of the
date  hereof,  would  subject  any HEART OF GEORGIA  Entity to a Tax  imposed by
either  Section 4975 of the Internal  Revenue Code or Section 502(i) of ERISA in
amounts which are reasonably likely to have, individually or in the aggregate, a
HEART OF GEORGIA Material Adverse Effect.

     (c) No HEART OF GEORGIA Pension Plan has any "unfunded current  liability,"
as that term is defined in Section  302(d)(8)(A)  of ERISA,  based on  actuarial
assumptions set forth for such plan's most recent actuarial valuation. Since the
date of the most  recent  actuarial  valuation,  there has been (i) no  material
change in the financial  position of any HEART OF GEORGIA  Pension Plan, (ii) no
change in the actuarial assumptions with respect to any HEART OF GEORGIA Pension
Plan, and (iii) no increase in benefits under any HEART OF GEORGIA  Pension Plan
as a result of plan  amendments or changes in applicable Law which is reasonably
likely to have,  individually or in the aggregate,  a HEART OF GEORGIA  Material
Adverse  Effect or materially  adversely  affect the funding  status of any such
plan.  Neither any HEART OF GEORGIA Pension Plan nor any "single employer plan,"
within the  meaning of  Section  4001(a)(15)  of ERISA,  currently  or  formerly
maintained by any HEART OF GEORGIA Entity,  or the  single-employer  plan of any
entity which is considered one employer with HEART OF GEORGIA under Section 4001
of ERISA or Section  414 of the  Internal  Revenue  Code or Section 302 of ERISA
(whether or not  waived)  (an "ERISA  Affiliate")  has an  "accumulated  funding
deficiency"  within the meaning of Section 412 of the  Internal  Revenue Code or
Section  302 of ERISA,  which is  reasonably  likely to have a HEART OF  GEORGIA
Material Adverse Effect. No HEART OF GEORGIA Entity has provided, or is required
to  provide,   security  to  a  HEART  OF  GEORGIA   Pension   Plan  or  to  any
single-employer plan of an ERISA Affiliate pursuant to Section 401(a)(29) of the
Internal Revenue Code.

     (d) Within the six-year  period  preceding the Effective Time, no Liability
under  Subtitle  C or D of  Title  IV of ERISA  has  been or is  expected  to be
incurred by any HEART OF GEORGIA Entity with respect to any ongoing,  frozen, or
terminated  single-employer  plan  or the  single-employer  plan  of  any  ERISA
Affiliate,  which  Liability  is  reasonably  likely to have a HEART OF  GEORGIA
Material Adverse Effect.  No HEART OF GEORGIA Entity has incurred any withdrawal
Liability with respect to a  multiemployer  plan under Subtitle B of Title IV of
ERISA  (regardless  of whether based on  contributions  of an ERISA  Affiliate),
which Liability is reasonably likely to have a HEART OF GEORGIA Material Adverse
Effect. No notice of a "reportable event," within the meaning of Section 4043 of
ERISA for which the 30-day reporting  requirement has not been waived,  has been
required  to be filed  for any  HEART OF  GEORGIA  Pension  Plan or by any ERISA
Affiliate within the 12-month period ending on the date hereof.

                                       15
<PAGE>

     (e) Except as disclosed in Section 5.15 of the HEART OF GEORGIA  Disclosure
Memorandum,  no HEART OF GEORGIA Entity has any Liability for retiree health and
life benefits  under any of the HEART OF GEORGIA  Benefit Plans and there are no
restrictions on the rights of such HEART OF GEORGIA Entity to amend or terminate
any such  retiree  health  or  benefit  Plan  without  incurring  any  Liability
thereunder,  which  Liability  is  reasonably  likely to have a HEART OF GEORGIA
Material Adverse Effect.

     (f) Except as disclosed in Section 5.15 of the HEART OF GEORGIA  Disclosure
Memorandum,  neither  the  execution  and  delivery  of this  Agreement  nor the
consummation  of the  transactions  contemplated  hereby  will (i) result in any
payment (including severance,  unemployment  compensation,  golden parachute, or
otherwise)  becoming due to any director or any employee of any HEART OF GEORGIA
Entity from any HEART OF GEORGIA Entity under any HEART OF GEORGIA  Benefit Plan
or otherwise,  (ii) increase any benefits  otherwise  payable under any HEART OF
GEORGIA Benefit Plan, or (iii) result in any acceleration of the time of payment
or vesting of any such benefit, where such payment, increase, or acceleration is
reasonably likely to have,  individually or in the aggregate, a HEART OF GEORGIA
Material Adverse Effect.

     (g) The  actuarial  present  values of all  accrued  deferred  compensation
entitlements   (including   entitlements   under  any  executive   compensation,
supplemental  retirement,  or  employment  agreement)  of  employees  and former
employees  of any HEART OF GEORGIA  Entity and their  respective  beneficiaries,
other than  entitlements  accrued pursuant to funded retirement plans subject to
the  provisions  of Section 412 of the  Internal  Revenue Code or Section 302 of
ERISA, have been fully reflected on the HEART OF GEORGIA Financial Statements to
the extent required by and in accordance with GAAP.

     5.16 Material  Contracts.  Except as disclosed in Section 5.16 of the HEART
OF GEORGIA Disclosure  Memorandum or otherwise reflected in the HEART OF GEORGIA
Financial  Statements,  none of the HEART OF GEORGIA Entities,  nor any of their
respective  Assets,  businesses,  or  operations,  is a party to, or is bound or
affected  by,  or  receives  benefits  under,  (i)  any  employment,  severance,
termination, consulting, or retirement Contract providing for aggregate payments
to any  Person in any  calendar  year in excess of  $50,000,  (ii) any  Contract
relating  to the  borrowing  of money  by any  HEART OF  GEORGIA  Entity  or the
guarantee  by any HEART OF GEORGIA  Entity of any such  obligation  (other  than
Contracts   evidencing   deposit   liabilities,   purchases  of  federal  funds,
fully-secured  repurchase agreements,  Federal Home Loan Bank advances and trade
payables and Contracts relating to borrowings or guarantees made in the ordinary
course of business),  (iii) any Contract which  prohibits or restricts any HEART
OF GEORGIA  Entity from engaging in any business  activities  in any  geographic
area, line of business or otherwise in competition  with any other Person,  (iv)
any Contract  between or among the HEART OF GEORGIA  Entities,  (v) any Contract
relating to the provision of data processing,  network  communication,  or other
technical  services  to or by any HEART OF  GEORGIA  Entity,  (vi) any  exchange
traded or over-the-counter swap, forward,  future, option, cap, floor, or collar
financial  Contract,  or any other interest rate or foreign currency  protection
Contract  not  included  on its balance  sheet  which is a financial  derivative
Contract,  and (vii) any other  Contract  or  amendment  thereto  that  would be
required to be filed as an exhibit to a Form 10-K filed by HEART OF GEORGIA with

                                       16
<PAGE>

the SEC (assuming HEART OF GEORGIA were subject to the reporting requirements of
the 1934  Act) as of the date of this  Agreement  (together  with all  Contracts
referred to in Sections  5.10 and  5.15(a),  the "HEART OF GEORGIA  Contracts").
With  respect to each  HEART OF GEORGIA  Contract  and  except as  disclosed  in
Section  5.16 of the HEART OF GEORGIA  Disclosure  Memorandum:  (i) assuming the
enforceability  of such  Contract  against  the third party  thereto,  each such
Contract  is in full force and  effect;  (ii) no HEART OF  GEORGIA  Entity is in
Default thereunder, other than Defaults which are not reasonably likely to have,
individually or in the aggregate,  a HEART OF GEORGIA  Material  Adverse Effect;
(iii) no HEART OF GEORGIA Entity has repudiated or waived any material provision
of any such  Contract;  and (iv) no other party to any such  Contract is, to the
Knowledge of HEART OF GEORGIA,  in Default in any respect,  other than  Defaults
which are not reasonably  likely to have,  individually  or in the aggregate,  a
HEART OF  GEORGIA  Material  Adverse  Effect,  or has  repudiated  or waived any
material provision thereunder.  Except as disclosed in Section 5.16 of the HEART
OF GEORGIA Disclosure Memorandum,  no officer, director or employee of any HEART
OF GEORGIA  Entity is party to any Contract  which  restricts or prohibits  such
officer,  director or employee from engaging in activities  competitive with any
Person,  including any HEART OF GEORGIA Entity.  All of the  indebtedness of any
HEART OF GEORGIA  Entity for money  borrowed is  prepayable  at any time by such
HEART OF GEORGIA Entity without penalty or premium.

     5.17 Legal Proceedings. There is no Litigation instituted or pending or, to
the Knowledge of HEART OF GEORGIA,  threatened  (or  unasserted  but  considered
probable of  assertion  and which if asserted  would have at least a  reasonable
probability of an unfavorable  outcome) against any HEART OF GEORGIA Entity,  or
against  any  director,  employee  or  employee  benefit  plan  (acting  in such
capacity) of any HEART OF GEORGIA  Entity,  or against any Asset,  interest,  or
right of any of them, that is reasonably likely to have,  individually or in the
aggregate,  a HEART OF GEORGIA Material Adverse Effect, nor are there any Orders
of any Regulatory Authorities,  other governmental  authorities,  or arbitrators
outstanding  against any HEART OF GEORGIA Entity,  that are reasonably likely to
have,  individually  or in the aggregate,  a HEART OF GEORGIA  Material  Adverse
Effect.  Section 5.17 of the HEART OF GEORGIA Disclosure  Memorandum  contains a
summary of all Litigation as of the date of this Agreement to which any HEART OF
GEORGIA  Entity  is a party  and  which  names a HEART OF  GEORGIA  Entity  as a
defendant or cross-defendant or for which, to the Knowledge of HEART OF GEORGIA,
any HEART OF GEORGIA Entity has any potential Liability.

     5.18 Reports.  Since January 1, 1995, or the date of organization if later,
each  HEART OF  GEORGIA  Entity has timely  filed all  reports  and  statements,
together with any amendments  required to be made with respect thereto,  that it
was required to file with Regulatory Authorities,  except for such filings which
the failure to so file is not reasonably likely to have,  individually or in the
aggregate,  a HEART OF GEORGIA Material  Adverse Effect.  As of their respective
dates, each of such reports and documents,  including the financial  statements,
exhibits,  and  schedules  thereto,  complied in all material  respects with all
applicable  Laws. As of its respective  date,  each such report and document did
not, in all material  respects,  contain any untrue statement of a material fact
or omit to state a material fact  required to be stated  therein or necessary to
make the statements made therein, in light of the circumstances under which they
were made,  not  misleading. 

                                       17
<PAGE>

     5.19 Statements True and Correct. No statement, certificate, instrument, or
other  writing  furnished or to be  furnished by any HEART OF GEORGIA  Entity to
FLAG pursuant to this Agreement or any other document,  agreement, or instrument
referred to herein  contains or will  contain any untrue  statement  of material
fact or will omit to state a  material  fact  necessary  to make the  statements
therein,  in  light  of the  circumstances  under  which  they  were  made,  not
misleading.  None of the information  supplied or to be supplied by any HEART OF
GEORGIA Entity for inclusion in the  registration  statement to be filed by FLAG
with the SEC in  accordance  with  Section  8.1  will,  when  such  registration
statement becomes effective, be false or misleading with respect to any material
fact,  or omit to state  any  material  fact  necessary  to make the  statements
therein  not  misleading.  All  documents  that any HEART OF  GEORGIA  Entity is
responsible  for filing with any  Regulatory  Authority in  connection  with the
transactions contemplated hereby will comply as to form in all material respects
with the  provisions of  applicable  Law. No documents to be filed by a HEART OF
GEORGIA Entity with any Regulatory Authority in connection with the transactions
contemplated  hereby,  will, at the respective time such documents are filed, be
false or  misleading  with  respect to any material  fact,  or omit to state any
material  fact  necessary  to make  the  statements  therein,  in  light  of the
circumstances under which they were made, not misleading.

     5.20 Accounting, Tax and Regulatory Matters. No HEART OF GEORGIA Entity has
taken  or  agreed  to take  any  action  or has  any  Knowledge  of any  fact or
circumstance that is reasonably likely to (i) prevent the Merger from qualifying
for pooling of interest accounting treatment and as a reorganization  within the
meaning of Section  368(a) of the  Internal  Revenue  Code,  or (ii)  materially
impede or delay receipt of any Consents of Regulatory Authorities referred to in
Section  9.1(b) or result in the imposition of a condition or restriction of the
type referred to in the last sentence of such Section.

     5.21 Charter Provisions.  Each HEART OF GEORGIA Entity has taken all action
so that the entering into of this Agreement and the  consummation  of the Merger
and the other  transactions  contemplated  by this Agreement do not and will not
result in the grant of any rights to any Person under the  Charter,  Articles of
Incorporation,  Bylaws or other  governing  instruments  of any HEART OF GEORGIA
Entity or restrict or impair the ability of FLAG or any of its  Subsidiaries  to
vote,  or  otherwise to exercise  the rights of a  shareholder  with respect to,
shares  of any  HEART OF  GEORGIA  Entity  that may be  directly  or  indirectly
acquired or controlled by them.

     5.22 Board Recommendation. The Board of Directors of HEART OF GEORGIA, at a
meeting duly called and held, has by unanimous vote of those  directors  present
(who  constituted  all of the directors then in office) (i) determined that this
Agreement and the transactions  contemplated  hereby are fair to and in the best
interests of the shareholders and (ii) resolved to recommend that the holders of
the shares of HEART OF GEORGIA Common Stock approve this Agreement.

     5.23 Y-2K.  HEART OF GEORGIA has formed a committee to review  policies and
directives  issued by Regulatory  Authorities  with respect to preparedness  for
year 2000 data  processing and other  operations,  and intends to implement such
committee's  recommendations  for  ensuring  compliance  with such  policies and
directives.

                                       18
<PAGE>

                                   ARTICLE 6.
                     REPRESENTATIONS AND WARRANTIES OF FLAG
                     --------------------------------------

     FLAG hereby represents and warrants to HEART OF GEORGIA as follows:

     6.1  Organization,   Standing,  and  Power.  FLAG  is  a  corporation  duly
organized, validly existing, and in good standing under the Laws of the State of
Georgia,  and has the corporate  power and authority to carry on its business as
now conducted and to own,  lease and operate its material  Assets.  FLAG is duly
qualified  or  licensed to transact  business as a foreign  corporation  in good
standing in the States of the United States and foreign  jurisdictions where the
character of its Assets or the nature or conduct of its business  requires it to
be so qualified or licensed,  except for such jurisdictions in which the failure
to be so qualified or licensed is not reasonably likely to have, individually or
in the  aggregate,  a FLAG Material  Adverse  Effect.  The minute book and other
organizational  documents for FLAG have been made  available to HEART OF GEORGIA
for its review and,  except as disclosed  in Section 6.1 of the FLAG  Disclosure
Memorandum,  are true and complete in all  material  respects as in effect as of
the date of this Agreement and accurately  reflect in all material  respects all
amendments   thereto  and  all   proceedings  of  the  Board  of  Directors  and
shareholders thereof.

     6.2  Authority of FLAG; No Breach By Agreement.

     (a) FLAG has the  corporate  power  and  authority  necessary  to  execute,
deliver and perform its  obligations  under this Agreement and to consummate the
transactions  contemplated  hereby.  The execution,  delivery and performance of
this Agreement and the  consummation of the  transactions  contemplated  herein,
including  the Merger,  have been duly and validly  authorized  by all necessary
corporate  action  in  respect  thereof  on the  part of  FLAG.  This  Agreement
represents a legal,  valid, and binding obligation of FLAG,  enforceable against
FLAG in accordance  with its terms  (except in all cases as such  enforceability
may  be   limited  by   applicable   bankruptcy,   insolvency,   reorganization,
receivership,  conservatorship,   moratorium,  or  similar  Laws  affecting  the
enforcement of creditors'  rights  generally and except that the availability of
the equitable remedy of specific  performance or injunctive relief is subject to
the discretion of the court before which any proceeding may be brought).

     (b) Neither the execution and delivery of this  Agreement by FLAG,  nor the
consummation by FLAG of the transactions  contemplated hereby, nor compliance by
FLAG with any of the  provisions  hereof,  will (i) conflict with or result in a
breach of any provision of FLAG's Articles of  Incorporation  or Bylaws,  or the
Charter,  or  Articles of  Incorporation  or Bylaws of any FLAG  Entity,  or any
resolution  adopted by the Board of  Directors or the  shareholders  of any FLAG
Entity,  or (ii) constitute or result in a Default under, or require any Consent
pursuant  to,  or result  in the  creation  of any Lien on any Asset of any FLAG
Entity under,  any Contract or Permit of any FLAG Entity,  where such Default or
Lien,  or any  failure to obtain such  Consent,  is  reasonably  likely to have,
individually  or in the  aggregate,  a FLAG Material  Adverse  Effect,  or (iii)
subject to receipt of the  requisite  Consents  referred to in Section 9. 1 (b),
constitute or result in a Default under, or require any Consent pursuant to, any
Law or Order applicable to any FLAG Entity or any of their  respective  material
Assets  (including any FLAG Entity becoming subject to or liable for the payment

                                       19
<PAGE>

of any Tax or any of the Assets  owned by any FLAG Entity  being  reassessed  or
revalued by any Taxing authority).

     (c) Other than in  connection  or  compliance  with the  provisions  of the
Securities  Laws,  applicable  state corporate and securities Laws, and rules of
the NASD,  and other than Consents  required from  Regulatory  Authorities,  and
other than  notices  to or  filings  with the  Internal  Revenue  Service or the
Pension Benefit Guaranty Corporation with respect to any employee benefit plans,
or under the HSR Act, and other than Consents,  filings, or notifications which,
if not obtained or made, are not reasonably  likely to have,  individually or in
the aggregate,  a FLAG Material  Adverse  Effect,  no notice to, filing with, or
Consent of, any public body or authority is necessary  for the  consummation  by
FLAG of the Merger and the other transactions contemplated in this Agreement.

     6.3 Capital Stock.

     (a) The authorized  capital stock of FLAG consists of (i) 20,000,000 shares
of FLAG Common Stock, of which 5,174,807 shares are issued and outstanding as of
the date of this Agreement,  and (ii) 10,000,000 shares of FLAG Preferred Stock,
of which no shares are issued and outstanding. All of the issued and outstanding
shares of FLAG Capital  Stock are, and all of the shares of FLAG Common Stock to
be  issued  in  exchange  for  shares  of HEART OF  GEORGIA  Common  Stock  upon
consummation  of the Merger,  when issued in  accordance  with the terms of this
Agreement,  will be, duly and validly issued and  outstanding and fully paid and
nonassessable  under the GBCC.  None of the  outstanding  shares of FLAG Capital
Stock has been,  and none of the  shares  of FLAG  Common  Stock to be issued in
exchange for shares of HEART OF GEORGIA  Common Stock upon  consummation  of the
Merger will be, issued in violation of any  preemptive  rights of the current or
past shareholders of FLAG.

     (b) Except as set forth in Section  6.3(a),  or as disclosed in Section 6.3
of the FLAG Disclosure Memorandum, there are no shares of capital stock or other
equity securities of FLAG outstanding and no outstanding  Equity Rights relating
to the capital stock of FLAG.

     6.4  FLAG  Subsidiaries.  FLAG has  disclosed  in  Section  6.4 of the FLAG
Disclosure  Memorandum  all of  the  FLAG  Subsidiaries  that  are  corporations
(identifying its jurisdiction of  incorporation,  each jurisdiction in which the
character of its Assets or the nature or conduct of its business  requires it to
be  qualified  and/or  licensed to transact  business,  and the number of shares
owned and percentage ownership interest represented by such share ownership) and
all of the FLAG Subsidiaries that are general or limited  partnerships,  limited
liability companies,  or other non-corporate entities (identifying the Law under
which such entity is organized,  each jurisdiction in which the character of its
Assets or the nature or  conduct of its  business  requires  it to be  qualified
and/or licensed to transact business, and the amount and nature of the ownership
interest  therein).  Except as disclosed  in Section 6.4 of the FLAG  Disclosure
Memorandum,  FLAG or one of its wholly-owned Subsidiaries owns all of the issued
and outstanding shares of capital stock (or other equity interests) of each FLAG
Subsidiary.  No capital stock (or other equity  interest) of any FLAG Subsidiary
are or may become  required to be issued  (other than to another FLAG Entity) by
reason  of any  Equity  Rights,  and there  are no  Contracts  by which any FLAG
Subsidiary  is bound to issue  (other than to another  FLAG  Entity)  additional

                                       20
<PAGE>

shares of its capital  stock (or other equity  interests) or Equity Rights or by
which any FLAG Entity is or may be bound to  transfer  any shares of the capital
stock (or other equity  interests) of any FLAG Subsidiary (other than to another
FLAG Entity).  There are no Contracts  relating to the rights of any FLAG Entity
to vote or to  dispose  of any  shares of the  capital  stock  (or other  equity
interests) of any FLAG Subsidiary.  All of the shares of capital stock (or other
equity  interests) of each FLAG  Subsidiary held by a FLAG Entity are fully paid
and  nonassessable  under the applicable  corporation Law of the jurisdiction in
which such  Subsidiary  is  incorporated  or organized and are owned by the FLAG
Entity  free and  clear of any  Lien.  Each  FLAG  Subsidiary  is either a bank,
savings association or a corporation,  and is duly organized,  validly existing,
and (as to  corporations) in good standing under the Laws of the jurisdiction in
which it is incorporated or organized, and has the corporate power and authority
necessary  for it to own,  lease  and  operate  its  Assets  and to carry on its
business as now conducted. Each FLAG Subsidiary is duly qualified or licensed to
transact business as a foreign corporation in good standing in the States of the
United States and foreign jurisdictions where the character of its Assets or the
nature or conduct of its  business  requires it to be so  qualified or licensed,
except  for such  jurisdictions  in which  the  failure  to be so  qualified  or
licensed is not reasonably likely to have,  individually or in the aggregate,  a
FLAG  Material  Adverse  Effect.  Each  FLAG  Subsidiary  that  is a  depository
institution  is an  "insured  institution"  as  defined in the  Federal  Deposit
Insurance Act and applicable regulations  thereunder.  The minute book and other
organizational  documents for each FLAG  Subsidiary  have been made available to
HEART OF GEORGIA for its review,  and, except as disclosed in Section 6.4 of the
FLAG Disclosure Memorandum, are true and complete in all material respects as in
effect as of the date of this Agreement and  accurately  reflect in all material
respects all  amendments  thereto and all  proceedings of the Board of Directors
and shareholders thereof.

     6.5 SEC Filings, Financial Statements.

     (a) FLAG has timely  filed and made  available  to HEART OF GEORGIA all SEC
Documents  required to be filed by FLAG since  December  31, 1993 (the "FLAG SEC
Reports").  The FLAG SEC Reports (i) at the time filed, complied in all material
respects  with the  applicable  requirements  of the  Securities  Laws and other
applicable Laws and (ii) did not, at the time they were filed (or, if amended or
superseded by a filing prior to the date of this Agreement,  then on the date of
such filing) contain any untrue  statement of a material fact or omit to state a
material  fact  required to be stated in such FLAG SEC Reports or  necessary  in
order  to make  the  statements  in such  FLAG  SEC  Reports,  in  light  of the
circumstances under which they were made, not misleading.  No FLAG Subsidiary is
required to file any SEC Documents.

     (b) Each of the FLAG  Financial  Statements  (including,  in each case, any
related notes) contained in the FLAG SEC Reports, including any FLAG SEC Reports
filed after the date of this Agreement until the Effective Time,  complied as to
form  in  all  material  respects  with  the  applicable   published  rules  and
regulations  of the SEC with respect  thereto,  was prepared in accordance  with
GAAP applied on a consistent  basis  throughout the periods  involved (except as
may be indicated in the notes to such  financial  statements  or, in the case of
unaudited interim statements,  as permitted by Form 10-Q of the SEC), and fairly
presented in all material respects the consolidated  financial  position of FLAG
and its Subsidiaries as at the respective dates and the consolidated  results of

                                       21
<PAGE>

operations and cash flows for the periods  indicated,  except that the unaudited
interim  financial  statements  were or are  subject  to  normal  and  recurring
year-end adjustments which were not or are not expected to be material in amount
or effect.

     6.6 Absence of Undisclosed Liabilities.  No FLAG Entity has any Liabilities
that are reasonably  likely to have,  individually  or in the aggregate,  a FLAG
Material  Adverse  Effect,  except  Liabilities  which are  accrued or  reserved
against in the  consolidated  balance sheets of FLAG as of December 31, 1997 and
March 31, 1998, included in the FLAG Financial Statements delivered prior to the
date of this  Agreement or reflected  in the notes  thereto.  No FLAG Entity has
incurred or paid any Liability since March 31, 1998, except for such Liabilities
incurred or paid (i) in the  ordinary  course of business  consistent  with past
business practice and which are not reasonably  likely to have,  individually or
in the aggregate,  a FLAG Material Adverse Effect or (ii) in connection with the
transactions contemplated by this Agreement.

     6.7 Absence of Certain Changes or Events.  Since December 31, 1997,  except
as disclosed in the FLAG  Financial  Statements  delivered  prior to the date of
this Agreement or as disclosed in Section 6.7 of the FLAG Disclosure Memorandum,
(i) there have been no events,  changes or  occurrences  which have had,  or are
reasonably  likely to have,  individually  or in the aggregate,  a FLAG Material
Adverse Effect,  and (ii) the FLAG Entities have not taken any action, or failed
to take any  action,  prior  to the  date of this  Agreement,  which  action  or
failure, if taken after the date of this Agreement, would represent or result in
a material  breach or violation of any of the covenants  and  agreements of FLAG
provided in Article 7.

     6.8 Tax Matters.

     (a) All Tax Returns required to be filed by or on behalf of any of the FLAG
Entities  have been timely  filed or requests  for  extensions  have been timely
filed, granted, and have not expired for periods ended on or before December 31,
1997,  and on or before the date of the most recent fiscal year end  immediately
preceding  the  Effective  Time,  except to the extent that all such failures to
file, taken together,  are not reasonably likely to have a FLAG Material Adverse
Effect,  and all Tax Returns  filed are  complete  and  accurate in all material
respects. All Taxes shown on filed Tax Returns have been paid. There is no audit
examination,  deficiency, or refund Litigation with respect to any Taxes that is
reasonably likely to result in a determination that would have,  individually or
in the aggregate,  a FLAG Material Adverse Effect, except as reserved against in
the FLAG Financial  Statements  delivered prior to the date of this Agreement or
as disclosed  in Section 6.8 of the FLAG  Disclosure  Memorandum.  All Taxes and
other  Liabilities  due with respect to completed  and settled  examinations  or
concluded  Litigation  have been paid.  There are no Liens with respect to Taxes
upon any of the Assets of the FLAG Entities, except for any such Liens which are
not reasonably  likely to have a FLAG Material Adverse Effect or with respect to
which the Taxes are not vet due and payable.

     (b) None of the FLAG  Entities  has  executed an extension or waiver of any
statute of limitations on the assessment or collection of any Tax due (excluding
such statutes that relate to veers currently  under  examination by the Internal
Revenue Service or other  applicable  taxing  authorities)  that is currently in
effect. 

                                       22
<PAGE>

     (c) The  provision  for any Taxes due or to become  due for any of the FLAG
Entities  for the  period  or  periods  through  and  including  the date of the
respective FLAG Financial Statements that has been made and is reflected on such
FLAG Financial Statements is sufficient to cover all such Taxes.

     (d)  Deferred  Taxes  of  the  FLAG  Entities  have  been  provided  for in
accordance with GAAP.

     (e) None of the FLAG  Entities is a party to any Tax  allocation or sharing
agreement and none of the FLAG Entities has been a member of an affiliated group
filing a  consolidated  federal income Tax Return (other than a group the common
parent of which was FLAG) or has any  Liability  for Taxes of any Person  (other
than FLAG and its Subsidiaries)  under Treasury  Regulation Section 1.1502-6 (or
any similar  provision  of state,  local or  foreign,  Law) as a  transferee  or
successor or by Contract or otherwise.

     (f)  Each of the FLAG  Entities  is in  compliance  with,  and its  records
contain all information and documents  (including  properly  completed IRS Forms
W-9)  necessary to comply with,  all  applicable  information  reporting and Tax
withholding  requirements  under  federal,  state,  and local Tax Laws, and such
records  identify with  specificity all accounts  subject to backup  withholding
under Section 3406 of the Internal  Revenue Code,  except for such  instances of
noncompliance  and  such  omissions  as  are  not  reasonably  likely  to  have,
individually or in the aggregate, a FLAG Material Adverse Effect.

     (g) Except as disclosed in Section 6.8 of the FLAG  Disclosure  Memorandum,
none of the FLAG  Entities  has  made any  payments,  is  obligated  to make any
payments,  or is a party to any  Contract  that  could  obligate  it to make any
payments that would be disallowed as a deduction  under  Sections 28OG or 162(m)
of the Internal Revenue Code.

     (h) There has not been an ownership  change, as defined in Internal Revenue
Code Section  382(g),  of the FLAG Entities  that  occurred  during or after any
Taxable  Period in which the FLAG Entities  incurred a net  operating  loss that
carries over to any Taxable Period ending after December 31, 1997.

     (i) No  FLAG  Entity  has or has had in any  foreign  country  a  permanent
establishment, as defined in any applicable tax treaty or convention between the
United States and such foreign country.

     (j) All  material  elections  with  respect  to  Taxes  affecting  the FLAG
Entities have been or will be timely made.

     6.9  Allowance  for  Possible  Loan  Losses.  The  Allowance  shown  on the
consolidated  balance  sheets of FLAG included in the most recent FLAG Financial
Statements  dated prior to the date of this  Agreement  was,  and the  Allowance
shown on the consolidated  balance sheets of FLAG included in the FLAG Financial
Statements as of dates subsequent to the execution of this Agreement will be, as
of the dates  thereof,  adequate  (within  the  meaning  of GAAP and  applicable
regulatory  requirements  or  guidelines) to provide for all known or reasonably

                                       23
<PAGE>

anticipated  losses  relating to or  inherent  in the loan and lease  portfolios
(including  accrued  interest  receivables)  of  the  FLAG  Entities  and  other
extensions of credit (including  letters of credit and commitments to make loans
or extend credit) by the FLAG Entities as of the dates thereof, except where the
failure of such Allowance to be so adequate is not  reasonably  likely to have a
FLAG Material Adverse Effect.

     6.10 Assets.

     (a) Except as disclosed in Section 6.10 of the FLAG  Disclosure  Memorandum
or as disclosed or reserved against in the FLAG Financial  Statements  delivered
prior to the date of this Agreement,  the FLAG Entities have good and marketable
title,  free and clear of all Liens, to all of their respective  Assets,  except
for any such Liens or other defects of title which are not reasonably  likely to
have a FLAG  Material  Adverse  Effect.  All  tangible  properties  used  in the
businesses of the FLAG Entities are in good condition,  reasonable wear and tear
excepted,  and are usable in the  ordinary  course of business  consistent  with
FLAG's past practices.

     (b) All Assets  which are  material to FLAG's  business  on a  consolidated
basis,  held under  leases or subleases  by any of the FLAG  Entities,  are held
under valid  Contracts  enforceable in accordance  with their  respective  terms
(except as enforceability may be limited by applicable  bankruptcy,  insolvency,
reorganization,   moratorium,   or  other  Laws  affecting  the  enforcement  of
creditors'  rights  generally and except that the  availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the  court  before  which  any  proceedings  may be  brought),  and each such
Contract is in full force and effect.

     (c) The FLAG  Entities  currently  maintain  insurance  similar in amounts,
scope and coverage to that maintained by other peer banking organizations.  None
of the FLAG Entities has received notice from any insurance carrier that (i) any
policy of  insurance  will be  cancelled  or that  coverage  thereunder  will be
reduced or  eliminated,  or (ii) premium  costs with respect to such policies of
insurance  will be  substantially  increased.  There are presently no claims for
amounts  exceeding in any individual case $25,000 pending under such policies of
insurance  and no notices of claims in excess of such amounts have been given by
any FLAG Entity under such policies.

     (d) The Assets of the FLAG Entities  include all Assets required to operate
the business of the FLAG Entities as presently conducted.

     6.11 Intellectual  Property.  Each FLAG Entity owns or has a license to use
all of the  Intellectual  Property used by such FLAG Entity in the course of its
business.  Each FLAG Entity is the owner of or has a license to any Intellectual
Property  sold or licensed  to a third  party by such FLAG Entity in  connection
with such FLAG Entity's business operations,  and such FLAG Entity has the right
to convey by sale or license  any  Intellectual  Property so  conveyed.  No FLAG
Entity  is in  Default  under  any of its  Intellectual  Property  licenses.  No
proceedings  have been  instituted,  or are pending or to the  Knowledge of FLAG
threatened,  which  challenge  the  rights of any FLAG  Entity  with  respect to
Intellectual  Property used,  sold or licensed by such FLAG Entity in the course
of its  business,  nor has any  person  claimed  or  alleged  any rights to such
Intellectual Property. The conduct of the business of the FLAG Entities does not
infringe any Intellectual  Property of any other person.  Except as disclosed in

                                       24
<PAGE>

Section 6.11 of the FLAG Disclosure  Memorandum,  no FLAG Entity is obligated to
pay any recurring  royalties to any Person with respect to any such Intellectual
Property. Except as disclosed in Section 6.11 of the FLAG Disclosure Memorandum,
no officer,  director  or  employee of any FLAG Entity is party to any  Contract
which restricts or prohibits such officer, director or employee from engaging in
activities competitive with any Person, including any FLAG Entity.

     6.12 Environmental Matters.

     (a)  To  the  Knowledge  of  FLAG,  each  FLAG  Entity,  its  Participation
Facilities,  and its Operating Properties are, and have been, in compliance with
all Environmental Laws, except for violations which are not reasonably likely to
have, individually or in the aggregate, a FLAG Material Adverse Effect.

     (b) There is no Litigation pending or, to the Knowledge of FLAG, threatened
before any court,  governmental agency, or authority or other forum in which any
FLAG Entity or any of its Operating  Properties or Participation  Facilities (or
FLAG in respect of such Operating  Property or Participation  Facility) has been
or, with respect to threatened  Litigation,  may be named as a defendant (i) for
alleged noncompliance  (including by any predecessor) with any Environmental Law
or (ii) relating to the emission,  migration,  release, discharge,  spillage, or
disposal  into  the  environment  of  any  Hazardous  Material,  whether  or not
occurring at, on, under, adjacent to, or affecting (or potentially  affecting) a
site owned,  leased,  or  operated  by any FLAG  Entity or any of its  Operating
Properties or Participation  Facilities or any neighboring property,  except for
such  Litigation  pending or threatened  that is not reasonably  likely to have,
individually or in the aggregate,  a FLAG Material Adverse Effect,  nor is there
any  reasonable  basis for any  Litigation of a type described in this sentence,
except  such  as is  not  reasonably  likely  to  have,  individually  or in the
aggregate, a FLAG Material Adverse Effect.

     (c) During the period of (i) any FLAG  Entity's  ownership  or operation of
any of their respective current properties, (ii) any FLAG Entity's participation
in the management of any Participation Facility or any Operating Property, there
have  been  no  emissions,  migrations,  releases,  discharges,   spillages,  or
disposals of Hazardous Material in, on, at, under, adjacent to, or affecting (or
potentially  affecting) such properties or any  neighboring  properties,  except
such as are not reasonably likely to have,  individually or in the aggregate,  a
FLAG  Material  Adverse  Effect.  Prior to the  period of (i) any FLAG  Entity's
ownership or operation of any of their respective current  properties,  (ii) any
FLAG Entity's  participation in the management of any Participation  Facility or
any  Operating  Property,  to the  Knowledge  of FLAG,  there were no  releases,
discharges,  spillages,  or disposals of Hazardous  Material in, on,  under,  or
affecting  any such  property,  Participation  Facility or  Operating  Property,
except  such  as are not  reasonably  likely  to  have,  individually  or in the
aggregate, a FLAG Material Adverse Effect.

     6.13  Compliance  with Laws.  Each FLAG  Entity  has in effect all  Permits
necessary  for it to own,  lease or operate its material  Assets and to carry on
its business as now conducted, except for those Permits the absence of which are
not reasonably likely to have, individually or in the aggregate, a FLAG Material
Adverse Effect,  and there has occurred no Default under any such Permit,  other
than Defaults which are not reasonably  likely to have,  individually  or in the

                                       25
<PAGE>

aggregate,  a FLAG Material Adverse Effect.  Except as disclosed in Section 6.11
of the FLAG Disclosure Memorandum, none of the FLAG Entities:

     (a)  is in  Default  under  any  of  the  provisions  of  its  Articles  of
Incorporation or Bylaws (or other governing instruments); or

     (b) is in  Default  under any Laws,  Orders or  Permits  applicable  to its
business or employees conducting its business, except for Defaults which are not
reasonably  likely to, have,  individually or in the aggregate,  a FLAG Material
Adverse Effect; or

     (c) since January 1, 1995, has received any  notification or  communication
from any agency or  department  of federal,  state,  or local  government or any
Regulatory  Authority or the staff thereof (i) asserting that any FLAG Entity is
not in  compliance  with  any of the  Laws or  Orders  which  such  governmental
authority  or  Regulatory  Authority  enforces,   where  such  noncompliance  is
reasonably  likely to have,  individually  or in the aggregate,  a FLAG Material
Adverse Effect, (ii) threatening to revoke any Permits,  the revocation of which
is reasonably likely to have,  individually or in the aggregate, a FLAG Material
Adverse  Effect,  or (iii) requiring any FLAG Entity to enter into or consent to
the  issuance  of  a  cease  and  desist  order,  formal  agreement,  directive,
commitment or memorandum of  understanding,  or to adopt any Board resolution or
similar undertaking,  which restricts materially the conduct of its business, or
in any manner relates to its capital  adequacy,  its credit or reserve policies,
its  management,  or the payment of dividends.  Copies of all material  reports,
correspondence,  notices and other documents relating to any inspection,  audit,
monitoring  or other  form of  review  or  enforcement  action  by a  Regulatory
Authority have been made available to HEART OF GEORGIA.

     6.14 Labor  Relations.  No FLAG  Entity is the  subject  of any  Litigation
asserting  that it or any other  FLAG  Entity  has  committed  an  unfair  labor
practice  (within the meaning of the National Labor  Relations Act or comparable
state law) or seeking to compel it or any other FLAG Entity to bargain  with any
labor  organization  as to wages or  conditions of  employment,  nor is any FLAG
Entity party to any collective bargaining agreement,  nor is there any strike or
other labor dispute involving any FLAG Entity, pending or threatened,  or to the
Knowledge of FLAG, is there any activity  involving any FLAG Entity's  employees
seeking  to  certify  a  collective  bargaining  unit or  engaging  in any other
organization activity.

     6.15 Employee Benefit Plans.

     (a) FLAG has  disclosed in Section 6.12 of the FLAG  Disclosure  Memorandum
and has  delivered or made  available to HEART OF GEORGIA prior to the execution
of  this   Agreement   copies   in  each  case  of  all   pension,   retirement,
profit-sharing,  deferred compensation,  stock option, employee stock ownership,
severance  pay,  vacation,  bonus,  or other  incentive  plan, all other written
employee programs,  arrangements, or agreements, all medical, vision, dental, or
other health plans,  all life insurance  plans,  and all other employee  benefit
plans or fringe benefit plans,  including  "employee benefit plans" as that term
is defined in Section 3(3) of ERISA, currently adopted, maintained by, sponsored
in whole or in part by, or contributed to by any FLAG Entity or ERISA  Affiliate
thereof for the benefit of employees, retirees, dependents,  spouses, directors,

                                       26
<PAGE>

independent  contractors,  or other  beneficiaries  and under  which  employees,
retirees,  dependents,  spouses,  directors,  independent contractors,  or other
beneficiaries  are  eligible to  participate  (collectively,  the "FLAG  Benefit
Plans").  Each FLAG Benefit Plan which is an "employee pension benefit plan," as
that term is defined in Section 3(2) of ERISA,  is referred to herein as a "FLAG
ERISA  Plan."  Each FLAG ERISA Plan which is also a "defined  benefit  plan" (as
defined in Section 4140) of the Internal  Revenue Code) is referred to herein as
a "FLAG Pension Plan." No FLAG Pension Plan is or has been a multiemployer  plan
within the meaning of Section 3(37) of ERISA.

     (b) All FLAG Benefit Plans are in compliance  with the applicable  terms of
ERISA,  the Internal  Revenue Code, and any other  applicable Laws the breach or
violation  of  which  are  reasonably  likely  to have,  individually  or in the
aggregate,  a FLAG  Material  Adverse  Effect.  Each FLAG  ERISA  Plan  which is
intended to be qualified  under Section 401(a) of the Internal  Revenue Code has
received a favorable determination letter from the Internal Revenue Service, and
FLAG is not aware of any  circumstances  likely to result in  revocation  of any
such favorable  determination  letter.  To the Knowledge of Flag, no FLAG Entity
has  engaged  in a  transaction  with  respect  to any FLAG  Benefit  Plan that,
assuming the taxable period of such  transaction  expired as of the date hereof,
would  subject any FLAG Entity to a Tax  imposed by either  Section  4975 of the
Internal Revenue Code or Section 502(i) of ERISA in amounts which are reasonably
likely  to have,  individually  or in the  aggregate,  a FLAG  Material  Adverse
Effect.

     (c) No FLAG Pension Plan has any "unfunded current liability," as that term
is defined in Section 302(d)(8)(A) of ERISA, based on actuarial  assumptions set
forth for such  plan's most recent  actuarial  valuation.  Since the date of the
most recent  actuarial  valuation,  there has been (i) no material change in the
financial  position  of a FLAG  Pension  Plan,  (ii) no change in the  actuarial
assumptions  with  respect to any FLAG  Pension  Plan,  and (iii) no increase in
benefits  under any FLAG Pension Plan as a result of plan  amendments or changes
in applicable  Law which is reasonably  likely to have,  individually  or in the
aggregate,  a FLAG Material  Adverse Effect or materially  adversely  affect the
funding  status  of any  such  plan.  Neither  any  FLAG  Pension  Plan  nor any
"single-employer  plan,"  within the  meaning of Section  4001(a)(15)  of ERISA,
currently or formerly maintained by any FLAG Entity, or the single-employer plan
of any ERISA  Affiliate  has an  "accumulated  funding  deficiency"  within  the
meaning of Section  412 of the  Internal  Revenue  Code or Section 302 of ERISA,
which is  reasonably  likely to have a FLAG  Material  Adverse  Effect.  No FLAG
Entity has provided, or is required to provide,  security to a FLAG Pension Plan
or to any  single-employer  plan of an ERISA Affiliate  pursuant to Section 40 1
(a)(29) of the Internal Revenue Code.

     (d) Within the six-year  period  preceding the Effective Time, no Liability
under  Subtitle  C or D of  Title  IV of ERISA  has  been or is  expected  to be
incurred by any FLAG Entity with  respect to any ongoing,  frozen or  terminated
single-employer plan or the single-employer  plan of any ERISA Affiliate,  which
Liability is reasonably  likely to have a FLAG Material Adverse Effect.  No FLAG
Entity has incurred any  withdrawal  Liability  with respect to a  multiemployer
plan under  Subtitle  B of Title IV of ERISA  (regardless  of  whether  based on
contributions of an ERISA  Affiliate),  which Liability is reasonably  likely to
have a FLAG Material Adverse Effect.  No notice of a "reportable  event," within
the meaning of Section 4043 of ERISA for which the 30-day reporting  requirement
has not been waived,  has been required to be filed for any FLAG Pension Plan or

                                       27
<PAGE>

by any ERISA Affiliate within the 12-month period ending on the date hereof.

     (e) Except as disclosed in Section 6.15 of the FLAG Disclosure  Memorandum,
no FLAG Entity has any Liability for retiree  health and life benefits under any
of the FLAG Benefit  Plans and there are no  restrictions  on the rights of such
FLAG  Entity to amend or  terminate  any such  retiree  health or  benefit  Plan
without incurring any Liability thereunder, which Liability is reasonably likely
to have a FLAG Material Adverse Effect.

     (f) Except as disclosed in Section 6.15 of the FLAG Disclosure  Memorandum,
neither the execution and delivery of this Agreement nor the consummation of the
transactions  contemplated  hereby  will (i)  result in any  payment  (including
severance,  unemployment compensation,  golden parachute, or otherwise) becoming
due to any  director  or any  employee  of any FLAG  Entity from any FLAG Entity
under any FLAG Benefit Plan or otherwise,  (ii) increase any benefits  otherwise
payable under any FLAG Benefit Plan, or (iii) result in any  acceleration of the
time of payment or vesting of any such benefit, where such payment, increase, or
acceleration is reasonably likely to have,  individually or in the aggregate,  a
FLAG Material Adverse Effect.

     (g) The  actuarial  present  values of all  accrued  deferred  compensation
entitlements   (including   entitlements   under  any  executive   compensation,
supplemental  retirement,  or  employment  agreement)  of  employees  and former
employees  of any FLAG  Entity and their  respective  beneficiaries,  other than
entitlements  accrued  pursuant  to  funded  retirement  plans  subject  to  the
provisions of Section 412 of the Internal  Revenue Code or Section 302 of ERISA,
have  been  fully  reflected  on the FLAG  Financial  Statements  to the  extent
required by and in accordance with GAAP.

     6.16  Material  Contracts.  Except as disclosed in Section 6.16 of the FLAG
Disclosure  Memorandum or otherwise reflected in the FLAG Financial  Statements,
none of the FLAG Entities,  nor any of their respective Assets,  businesses,  or
operations,  is a party to, or is bound or  affected  by, or  receives  benefits
under,  (i) any  employment,  severance,  termination,  consulting or retirement
Contract  providing for aggregate payments to any Person in any calendar year in
excess of $50,000,  (ii) any Contract  relating to the borrowing of money by any
FLAG Entity or the  guarantee by any FLAG Entity of any such  obligation  (other
than  Contracts  evidencing  deposit  liabilities,  purchases of federal  funds,
fully-secured  repurchase  agreements,  and Federal  Home Loan Bank  advances of
depository  institution  Subsidiaries,  trade payables and Contracts relating to
borrowings or  guarantees  made in the ordinary  course of business),  (iii) any
Contract  which  prohibits  or  restricts  any FLAG Entity from  engaging in any
business  activities in any  geographic  area,  line of business or otherwise in
competition  with any other  Person,  (iv) any  Contract  between  or among FLAG
Entities, (v) any Contract relating to the provision of data processing, network
communication,  or other technical  services to or by any FLAG Entity,  (vi) any
exchange-traded or over-the-counter  swap, forward,  future, option, cap, floor,
or collar  financial  Contract,  or any other interest rate or foreign  currency
protection  Contract  not  included  on its  balance  sheet which is a financial
derivative Contract, or (vii) any other Contract or amendment thereto that would
be  required to be filed as an exhibit to a Form 10-K filed by FLAG with the SEC
as of the date of this Agreement that has not been filed as an exhibit to FLAG's

                                       28
<PAGE>

Form 10-K  filed for the fiscal  year  ended  December  31,  1997,  or in an SEC
Document  and  identified  to  HEART OF  GEORGIA  (together  with all  Contracts
referred to in Sections 6.10 and 6.15(a), the "FLAG Contracts"). With respect to
each  FLAG  Contract  and  except  as  disclosed  in  Section  6.16 of the  FLAG
Disclosure  Memorandum:  (i) the  Contract is in full force and effect;  (ii) no
FLAG  Entity  is in  Default  thereunder,  other  than  Defaults  which  are not
reasonably  likely to have,  individually  or in the aggregate,  a FLAG Material
Adverse  Effect;  (iii) no FLAG  Entity has  repudiated  or waived any  material
provision of any such Contract; and (iv) no other party to any such Contract is,
to the Knowledge of FLAG, in Default in any respect,  other than Defaults  which
are not reasonably  likely to have,  individually  or in the  aggregate,  a FLAG
Material  Adverse  Effect,  or has  repudiated or waived any material  provision
thereunder.  All of the  indebtedness  of any FLAG Entity for money  borrowed is
prepayable at any time by such FLAG Entity without penalty or premium.

     6.17 Legal Proceedings. There is no Litigation instituted or pending or, to
the Knowledge of FLAG,  threatened (or  unasserted  but  considered  probable of
assertion and which if asserted would have at least a reasonable  probability of
an  unfavorable  outcome)  against any FLAG  Entity,  or against  any  director,
employee  or employee  benefit  plan of any FLAG  Entity,  or against any Asset,
interest,  or  right  of any  of  them,  that  is  reasonably  likely  to  have,
individually or in the aggregate,  a FLAG Material Adverse Effect, nor are there
any Orders of any Regulatory  Authorities,  other governmental  authorities,  or
arbitrators  outstanding  against any FLAG Entity, that are reasonably likely to
have,  individually or in the aggregate, a FLAG Material Adverse Effect. Section
6.17 of the FLAG Disclosure  Memorandum  contains a summary of all Litigation as
of the date of this  Agreement  to which  any FLAG  Entity  is a party and which
names a FLAG  Entity as a  defendant  or  cross-defendant  or for which any FLAG
Entity has any potential Liability.

     6.18 Reports.  Since January 1, 1993, each FLAG Entity has timely filed all
reports and  statements,  together with any amendments  required to be made with
respect  thereto,  that it was  required  to file  with  Regulatory  Authorities
(except, in the case of state securities authorities, failures to file which are
not reasonably likely to have, individually or in the aggregate, a FLAG Material
Adverse  Effect).  As of  their  respective  dates,  each  of such  reports  and
documents, including the financial statements,  exhibits, and schedules thereto,
complied in all material respects with all applicable Laws. As of its respective
date, each such report and document did not, in all material  respects,  contain
any  untrue  statement  of a  material  fact or omit to  state a  material  fact
required to be stated therein or necessary to make the statements  made therein,
in light of the circumstances under which they were made, not misleading.

     6.19 Statements True and Correct. No statement, certificate,  instrument or
other  writing  furnished  or to be  furnished  by any FLAG  Entity  to HEART OF
GEORGIA  pursuant  to  this  Agreement  or  any  other  document,  agreement  or
instrument  referred to herein contains or will contain any untrue  statement of
material  fact or will  omit to  state a  material  fact  necessary  to make the
statements  therein,  in light of the circumstances  under which they were made,
not misleading.  None of the information  supplied or to be supplied by any FLAG
Entity for inclusion in the Registration  Statement to be filed by FLAG with the
SEC, will,  when such  Registration  Statement  becomes  effective,  be false or
misleading with respect to any material fact, or omit to state any material fact

                                       29
<PAGE>

necessary to make the statements  therein not misleading.  None of the documents
to be filed by any FLAG Entity with the SEC or any other Regulatory Authority in
connection with the transactions  contemplated  hereby,  will, at the respective
time such  documents  are  filed,  be false or  misleading  with  respect to any
material  fact,  or omit to  state  any  material  fact  necessary  to make  the
statements  therein,  in light of the circumstances  under which they were made,
not  misleading.  All documents that any FLAG Entity thereof is responsible  for
filing  with any  Regulatory  Authority  in  connection  with  the  transactions
contemplated  hereby will comply as to form in all  material  respects  with the
provisions of applicable Law.

     6.20 Accounting,  Tax and Regulatory  Matters.  No FLAG Entity has taken or
agreed to take any action or has any knowledge of any fact or circumstance  that
is reasonably  likely to (i) prevent the Merger from  qualifying  for pooling of
interests  accounting  treatment and as a  reorganization  within the meaning of
Section 368(a) of the Internal Revenue Code, or (ii) materially  impede or delay
receipt of any Consents of Regulatory  Authorities referred to in Section 9.l(b)
or result in the  imposition of a condition or  restriction of the type referred
to in the last sentence of such Section.

     6.21 Charter Provisions.  Each FLAG Entity has taken all action so that the
entering into of this Agreement and the consummation of the Merger and the other
transactions  contemplated  by this  Agreement do not and will not result in the
grant of any rights to any Person under the Charter,  Articles of Incorporation,
Bylaws or other  governing  instruments of any FLAG Entity or restrict or impair
the ability of FLAG or any of its Subsidiaries to vote, or otherwise to exercise
the rights of a shareholder  with respect to, shares of any FLAG Entity that may
be directly or indirectly acquired or controlled by them.

     6.22 Board  Recommendation.  The Board of Directors  of FLAG,  at a meeting
duly called and held,  has by  unanimous  vote of those  directors  present (who
constituted all of the directors then in office)  determined that this Agreement
and the transactions  contemplated hereby, including the Merger, taken together,
are fair to and in the best interests of the FLAG shareholders.

     6.23  Y2K.  Each  FLAG  Entity  is in  compliance  with  all  policies  and
directives  issued by Regulatory  Authorities  with respect to preparedness  for
year  2000  data  processing  and  other  operations.  Section  6.23 of the FLAG
Disclosure  Memorandum sets forth a summary of the steps taken by FLAG to ensure
such compliance.  FLAG has entered into an agreement with Phoenix  International
Ltd., Inc. ("Phoenix") to license the Phoenix Retail Banking System, and FLAG is
scheduled to convert each of the existing FLAG Entities, as well as the HEART OF
GEORGIA  Subsidiaries,  to the Phoenix  Retail Banking System prior to March 31,
1999.  Phoenix has represented to FLAG that the Phoenix Retail Banking System is
year 2000 compliant.

                                       30
<PAGE>

                                   ARTICLE 7.
                    CONDUCT OF BUSINESS PENDING CONSUMMATION
                    ----------------------------------------

     7.1  Affirmative  Covenants  of  HEART  OF  GEORGIA.  From the date of this
Agreement  until the earlier of the Effective  Time or the  termination  of this
Agreement,  unless the prior written  consent of FLAG shall have been  obtained,
and except as otherwise expressly  contemplated  herein, HEART OF GEORGIA shall,
and shall cause each of its Subsidiaries to (a) operate its business only in the
usual,   regular,   and  ordinary  course,  (b)  preserve  intact  its  business
organization and Assets and maintain its rights and franchises,  and (c) take no
action which would (i) materially  adversely  affect the ability of any Party to
obtain any Consents  required for the transactions  contemplated  hereby without
imposition  of a condition or  restriction  of the type  referred to in the last
sentences of Section 9.1(b) or 9.1(c),  or (ii) materially  adversely affect the
ability  of any  Party to  perform  its  covenants  and  agreements  under  this
Agreement.

     7.2 Negative Covenants of HEART OF GEORGIA. From the date of this Agreement
until the earlier of the Effective Time or the  termination  of this  Agreement,
unless the prior written consent of FLAG shall have been obtained, and except as
otherwise expressly  contemplated  herein, HEART OF GEORGIA covenants and agrees
that it will not do or agree or commit to do, or permit any of its  Subsidiaries
to do or agree or commit to do, any of the following:

     (a)  amend  the  Articles  of  Incorporation,  Bylaws  or  other  governing
instruments of any HEART OF GEORGIA entity, or

     (b) incur any additional debt  obligation or other  obligation for borrowed
money (other than  indebtedness of a HEART OF GEORGIA Entity to another HEART OF
GEORGIA  Entity) in excess of an  aggregate  of  $100,000  (for HEART OF GEORGIA
Entities on a consolidated  basis) except in the ordinary course of the business
of the HEART OF GEORGIA Subsidiaries consistent with past practices (which shall
include, for the HEART OF GEORGIA Subsidiaries that are depository institutions,
creation of deposit liabilities,  purchases of federal funds,  advances from the
Federal  Reserve  Bank or  Federal  Home Loan Bank,  and entry  into  repurchase
agreements fully secured by U.S. government or agency securities), or impose, or
suffer the  imposition,  on any Asset of any HEART OF GEORGIA Entity of any Lien
or permit  any such  Lien to exist  (other  than in  connection  with  deposits,
repurchase  agreements,  bankers  acceptances,  "treasury tax and loan" accounts
established  in the  ordinary  course of  business,  the  satisfaction  of legal
requirements in the exercise of trust powers, and Liens in effect as of the date
hereof that are disclosed in Section  7.2(b) of the HEART OF GEORGIA  Disclosure
Memorandum); or

     (c)  repurchase,  redeem,  or  otherwise  acquire or  exchange  (other than
exchanges in the ordinary  course under  employee  benefit  plans),  directly or
indirectly,  any shares,  or any securities  convertible into any shares, of the
capital stock of any HEART OF GEORGIA Entity,  or declare or pay any dividend or
make any other distribution in respect of HEART OF GEORGIA's capital stock; or

                                       31
<PAGE>

     (d) except for this Agreement, or pursuant to the exercise of stock options
outstanding as of the date hereof and pursuant to the terms thereof in existence
on the date hereof,  or as  disclosed in Section  7.2(d) of the HEART OF GEORGIA
Disclosure Memorandum, issue, sell, pledge, encumber, authorize the issuance of,
enter into any Contract to issue,  sell,  pledge,  encumber,  or  authorize  the
issuance of, or otherwise permit to become outstanding, any additional shares of
HEART OF GEORGIA Common Stock or any other capital stock of any HEART OF GEORGIA
Entity,  or any stock  appreciation  rights,  or any option,  warrant,  or other
Equity Right; or

     (e) adjust,  split, combine or reclassify any capital stock of any HEART OF
GEORGIA  Entity or issue or authorize  the issuance of any other  securities  in
respect of or in  substitution  for shares of HEART OF GEORGIA Common Stock,  or
sell, lease,  mortgage or otherwise  dispose of or otherwise  encumber any Asset
having a book value in excess of $100,000  other than in the ordinary  course of
business  for  reasonable  and adequate  consideration  or any shares of capital
stock of any HEART OF GEORGIA  Subsidiary  (unless  any such shares of stock are
sold or otherwise transferred to another HEART OF GEORGIA Entity); or

     (f) except for loans made in the ordinary course of its business,  make any
material investment, either by purchase of stock or securities, contributions to
capital, Asset transfers,  or purchase of any Assets, in any Person other than a
wholly  owned  HEART OF  GEORGIA  Subsidiary,  or  otherwise  acquire  direct or
indirect control over any Person, other than in connection with (i) foreclosures
in the ordinary course of business, (ii) acquisitions of control by a depository
institution  Subsidiary in its fiduciary capacity,  or (iii) the creation of new
wholly owned Subsidiaries  organized to conduct or continue activities otherwise
permitted by this Agreement; or

     (g) grant any  increase in  compensation  or benefits to the  employees  or
officers of any HEART OF GEORGIA Entity, except in accordance with past practice
specifically  disclosed  in Section  7.2(g) of the HEART OF  GEORGIA  Disclosure
Memorandum  or as required by Law; pay any severance or  termination  pay or any
bonus other than pursuant to written policies or written  Contracts in effect on
the date of this  Agreement  and  disclosed  in  Section  7.2(g) of the HEART OF
GEORGIA Disclosure Memorandum;  and enter into or amend any severance agreements
with  officers of any HEART OF GEORGIA  Entity;  grant any material  increase in
fees or other  increases in  compensation  or other benefits to directors of any
HEART OF GEORGIA  Entity  except in accordance  with past practice  disclosed in
Section  7.2(g) of the HEART OF GEORGIA  Disclosure  Memorandum;  or voluntarily
accelerate the vesting of any stock options or other stock-based compensation or
employee benefits or other Equity Rights; or

     (h)  enter  into or amend  any  employment  Contract  between  any HEART OF
GEORGIA  Entity and any Person  having a salary  thereunder in excess of $50,000
per year  (unless  such  amendment is required by Law) that the HEART OF GEORGIA
Entity does not have the  unconditional  right to  terminate  without  Liability
(other than Liability for services  already  rendered),  at any time on or after
the Effective Time; or


                                       32
<PAGE>

     (i) adopt any new employee  benefit plan of any HEART OF GEORGIA  Entity or
terminate or withdraw  from, or make any material  change in or to, any existing
employee benefit plans of any HEART OF GEORGIA Entity other than any such change
that is required by Law or that,  in the opinion of  counsel,  is  necessary  or
advisable to maintain  the tax  qualified  status of any such plan,  or make any
distributions  from such employee benefit plans,  except as required by Law, the
terms of such plans or consistent with past practice; or

     (j) make any significant change in any Tax or accounting methods or systems
of internal  accounting  controls,  except as may be  appropriate  to conform to
changes in Tax Laws or regulatory accounting requirements or GAAP; or

     (k) commence any Litigation  other than in accordance with past practice or
except  as set  forth in  Section  7.2(k)  of the  HEART OF  GEORGIA  Disclosure
Memorandum,  settle  any  Litigation  involving  any  Liability  of any HEART OF
GEORGIA Entity for material money damages or restrictions upon the operations of
any HEART OF GEORGIA Entity; or

     (l) except in the ordinary course of business, enter into, modify, amend or
terminate  any material  Contract  (including  any loan  Contract with an unpaid
balance exceeding $50,000) or waive, release,  compromise or assign any material
rights or claims.

     7.3  Affirmative  Covenants of FLAG.  From the date of this Agreement until
the earlier of the Effective Time or the termination of this  Agreement,  unless
the prior  written  consent of HEART OF GEORGIA  shall have been  obtained,  and
except as otherwise  expressly  contemplated  herein, FLAG shall and shall cause
each of its Subsidiaries to (a) operate its business only in the usual, regular,
and ordinary  course,  (b) preserve intact its business  organization and Assets
and maintain its rights and  franchises,  and (c) take no action which would (i)
materially  adversely  affect the  ability  of any Party to obtain any  Consents
required  for the  transactions  contemplated  hereby  without  imposition  of a
condition  or  restriction  of the type  referred  to in the last  sentences  of
Section 9.1(b) or 9.1(c), or (ii) materially adversely affect the ability of any
Party to perform its covenants and agreements under this Agreement.

     7.4 Negative  Covenants of FLAG.  From the date of this Agreement until the
earlier of the Effective Time or the termination of this  Agreement,  unless the
prior written  consent of HEART OF GEORGIA shall have been obtained,  and except
as otherwise  expressly  contemplated  herein, FLAG covenants and agrees that it
will not amend the  Articles  of  Incorporation  or Bylaws of FLAG in any manner
adverse  to the  holders of HEART OF GEORGIA  Common  Stock,  or take any action
which  will  materially  adversely  impact  the  ability  of  FLAG  Entities  to
consummate the transactions contemplated by this Agreement.

     7.5 Adverse Changes in Condition.  Each of FLAG and HEART OF GEORGIA agrees
to give  written  notice  promptly  to the  other  upon  becoming  aware  of the
occurrence or impending  occurrence of any event or circumstance  relating to it
or any of its Subsidiaries which (i) is reasonably likely to have,  individually
or in the  aggregate,  a HEART OF  GEORGIA  Material  Adverse  Effect  or a FLAG
Material  Adverse  Effect,  as  applicable,  or (ii) would cause or constitute a

                                       33
<PAGE>

material  breach  of  any  of  its  representations,  warranties,  or  covenants
contained  herein,  and to use its reasonable  efforts to prevent or promptly to
remedy the same.

     7.6 Reports. Each of FLAG and HEART OF GEORGIA and their Subsidiaries shall
file all reports required to be filed by it with Regulatory  Authorities between
the date of this Agreement and the Effective Time and shall deliver to the other
copies of all such  reports  promptly  after the same are  filed.  If  financial
statements  are contained in any such reports filed with the SEC, such financial
statements will fairly present the consolidated financial position of the entity
filing such statements as of the dates indicated and the consolidated results of
operations, changes in shareholders' equity, and cash flows for the periods then
ended  in  accordance  with  GAAP  (subject  in the  case of  interim  financial
statements to normal recurring year-end  adjustments that are not material).  As
of their  respective  dates,  such reports filed with the SEC will comply in all
material  respects  with the  Securities  Laws and will not  contain  any untrue
statement  of a material  fact or omit to state a material  fact  required to be
stated therein or necessary in order to make the statements therein, in light of
the  circumstances  under which they were made,  not  misleading.  Any financial
statements  contained in any other reports to another Regulatory Authority shall
be prepared in accordance with Laws applicable to such reports.


                                   ARTICLE 8.
                              ADDITIONAL AGREEMENTS
                              ---------------------

     8.1 Registration  Statement. As soon as practicable after execution of this
Agreement,  FLAG shall prepare and file the Registration Statement with the SEC,
and shall use its  reasonable  efforts to cause the  Registration  Statement  to
become  effective  under the 1933 Act and take any action  required  to be taken
under the applicable  state Blue Sky or Securities  Laws in connection  with the
issuance of the shares of FLAG  Common  Stock upon  consummation  of the Merger.
HEART  OF  GEORGIA  shall  cooperate  in  the  preparation  and  filing  of  the
Registration  Statement and shall furnish all information  concerning it and the
holders of its capital stock as FLAG may reasonably  request in connection  with
such action.  FLAG and HEART OF GEORGIA  shall make all  necessary  filings with
respect to the Merger under the Securities Laws.

     8.2 Nasdaq Listing. FLAG shall use its reasonable efforts to list, prior to
the  Effective  Time,  on the Nasdaq  National  Market the shares of FLAG Common
Stock to be issued to the holders of HEART OF GEORGIA  Common Stock  pursuant to
the Merger,  and FLAG shall give all notices and make all filings  with the NASD
required in connection with the transactions contemplated herein.

     8.3  Shareholder  Approval.  HEART OF GEORGIA  shall  call a  Shareholders'
Meeting,  to be held as soon as reasonably  practicable  after the  Registration
Statement  is  declared  effective  by the SEC,  for the  purpose of voting upon
approval  of  this  Agreement  and  such  other  related  matters  as  it  deems
appropriate.  In  connection  with  the  Shareholders'  Meeting,  the  Board  of
Directors of HEART OF GEORGIA shall  recommend to its  shareholders,  subject to
the  conditions  in  such  authorization  and  recommendation  by the  Board  of
Directors,  the approval of the matters  submitted for approval  (subject to the
Board  of  Directors  of HEART  OF  GEORGIA,  after  having  consulted  with and

                                       34
<PAGE>

considered the advice of outside counsel,  reasonably  determining in good faith
that the making of such recommendation, or the failure to withdraw or modify its
recommendation,  would constitute a breach of fiduciary duties of the members of
such Board of  Directors to HEART OF GEORGIA's  shareholders,  under  applicable
law),  and the Board of  Directors  and  officers of HEART OF GEORGIA  shall use
their reasonable efforts to obtain such  shareholders'  approval (subject to the
Board  of  Directors  of HEART  OF  GEORGIA,  after  having  consulted  with and
considered the advice of outside counsel,  reasonably  determining in good faith
that the taking of such actions would constitute a breach of fiduciary duties of
the  members of such Board of  Directors  to the HEART OF GEORGIA  shareholders,
under applicable law).

     8.4  Applications.  FLAG  shall  promptly  prepare  and file,  and HEART OF
GEORGIA shall cooperate in the preparation  and, where  appropriate,  filing of,
applications  with  all  Regulatory  Authorities  having  jurisdiction  over the
transactions contemplated by this Agreement,  including without limitation,  the
Board of Governors of the Federal  Reserve System and the Georgia  Department of
Banking and Finance,  seeking the requisite Consents necessary to consummate the
transactions  contemplated by this Agreement.  The Parties shall deliver to each
other  copies  of  all  filings,  correspondence  and  orders  to and  from  all
Regulatory Authorities in connection with the transactions contemplated hereby.

     8.5  Filings  with  State  Offices.  Upon  the  terms  and  subject  to the
conditions of this  Agreement,  FLAG shall cause to be filed the  Certificate of
Merger with the Secretary of State of the State of Georgia.

     8.6  Agreements  as to  Effects  to  Consummate.  Subject  to the terms and
conditions  of this  Agreement,  each  Party  agrees  to use,  and to cause  its
Subsidiaries to use, its reasonable  efforts to take, or cause to be taken,  all
actions,  and to do,  or cause to be done,  all  things  necessary,  proper,  or
advisable under  applicable  Laws to consummate and make  effective,  as soon as
reasonably  practicable  after  the  date of this  Agreement,  the  transactions
contemplated by this Agreement,  including using its reasonable  efforts to lift
or  rescind  any  Order  adversely  affecting  its  ability  to  consummate  the
transactions  contemplated  herein and to cause to be satisfied  the  conditions
referred to in Article 9; provided,  that nothing  herein shall preclude  either
Party from exercising its rights under this Agreement. Each Party shall use, and
shall cause each of its  Subsidiaries  to use, its reasonable  efforts to obtain
all Consents  necessary or desirable for the  consummation  of the  transactions
contemplated by this Agreement.

     8.7 Investigation and Confidentiality.

     (a) Prior to the  Effective  Time,  each Party  shall keep the other  Party
advised  of  all  material   developments   relevant  to  its  business  and  to
consummation  of the Merger and shall permit the other Party to make or cause to
be  made  such  investigation  of the  business  and  properties  of it and  its
Subsidiaries and of their respective financial and legal conditions as the Party
reasonably  requests,  provided  that  such  investigation  shall be  reasonably
related  to the  transactions  contemplated  hereby,  and  shall  not  interfere
unnecessarily with normal  operations.  No investigation by a Party shall affect
the representations and warranties of any other Party.

                                       35
<PAGE>

     (b) Each Party shall,  and shall cause its advisers and agents to, maintain
the confidentiality of all confidential information furnished to it by the other
Party concerning its and its Subsidiaries' businesses, operations, and financial
positions  and  shall  not use  such  information  for  any  purpose  except  in
furtherance  of  the  transactions  contemplated  by  this  Agreement.  If  this
Agreement is terminated  prior to the Effective  Time, each Party shall promptly
return or certify the destruction of all documents and copies  thereof,  and all
work papers containing confidential information received from the other Party.

     (c) Each Party  shall use its  reasonable  efforts to  exercise  its rights
under   confidentiality   agreements   entered  into  with  Persons  which  were
considering an  Acquisition  Proposal with respect to such Party to preserve the
confidentiality  of the information  relating to such Party and its Subsidiaries
provided to such Persons and their Affiliates and Representatives.

     (d) Each Party agrees to give the other Party notice as soon as practicable
after any  determination  by it of any fact or occurrence  relating to the other
Party which it has discovered  through the course of its investigation and which
represents,  or is reasonably  likely to represent,  either a material breach of
any representation,  warranty, covenant or agreement of the other Party or which
has had or is  reasonably  likely to have a HEART OF  GEORGIA  Material  Adverse
Effect or a FLAG Material Adverse Effect, as applicable.

     8.8 Press Releases.  Prior to the Effective Time, HEART OF GEORGIA and FLAG
shall  consult with each other as to the form and substance of any press release
or other public  disclosure  materially  related to this  Agreement or any other
transaction  contemplated  hereby;  provided,  that  nothing in this Section 8.8
shall be deemed to  prohibit  any Party  from  making any  disclosure  which its
counsel deems necessary or advisable in order to satisfy such Party's disclosure
obligations imposed by Law.

     8.9  Certain  Actions.  Except  with  respect  to  this  Agreement  and the
transactions   contemplated   hereby,   no  HEART  OF  GEORGIA  Entity  nor  any
Representatives  thereof  retained by any HEART OF GEORGIA Entity shall directly
or  indirectly  solicit any  Acquisition  Proposal by any Person.  Except to the
extent the Board of Directors of HEART OF GEORGIA,  after having  consulted with
and  considered  the advice of outside  counsel,  reasonably  determines in good
faith  that the  failure  to take  such  actions  would  constitute  a breach of
fiduciary duties of the members of such Board of Directors to HEART OF GEORGIA's
shareholders, under applicable Law, no HEART OF GEORGIA Entity or Representative
thereof  shall  furnish  any  non-public  information  that  it is  not  legally
obligated to furnish, negotiate with respect to, or enter into any Contract with
respect  to, any  Acquisition  Proposal,  but HEART OF GEORGIA  may  communicate
information about such an Acquisition Proposal to its shareholders if and to the
extent  that  it is  required  to do  so in  order  to  comply  with  its  legal
obligations.  HEART OF GEORGIA shall promptly  advise FLAG following the receipt
of any  Acquisition  Proposal  and the details  thereof,  and advise FLAG of any
developments  with  respect  to such  Acquisition  Proposal  promptly  upon  the
occurrence thereof. HEART OF GEORGIA shall (i) immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any Persons
conducted  heretofore with respect to any of the foregoing,  and (ii) direct and
use its reasonable efforts to cause its  Representatives not to engage in any of
the foregoing.

                                       36
<PAGE>

     8.10  Accounting  and Tax  Treatment.  Each of the Parties  undertakes  and
agrees to use its  reasonable  efforts  to cause the  Merger  to, and to take no
action  which  would cause the Merger not to,  qualify for pooling of  interests
accounting  treatment  and as a  "reorganization"  within the meaning of Section
368(a) of the Internal Revenue Code for federal income tax purposes.

     8.11  Charter  Provisions.  Each  Party  shall  take,  and shall  cause its
Subsidiaries  to take, all necessary  action to ensure that the entering into of
this  Agreement and the  consummation  of the Merger and the other  transactions
contemplated hereby do not and will not result in the grant of any rights to any
Person under the charter,  articles of incorporation,  bylaws or other governing
instruments of such Party or any of its  Subsidiaries  or restrict or impair the
ability of FLAG or any of its Subsidiaries to vote, or otherwise to exercise the
rights of a shareholder  with respect to, shares of any HEART OF GEORGIA  Entity
that may be directly or indirectly acquired by them.

     8.12  Agreements of  Affiliates.  HEART OF GEORGIA has disclosed in Section
8.12  of the  HEART  OF  GEORGIA  Disclosure  Memorandum  each  Person  whom  it
reasonably  believes is an  "affiliate" of HEART OF GEORGIA for purposes of Rule
145 under the 1933 Act.  HEART OF GEORGIA  shall use its  reasonable  efforts to
cause each such  Person to deliver to FLAG not later than 30 days after the date
of this Agreement a written  agreement,  substantially in the form of Exhibit 1,
providing that such Person will not sell, pledge, transfer, or otherwise dispose
of the shares of the HEART OF GEORGIA Common Stock held by such Person except as
contemplated  by such agreement or by this Agreement and will not sell,  pledge,
transfer, or otherwise dispose of the shares of FLAG Common Stock to be received
by such  Person  upon  consummation  of the  Merger  except in  compliance  with
applicable  provisions of the 1933 Act and the rules and regulations  thereunder
and until such time as financial  results  covering at least 30 days of combined
operations of FLAG and HEART OF GEORGIA have been  published  within the meaning
of Section 201.01 of the SEC's  Codification  of Financial  Reporting  Policies,
except that transfers may be made in compliance with Staff  Accounting  Bulletin
No. 76 issued by the SEC.  Except for transfers  made in  compliance  with Staff
Accounting  Bulletin  No.  76,  shares  of  FLAG  Common  Stock  issued  to such
affiliates  of HEART OF  GEORGIA  shall not be  transferable  until such time as
financial  results covering at least 30 days of combined  operations of FLAG and
HEART OF GEORGIA have been published within the meaning of Section 201.01 of the
SEC's Codification of Financial Reporting  Policies,  regardless of whether each
such  affiliate has provided the written  agreement  referred to in this Section
8.12. FLAG shall be entitled to place restrictive  legends upon certificates for
shares of FLAG Common Stock issued to affiliates of HEART OF GEORGIA pursuant to
this Agreement to enforce the provisions of this Section 8.12. FLAG shall not be
required to maintain the  effectiveness of the Registration  Statement under the
1933 Act for the purposes of resale of FLAG Common Stock by such affiliates.

     8.13 Employee  Benefits and Contracts.  Following the Effective  Time, FLAG
shall either (i)  continue to provide to officers and  employees of the HEART OF
GEORGIA Entities  employee  benefits under HEART OF GEORGIA's  existing employee
benefit  and  welfare  plans or,  (ii) if FLAG  shall  determine  to  provide to
officers and employees of the HEART OF GEORGIA Entities  employee benefits under
other employee  benefit plans and welfare plans,  provide  generally to officers

                                       37
<PAGE>

and employees of the HEART OF GEORGIA Entities  employee benefits under employee
benefit and welfare plans,  on terms and conditions  which when taken as a whole
are  substantially  similar to those currently  provided by the FLAG Entities to
their similarly  situated officers and employees.  For purposes of participation
and vesting (but not accrual of benefits) under FLAG's  employee  benefit plans,
(i) service under any qualified  defined  benefit plan of HEART OF GEORGIA shall
be treated as service  under FLAG's  defined  benefit plan, if any, (ii) service
under any  qualified  defined  contribution  plans of HEART OF GEORGIA  shall be
treated as service under FLAG's qualified defined  contribution plans, and (iii)
service  under any other  employee  benefit  plans of HEART OF GEORGIA  shall be
treated as service under any similar  employee benefit plans maintained by FLAG.
With respect to officers and employees of the HEART OF GEORGIA  Entities who, at
or  after  the  Effective  Time,  become  employees  of a FLAG  Entity  and who,
immediately  prior  to the  Effective  Time,  are  participants  in one or  more
employee welfare benefit plans maintained by the HEART OF GEORGIA Entities, FLAG
shall cause each comparable  employee  welfare benefit plan which is substituted
for  a  HEART  OF  GEORGIA  welfare  benefit  plan  to  waive  any  evidence  of
insurability  or similar  provision,  to provide  credit for such  participation
prior to such  substitution  with regard to the application of any  pre-existing
condition  limitation,  and  to  provide  credit  towards  satisfaction  of  any
deductible  or   out-of-pocket   provisions   for  expenses   incurred  by  such
participants during the period prior to such substitution, if any, that overlaps
with the then  current  plan year for each  such  substituted  employee  welfare
benefit plans.  FLAG also shall cause the Surviving Bank and its Subsidiaries to
honor in accordance with their terms all employment,  severance,  consulting and
other compensation  Contracts  disclosed in Section 8.13 of the HEART OF GEORGIA
Disclosure  Memorandum  to FLAG  between  any HEART OF  GEORGIA  Entity  and any
current or former director, officer, or employee thereof, and all provisions for
vested  benefits or other vested amounts earned or accrued through the Effective
Time under the HEART OF GEORGIA Benefit Plans.

     8.14 Indemnification.

     (a)  Subject to the  conditions  set forth in  paragraph  (b) below,  for a
period of six years after the Effective Time, FLAG shall  indemnify,  defend and
hold harmless each person  entitled to  indemnification  from a HEART OF GEORGIA
Entity (each,  an "Indemnified  Party")  against all Liabilities  arising out of
actions or omissions  occurring at or prior to the Effective Time (including the
transactions  contemplated  by this  Agreement) to the fullest extent  permitted
under Georgia Law and by HEART OF GEORGIA's Articles of Incorporation and Bylaws
as in effect on the date hereof,  including  provisions  relating to advances of
expenses  incurred  in the  defense  of any  Litigation.  Without  limiting  the
foregoing,  in any case in which  approval by FLAG is required to effectuate any
indemnification,  FLAG shall direct,  at the election of the Indemnified  Party,
that the determination of any such approval shall be made by independent counsel
mutually agreed upon between FLAG and the Indemnified Party.

     (b) Any Indemnified Party wishing to claim  indemnification under paragraph
(a) of this Section  8.14,  upon learning of any such  Liability or  Litigation,
shall  promptly  notify  FLAG  thereof.  In the event of any such  Liability  or
Litigation  (whether arising before or after the Effective Time), (i) FLAG shall
have the  right to  assume  the  defense  thereof  (provided  FLAG  acknowledges
responsibility  for such  indemnification)  and FLAG shall not be liable to such

                                       38
<PAGE>

Indemnified  Parties  for any  legal  expenses  of other  counsel  or any  other
expenses  subsequently  incurred by such Indemnified  Parties in connection with
the defense  thereof,  except that if FLAG elects not to assume such  defense or
counsel for the Indemnified  Parties  advises that there are substantive  issues
which raise conflicts of interest between FLAG and the Indemnified  Parties, the
Indemnified Parties may retain counsel  satisfactory to them, and FLAG shall pay
all  reasonable  fees and expenses of such counsel for the  Indemnified  Parties
promptly as  statements  therefor  are  received;  provided,  that FLAG shall be
obligated pursuant to this paragraph (b) to pay for only one firm of counsel for
all Indemnified  Parties in any jurisdiction,  (ii) the Indemnified Parties will
cooperate  in the  defense of any such  Litigation,  and (iii) FLAG shall not be
liable for any  settlement  effected  without  its prior  written  consent;  and
provided  further  that FLAG  shall  not have any  obligation  hereunder  to any
Indemnified Party when and if a court of competent jurisdiction shall determine,
and such determination shall have become final, that the indemnification of such
Indemnified Party in the manner  contemplated hereby is prohibited by applicable
Law.


                                   ARTICLE 9.
                CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE
                -------------------------------------------------

     9.1 Conditions to Obligations of Each Party. The respective  obligations of
each Party to perform this  Agreement  and  consummate  the Merger and the other
transactions  contemplated  hereby  are  subject  to  the  satisfaction  of  the
following conditions, unless waived by both Parties pursuant to Section 11.6:

     (a) Shareholder  Approval.  The shareholders of HEART OF GEORGIA shall have
approved this Agreement,  and the consummation of the transactions  contemplated
hereby,  including  the Merger,  as and to the extent  required by Law or by the
provisions of any governing  instruments.  The  shareholders  of FLAG shall have
approved the issuance of shares of FLAG Common Stock pursuant to the Merger,  as
and  to  the  extent  required  by  Law,  by the  provisions  of  any  governing
instruments, or by the rules of the NASD.

     (b) Regulatory Approvals.  All Consents of, filings and registrations with,
and  notifications to, all Regulatory  Authorities  required for consummation of
the  Merger  shall  have been  obtained  or made and shall be in full  force and
effect and all waiting  periods  required by Law shall have expired.  No Consent
obtained from any  Regulatory  Authority  which is necessary to  consummate  the
transactions  contemplated hereby shall be conditioned or restricted in a manner
(including  requirements  relating to the raising of  additional  capital or the
disposition  of  Assets)  which  in the  reasonable  judgment  of the  Board  of
Directors  of any Party would so  materially  adversely  impact the  economic or
business  benefits of the transactions  contemplated by this Agreement that, had
such  condition  or  requirement  been  known,  such  Party  would  not,  in its
reasonable judgment, have entered into this Agreement.

     (c)  Consents  and  Approvals.  Each Party shall have  obtained any and all
Consents  required for  consummation of the Merger (other than those referred to
in Section 9.1 (b)) or for the  preventing  of any Default under any Contract or
Permit of such Party which,  if not obtained or made,  is  reasonably  likely to
have,  individually  or in the aggregate,  a HEART OF GEORGIA  Material  Adverse

                                       39
<PAGE>

Effect or a FLAG Material Adverse Effect, as applicable.  No Consent so obtained
which is necessary to consummate the transactions  contemplated  hereby shall be
conditioned  or restricted in a manner which in the  reasonable  judgment of the
Board of  Directors  of any  Party  would so  materially  adversely  impact  the
economic or business benefits of the transactions contemplated by this Agreement
that, had such condition or requirement been known, such Party would not, in its
reasonable judgment, have entered into this Agreement.

     (d) Legal Proceedings.  No court or governmental or regulatory authority of
competent  jurisdiction  shall have enacted,  issued,  promulgated,  enforced or
entered any Law or Order (whether temporary,  preliminary or permanent) or taken
any other action which prohibits, restricts or makes illegal consummation of the
transactions contemplated by this Agreement.

     (e) Registration  Statement.  The Registration Statement shall be effective
under the 1933 Act,  and no stop  orders  suspending  the  effectiveness  of the
Registration  Statement shall have been issued, no action,  suit,  proceeding or
investigation  by the SEC to suspend the  effectiveness  thereof shall have been
initiated and be continuing,  and all necessary approvals under state securities
laws or the 1933 Act or 1934 Act  relating  to the  issuance  or  trading of the
shares of FLAG Common  Stock  issuable  pursuant  to the Merger  shall have been
received.

     (f) Nasdaq  Listing.  The shares of FLAG Common Stock issuable  pursuant to
the Merger shall have been approved for listing on the Nasdaq National Market.

     (g) Tax  Matters.  Each  Party  shall have  received  a written  opinion of
counsel  from  Powell,  Goldstein,  Frazer  &  Murphy  LLP,  in form  reasonably
satisfactory  to such  Parties (the "Tax  Opinion"),  to the effect that (i) the
Merger will constitute a reorganization  within the meaning of Section 368(a) of
the Internal  Revenue Code,  (ii) the exchange in the Merger of HEART OF GEORGIA
Common  Stock for FLAG  Common  Stock  will not give rise to gain or loss to the
shareholders  of HEART OF GEORGIA with respect to such  exchange  (except to the
extent of any cash  received),  and (iii) neither HEART OF GEORGIA nor FLAG will
recognize  gain or loss as a  consequence  of the  Merger  (except  for  amounts
resulting  from any  required  change in  accounting  methods and any income and
deferred gain recognized  pursuant to Treasury  regulations issued under Section
1502 of the Internal Revenue Code). In rendering such Tax Opinion,  such counsel
shall be entitled to rely upon  representations  of officers of HEART OF GEORGIA
and FLAG reasonably satisfactory in form and substance to such counsel.

     (h)  Donald M.  Thigpen  shall  have  negotiated  a  mutually  satisfactory
employment  relationship  with  FLAG,  and any  previously  existing  agreements
between  Mr.  Thigpen  and HEART OF GEORGIA  concerning  employment,  severance,
consulting  and any other  compensation,  including  post  termination  payments
subsequent to a change in ownership, shall have been terminated.

                                       40
<PAGE>

     9.2 Conditions to  Obligations of FLAG. The  obligations of FLAG to perform
this Agreement and consummate the Merger and the other transactions contemplated
hereby are  subject to the  satisfaction  of the  following  conditions,  unless
waived by FLAG pursuant to Section 11.6(a):

     (a)  Representations  and Warranties.  For purposes of this Section 9.2(a),
the accuracy of the representations and warranties of HEART OF GEORGIA set forth
in this  Agreement  shall be assessed as of the date of this Agreement and as of
the Effective Time with the same effect as though all such  representations  and
warranties  had  been  made  on and  as of the  Effective  Time  (provided  that
representations  and  warranties  which are  confined to a specified  date shall
speak only as of such date).  The  representations  and  warranties set forth in
Section 5.3 shall be true and  correct  (except  for  inaccuracies  which are de
minimus in amount).  The  representations  and  warranties set forth in Sections
5.20 and 5.21 shall be true and correct in all  material  respects.  There shall
not exist inaccuracies in the representations and warranties of HEART OF GEORGIA
set forth in this Agreement  (including the  representations  and warranties set
forth in Sections  5.3,  5.20 and 5.21) such that the  aggregate  effect of such
inaccuracies  has, or is reasonably  likely to have, a HEART OF GEORGIA Material
Adverse  Effect;  provided  that,  for  purposes of this  sentence  only,  those
representations  and warranties  which are qualified by references to "material"
or "Material Adverse Effect" or to the "Knowledge" of any Person shall be deemed
not to include such qualifications.

     (b) Performance of Agreements and Covenants. Each and all of the agreements
and  covenants of HEART OF GEORGIA to be performed and complied with pursuant to
this  Agreement  and the  other  agreements  contemplated  hereby  prior  to the
Effective  Time shall have been duly performed and complied with in all material
respects.

     (c)  Certificates.  HEART OF  GEORGIA  shall have  delivered  to FLAG (i) a
certificate,  dated as of the  Effective  Time and  signed on its  behalf by its
chief  executive  officer and its  secretary,  to the effect that to the best of
their  Knowledge the  conditions set forth in Section 9.1 as relates to HEART OF
GEORGIA and in Section 9.2(a) and 9.2(b) have been satisfied; provided, however,
that the  representations,  warranties  and covenants to which such  certificate
relates shall not been deemed to have survived the Closing,  and (ii)  certified
copies of resolutions  duly adopted by HEART OF GEORGIA's Board of Directors and
shareholders  evidencing  the  taking  of  all  corporate  action  necessary  to
authorize the execution,  delivery and  performance of this  Agreement,  and the
consummation of the  transactions  contemplated  hereby,  all in such reasonable
detail as FLAG and its counsel shall request.

     (d)  Opinion of  Counsel.  FLAG shall  have  received  an opinion of Nelson
Mullins Riley & Scarborough,  L.L.P.,  counsel to HEART OF GEORGIA,  dated as of
the Closing Date, in form reasonably satisfactory to FLAG, as to the matters set
forth in Exhibit 2.

                                       41
<PAGE>

     (e) Pooling  Letters.  FLAG shall have received an opinion of Porter Keadle
Moore,  LLP, dated as of the date of filing of the  Registration  Statement with
the SEC and as of the Closing Date,  addressed to FLAG and in form and substance
reasonably  acceptable  to FLAG, to the effect that the Merger,  for  accounting
purposes, shall qualify for treatment as a pooling of interests.

     (f) Affiliates Agreements.  FLAG shall have received from each affiliate of
HEART OF GEORGIA the affiliates  letter  referred to in Section 8.12 and Exhibit
1.

     (g) Claims Letters.  Each of the directors and officers of HEART OF GEORGIA
shall have executed and delivered to FLAG letters in  substantially  the form of
Exhibit 3.

     9.3 Conditions to Obligations of HEART OF GEORGIA. The obligations of HEART
OF GEORGIA to perform this  Agreement  and  consummate  the Merger and the other
transactions  contemplated  hereby  are  subject  to  the  satisfaction  of  the
following  conditions,  unless  waived by HEART OF GEORGIA  pursuant  to Section
11.6(b):

     (a)  Representations  and Warranties.  For purposes of this Section 9.3(a),
the accuracy of the  representations  and  warranties  of FLAG set forth in this
Agreement  shall  be  assessed  as of the date of this  Agreement  and as of the
Effective  Time  with the same  effect as though  all such  representations  and
warranties  had  been  made  on and  as of the  Effective  Time  (provided  that
representations  and  warranties  which are  confined to a specified  date shall
speak only as of such date).  The  representations  and  warranties set forth in
Section 6.3 shall be true and  correct  (except  for  inaccuracies  which are de
minimus in amount).  The  representations  and  warranties  of FLAG set forth in
Section 6.16 and 6.17 shall be true and correct in all material respects.  There
shall not exist inaccuracies in the  representations  and warranties of FLAG set
forth in this Agreement  (including the representations and warranties set forth
in  Sections  6.3,  6.16 and  6.17)  such  that  the  aggregate  effect  of such
inaccuracies  has, or is  reasonably  likely to have,  a FLAG  Material  Adverse
Effect; provided that, for purposes of this sentence only, those representations
and  warranties  which are  qualified by  references  to "material" or "Material
Adverse  Effect"  or to the  "Knowledge"  of any  Person  shall be deemed not to
include such qualifications.

     (b) Performance of Agreements and Covenants. Each and all of the agreements
and  covenants  of FLAG to be  performed  and  complied  with  pursuant  to this
Agreement and the other  agreements  contemplated  hereby prior to the Effective
Time shall have been duly performed and complied with in all material respects.

     (c)  Certificates.  FLAG shall  have  delivered  to HEART OF GEORGIA  (i) a
certificate,  dated as of the Closing Date and signed on its behalf by its chief
executive  officer and its chief  financial  officer,  to the effect that to the
best of their  knowledge the  conditions  set forth in Section 9.1 as relates to
FLAG and in Section 9.3(a) and 9.3(b) have been  satisfied,  provided,  however,
that the  representations,  warranties  and covenants to which such  certificate
relates shall not been deemed to have survived the Closing,  and (ii)  certified

                                       42
<PAGE>

copies of resolutions duty adopted by FLAG's Board of Directors and shareholders
evidencing  the  taking of all  corporate  action  necessary  to  authorize  the
execution,  delivery and performance of this Agreement,  and the consummation of
the transactions  contemplated hereby, all in such reasonable detail as HEART OF
GEORGIA and its counsel shall request.

     (d) Opinion of Counsel.  HEART OF GEORGIA shall have received an opinion of
Powell, Goldstein, Frazer & Murphy LLP, counsel to FLAG, dated as of the Closing
Date, in form reasonably  acceptable to HEART OF GEORGIA,  as to the matters set
forth in Exhibit 4.


                                   ARTICLE 10.
                                   TERMINATION
                                   -----------

     10.1  Termination.  Notwithstanding  any other provision of this Agreement,
and  notwithstanding the approval of this Agreement by the shareholders of HEART
OF GEORGIA,  this  Agreement may be terminated  and the Merger  abandoned at any
time prior to the Effective Time:

     (a) By mutual consent of FLAG and HEART OF GEORGIA; or

     (b) By either Party  (provided  that the  terminating  Party is not then in
material breach of any representation,  warranty,  covenant,  or other agreement
contained  in this  Agreement)  in the event of a  material  breach by the other
Party of any representation or warranty contained in this Agreement which cannot
be or has not been cured  within 30 days  after the giving of written  notice to
the breaching Party of such breach and which breach is reasonably likely, in the
opinion of the non-breaching Party, to have, individually or in the aggregate, a
HEART OF GEORGIA Material  Adverse Effect or a FLAG Material Adverse Effect,  as
applicable, on the breaching Party; or

     (c) By either Party  (provided  that the  terminating  Party is not then in
material breach of any representation,  warranty,  covenant,  or other agreement
contained  in this  Agreement)  in the event of a  material  breach by the other
Party of any covenant or agreement  contained in this Agreement  which cannot be
or has not been cured  within 30 days after the giving of written  notice to the
breaching Party of such breach; or

     (d) By either Party  (provided  that the  terminating  Party is not then in
material breach of any representation,  warranty,  covenant,  or other agreement
contained  in this  Agreement)  in the event (i) any  Consent of any  Regulatory
Authority  required for  consummation  of the Merger and the other  transactions
contemplated  hereby  shall have been denied by final  non-appealable  action of
such authority or if any action taken by such  authority is not appealed  within
the time limit for appeal,  or (ii) the shareholders of HEART OF GEORGIA fail to
vote  their  approval  of  the  matters  relating  to  this  Agreement  and  the
transactions contemplated hereby at the Shareholders' Meeting where such matters
were presented to such shareholders for approval and voted upon; or

                                       43
<PAGE>

     (e) By  either  Party in the  event  that the  Merger  shall  not have been
consummated by December 31, 1998, if the failure to consummate the  transactions
contemplated  hereby on or before  such date is not caused by any breach of this
Agreement by the Party electing to terminate pursuant to this Section 10.1(e).

     10.2 Effect of Termination. In the event of the termination and abandonment
of this Agreement pursuant to Section 10.1, this Agreement shall become void and
have no effect,  except that (i) the provisions of this Section 10.2 and Article
11 and Section 8.7(b) shall survive any such  termination and  abandonment,  and
(ii) a termination  pursuant to Sections  10.1(b),  10.1(c) or 10.1(e) shall not
relieve the breaching  Party from  Liability for an uncured  willful breach of a
representation,   warranty,   covenant,   or  agreement   giving  rise  to  such
termination.

     10.3  Non-Survival  of  Representations   and  Covenants.   The  respective
representations,  warranties,  obligations,  covenants,  and  agreements  of the
Parties  shall not survive the  Effective  Time  except  this  Section  10.3 and
Articles 1, 2, 3, 4 and 11 and Section 8.10.


                                   ARTICLE 11.
                                  MISCELLANEOUS
                                  -------------

     11.1 Definitions.

     (a) Except as otherwise  provided herein,  the capitalized  terms set forth
below shall have the following meanings:

     "1933 Act" shall mean the Securities Act of 1933, as amended.

     "1934 Act" shall mean the Securities Exchange Act of 1934, as amended.

     "Acquisition  Proposal" with respect to a Party shall mean any tender offer
or exchange offer or any proposal for a merger,  acquisition of all of the stock
or assets of, or other business  combination  involving the  acquisition of such
Party or any of its  Subsidiaries  or the  acquisition  of a substantial  equity
interest in, or a substantial portion of the assets of, such Party or any of its
Subsidiaries.

     "Affiliate"  of a Person  shall mean:  (i) any other  Person  directly,  or
indirectly  through one or more  intermediaries,  controlling,  controlled by or
under  common  control with such Person;  (ii) any officer,  director,  partner,
employer, or direct or indirect beneficial owner of any 10% or greater equity or
voting  interest of such  Person;  or (iii) any other  Person for which a Person
described in clause (ii) acts in any such capacity.

     "Agreement"  shall mean this  Agreement  and Plan of Merger,  including the
Exhibits,  the FLAG  Disclosure  Memorandum and the HEART OF GEORGIA  Disclosure
Memorandum delivered pursuant hereto and incorporated herein by reference.

                                       44
<PAGE>

     "Assets" of a Person shall mean all of the assets,  properties,  businesses
and rights of such  Person of every kind,  nature,  character  and  description,
whether real, personal or mixed, tangible or intangible,  accrued or contingent,
or  otherwise  relating to or utilized in such  Person's  business,  directly or
indirectly, in whole or in part, whether or not carried on the books and records
of such Person, or any Affiliate of such Person and wherever located.

     "Certificate of Merger" shall mean the Certificate of Merger to be executed
by FLAG and HEART OF GEORGIA and filed with the  Secretary of State of the State
of Georgia relating to the Merger as contemplated by Section 1.1.

     "Closing Date" shall mean the date on which the Closing occurs.

     "Consent"  shall  mean any  consent,  approval,  authorization,  clearance,
exemption,  waiver,  or  similar  affirmation  by  any  Person  pursuant  to any
Contract, Law, Order, or Permit.

     "Contract"  shall mean any written or oral  agreement  (provided  such oral
agreement  is, in any one year  period,  in excess  of $5,000  individually,  or
$25,000 in the aggregate),  arrangement,  authorization,  commitment,  contract,
indenture,   instrument,   lease,  obligation,   plan,  practice,   restriction,
understanding,  or  undertaking  of any kind or character,  or other document to
which any  Person is a party or that is  binding  on any  Person or its  capital
stock, Assets or business.

     "Default"  shall  mean (i) any  breach  or  violation  of,  default  under,
contravention of, or conflict with, any Contract,  Law, Order, or Permit,  after
failing to cure any such breach, violation,  default,  contravention or conflict
within any applicable grace or cure period (ii) any occurrence of any event that
with the  passage  of time or the giving of notice or both  would  constitute  a
breach or violation of, default under,  contravention  of, or conflict with, any
Contract,  Law, Order, or Permit, or (iii) any occurrence of any event that with
or without  the  passage  of time or the  giving of notice  would give rise to a
right of any Person to exercise any remedy or obtain any relief under, terminate
or  revoke,  suspend,  cancel,  or  modify or change  the  current  terms of, or
renegotiate,  or to accelerate the maturity or performance of, or to increase or
impose any Liability under, any Contract, Law, Order, or Permit.

     "Environmental   Laws"  shall  mean  all  Laws  relating  to  pollution  or
protection of human health or the environment  (including  ambient air,  surface
water,  ground  water,  land  surface,  or  subsurface  strata)  and  which  are
administered,  interpreted,  or  enforced  by the  United  States  Environmental
Protection Agency and other federal,  state and local agencies with jurisdiction
over,  and  including  common law in respect of,  pollution or protection of the
environment, including the Comprehensive Environmental Response Compensation and
Liability  Act, as amended,  42 U.S.C.  9601 et seq.  ("CERCLA"),  the  Resource
Conservation and Recovery Act, as amended, 42 U.S.C. 6901 et seq. ("RCRA"),  and
other  Laws  relating  to  emissions,   migrations,   discharges,  releases,  or
threatened  releases of any  Hazardous  Material,  or otherwise  relating to the
manufacture,   processing,   distribution  use,  treatment,  storage,  disposal,
generation, recycling, transport, or handling of any Hazardous Material.

                                       45
<PAGE>

     "Equity Rights" shall mean all arrangements, calls, commitments, Contracts,
options,  rights to subscribe  to,  scrip,  understandings,  warrants,  or other
binding  obligations of any character  whatsoever  relating to, or securities or
rights  convertible  into or exchangeable  for, shares of the capital stock of a
Person or by which a Person is or may be bound to issue additional shares of its
capital stock or other Equity Rights.

     "ERISA" shall mean the Employee  Retirement Income Security Act of 1974, as
amended.

     "Exhibits  1 through  4,"  inclusive,  shall mean the  Exhibits  so marked,
copies of which  are  attached  to this  Agreement.  Such  Exhibits  are  hereby
incorporated by reference herein and made a part hereof,  and may be referred to
in this  Agreement  and any other related  instrument or document  without being
attached hereto.

     "FLAG Capital Stock" shall mean,  collectively,  the FLAG Common Stock, the
FLAG Preferred Stock and any other class or series of capital stock of FLAG.

     "FLAG Common Stock" shall mean the $1.00 par value common stock of FLAG.

     "FLAG Disclosure  Memorandum" shall mean the written  information  entitled
"FLAG Financial Corporation  Disclosure Memorandum" delivered prior to execution
of this  Agreement  to HEART OF  GEORGIA  describing  in  reasonable  detail the
matters  contained  therein and, with respect to each  disclosure  made therein,
specifically  referencing  each  Section  of this  Agreement  under  which  such
disclosure  is being made.  Information  disclosed  with  respect to one Section
shall  not be deemed to be  disclosed  for  purposes  of any other  Section  not
specifically  referenced  with  respect  thereto,  unless  it is clear  from the
disclosure of such information that it applies to other Sections.

     "FLAG Entities" shall mean, collectively, FLAG and all FLAG Subsidiaries.

     "FLAG Financial  Statements" shall mean (i) the consolidated balance sheets
(including related notes and schedules,  if any) of FLAG as of June 30, 1998 and
as of December 31, 1997 and 1996, and the related statements of income,  changes
in shareholders'  equity, and cash flows (including related notes and schedules,
if any) for the six months ended June 30, 1998, and for each of the three fiscal
years ended December 31, 1997, 1996 and 1995, as filed by FLAG in SEC Documents,
and (ii) the  consolidated  balance sheets of FLAG (including  related notes and
schedules,  if any) and related  statements of income,  changes in shareholders'
equity, and cash flows (including related notes and schedules,  if any) included
in SEC  Documents  filed with respect to periods  ended  subsequent  to June 30,
1998.

     "FLAG Material  Adverse  Effect" shall mean an event,  change or occurrence
which, individually or together with any other event, change or occurrence,  has
a material adverse impact on (i) the financial position, business, or results of
operations of FLAG and its  Subsidiaries,  taken as a whole, or (ii) the ability
of FLAG  Entities  to  perform  their  obligations  under this  Agreement  or to
consummate the Merger or the other transactions  contemplated by this Agreement,

                                       46
<PAGE>

provided  that  "Material  Adverse  Effect"  shall not be deemed to include  the
impact of (a) changes in banking and similar  Laws of general  applicability  or
interpretations  thereof by courts or governmental  authorities,  (b) changes in
generally accepted  accounting  principles or regulatory  accounting  principles
generally  applicable  to  savings   associations,   banks,  and  their  holding
companies,  and (c) actions and  omissions of FLAG (or any of its  Subsidiaries)
taken  with  the  prior  informed   written  Consent  of  HEART  OF  GEORGIA  in
contemplation of the transactions contemplated hereby.

     "FLAG Preferred Stock" shall mean the shares of preferred stock of FLAG.

     "FLAG  Subsidiaries"  shall  mean the  Subsidiaries  of FLAG,  which  shall
include the FLAG  Subsidiaries  described  in Section  6.4 and any  corporation,
bank, savings  association,  or other  organization  acquired as a Subsidiary of
FLAG in the future and held as a Subsidiary by FLAG at the Effective Time.

     "GAAP" shall mean generally accepted  accounting  principles,  consistently
applied during the periods involved.

     "GBCC" shall mean the Georgia Business Corporation Code.

     "Hazardous  Material"  shall mean (i) any  hazardous  substance,  hazardous
constituent,  hazardous waste, solid waste, special waste,  regulated substance,
or toxic  substance  (as those terms are  listed,  defined or  regulated  by any
applicable Environmental Laws) and (ii) any chemicals, pollutants, contaminants,
petroleum,  petroleum products,  or oil (and specifically shall include asbestos
requiring abatement.  removal, or encapsulation  pursuant to the requirements of
governmental authorities and any polychlorinated biphenyls).

     "HEART OF GEORGIA Common Stock" shall mean the $1.00 par value common stock
of HEART OF GEORGIA.

     "HEART OF GEORGIA Disclosure Memorandum" shall mean the written information
entitled "HEART OF GEORGIA Disclosure  Memorandum"  delivered prior to execution
of this Agreement to FLAG describing in reasonable  detail the matters contained
therein  and,  with  respect  to  each  disclosure  made  therein,  specifically
referencing  each Section of this Agreement under which such disclosure is being
made.  Information  disclosed with respect to one Section shall not be deemed to
be disclosed for purposes of any other Section not specifically  referenced with
respect thereto, unless it is clear from the disclosure of such information that
it applies to other Sections.

     "HEART OF GEORGIA Entities" shall mean, collectively,  HEART OF GEORGIA and
all HEART OF GEORGIA Subsidiaries.

     "HEART OF GEORGIA  Financial  Statements"  shall mean (i) the  consolidated
balance  sheets  (including  related  notes and  schedules,  if any) of HEART OF
GEORGIA  as of June 30,  1998,  and as of  December  31,  1997  and the  related
statements of income, changes in shareholders' equity, and cash flows (including
related notes and schedules, if any) for the six months ended June 30, 1998, and

                                       47
<PAGE>

for the Fiscal year ended December 31, 1997, and (ii) the  consolidated  balance
sheets of HEART OF GEORGIA (including  related notes and schedules,  if any) and
related  statements of income,  changes in shareholders'  equity, and cash flows
(including  related notes and  schedules,  if any) with respect to periods ended
subsequent to June 30, 1998.

     "HEART OF GEORGIA Material  Adverse Effect" shall mean an event,  change or
occurrence  which,  individually  or together  with any other  event,  change or
occurrence,  has a  material  adverse  impact  on (i)  the  financial  position,
business,  or results of  operations  of HEART OF GEORGIA and its  Subsidiaries,
taken as a whole,  or (ii) the  ability  of HEART  OF  GEORGIA  to  perform  its
obligations  under  this  Agreement  or to  consummate  the  Merger or the other
transactions contemplated by this Agreement,  provided that an "HEART OF GEORGIA
Material  Adverse  Effect"  shall  not be deemed to  include  the  impact of (a)
changes in banking and similar Laws of general  applicability or interpretations
thereof by courts or governmental authorities, (b) changes in generally accepted
accounting  principles or regulatory  accounting principles generally applicable
to banks and their holding companies,  and (c) actions and omissions of HEART OF
GEORGIA  (or any of its  Subsidiaries)  taken  with the prior  informed  written
Consent of FLAG in contemplation of the transactions contemplated hereby.

     "HEART OF GEORGIA  Subsidiaries"  shall mean the  Subsidiaries  of HEART OF
GEORGIA,  which shall  include the HEART OF GEORGIA  Subsidiaries  described  in
Section  5.4  and  any  corporation,   bank,  savings   association,   or  other
organization acquired as a Subsidiary of HEART OF GEORGIA in the future and held
as a Subsidiary by HEART OF GEORGIA at the Effective Time.

     "HSR Act" shall mean Section 7A of the Clayton Act, as added by Title II of
the  Hart-Scott-Rodino  Antitrust  Improvements Act of 1976, as amended, and the
rules and regulations promulgated thereunder.

     "Intellectual Property" shall mean copyrights, patents, trademarks, service
marks, service names, trade names, applications therefor, and licenses, computer
software  (including  any  source  or object  codes  therefor  or  documentation
relating thereto), trade secrets, franchises, inventions, and other intellectual
property rights.

     "Internal  Revenue  Code" shall mean the Internal  Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder.

     "Knowledge" as used with respect to a FLAG Entity (including  references to
being  aware of a  particular  matter)  shall mean those facts that are known or
should reasonably have been known after due inquiry by the chairman,  president,
chief financial  officer,  chief accounting  officer,  chief operating  officer,
chief credit officer,  general counsel, any assistant or deputy general counsel,
or  any  senior,  executive  or  other  vice  president  of  such  FLAG  Entity.
"Knowledge"  as used  with  respect  to a HEART  OF  GEORGIA  Entity  (including
references  to being aware of a particular  matter)  shall mean those facts that
are actually  known (with no  obligation  of inquiry) by the president and chief
executive officer of such HEART OF GEORGIA Entity.

                                       48
<PAGE>

     "Law"  shall  mean  any  code,  law  (including  common  law),   ordinance,
regulation,   decision,   judicial   interpretation,   reporting   or  licensing
requirement, rule, or statute applicable to a Person or its Assets, Liabilities,
or  business,  including  those  promulgated,  interpreted  or  enforced  by any
Regulatory Authority.

     "Liability"  shall  mean any  direct or  indirect,  primary  or  secondary,
liability,  indebtedness,  obligation, penalty, cost or expense (including costs
of  investigation,  collection  and  defense),  claim,  deficiency,  guaranty or
endorsement  of or by any  Person  (other  than  endorsements  of notes,  bills,
checks, and drafts presented for collection or deposit in the ordinary course of
business) of any type,  whether accrued,  absolute or contingent,  liquidated or
unliquidated, matured or unmatured, or otherwise.

     "Lien"  shall  mean any  conditional  sale  agreement,  default  of  title,
easement,   encroachment,   encumbrance,   hypothecation,   infringement,  lien,
mortgage, pledge, reservation,  restriction,  security interest, title retention
or other  security  arrangement,  or any adverse right or interest,  charge,  or
claim of any nature  whatsoever  of,  on, or with  respect  to any  property  or
property  interest,  other than (i) Liens for current property Taxes not yet due
and payable, (ii) for depository institution Subsidiaries of a Party, pledges to
secure  deposits and other Liens incurred in the ordinary  course of the banking
business,  and (iii) Liens which do not materially impair the use of or title to
the Assets subject to such Lien.

     "Litigation" shall mean any action,  arbitration,  cause of action.  claim,
complaint  investigation  hearing,  criminal prosecution,  governmental or other
examination or other administrative or other proceeding relating to or affecting
a Party, its business.  its Assets  (including  Contracts related to it), or the
transactions  contemplated  by this  Agreement.  but shall not include  regular.
periodic  examinations  of  depository  institutions  and  their  Affiliates  by
Regulatory Authorities.

     "NASD" shall mean the National Association of Securities Dealers, Inc.

     "Nasdaq  National  Market"  shall mean the  National  Market  System of the
National Association of Securities Dealers Automated Quotations System.

     "Operating  Property" shall mean any property owned, leased, or operated by
the Party in question or by any of its  Subsidiaries  and, where required by the
context,  includes the owner or operator of such property, but only with respect
to such property.

     "Order"  shall  mean  any   administrative   decision  or  award,   decree,
injunction,  judgment, order,  quasi-judicial decision or award, ruling, or writ
of any federal,  state, local or foreign or other court,  arbitrator,  mediator,
tribunal, administrative agency, or Regulatory Authority.

                                       49
<PAGE>


     "Participation  Facility"  shall mean any facility or property in which the
Party in question or any of its Subsidiaries participates in the management and,
where  required  by the  context,  said term means the owner or operator of such
facility or property, but only with respect to such facility or property.

     "Party"  shall mean either HEART OF GEORGIA or FLAG,  and  "Parties"  shall
mean HEART OF GEORGIA and FLAG.

     "Permit" shall mean any federal,  state,  local,  and foreign  governmental
approval,  authorization,  certificate,  easement,  filing, franchise,  license,
notice,  permit,  or right to which  any  Person is a party or that is or may be
binding upon or inure to the benefit of any Person or its securities, Assets, or
business.

     "Person"  shall  mean  a  natural  person  or  any  legal,   commercial  or
governmental  entity,  such  as,  but not  limited  to, a  corporation,  general
partnership,  joint venture,  limited  partnership,  limited liability  company,
trust, business association,  group acting in concert, or any person acting in a
representative capacity.

     "Registration Statement" shall mean the Registration Statement on Form S-4,
or  other  appropriate  form,  including  any  pre-effective  or  post-effective
amendments or supplements thereto, filed with the SEC by FLAG under the 1933 Act
with respect to the shares of FLAG Common Stock to be issued to the shareholders
of HEART OF GEORGIA in connection  with the  transactions  contemplated  by this
Agreement.

     "Regulatory Authorities" shall mean,  collectively,  the SEC, the NASD, the
Federal Trade Commission,  the United States Department of Justice, the Board of
the Governors of the Federal  Reserve System,  the Office of Thrift  Supervision
(including  its  predecessor,  the Federal  Home Loan Bank  Board),  the Federal
Deposit Insurance  Corporation,  the Georgia  Department of Banking and Finance,
and all other federal,  state, county, local or other governmental or regulatory
agencies,      authorities     (including     self-regulatory      authorities),
instrumentalities,  commissions,  boards or bodies having  jurisdiction over the
Parties and their respective Subsidiaries.

     "Representative"  shall  mean any  investment  banker,  financial  advisor,
attorney, accountant, consultant, or other representative engaged by a Person.
     
     "SEC  Documents"  shall  mean all  forms,  proxy  statements,  registration
statements,  reports,  schedules,  and other documents  filed, or required to be
filed,  by a Party  or any of its  Subsidiaries  with any  Regulatory  Authority
pursuant to the Securities Laws.


                                       50
<PAGE>


     "Securities  Laws" shall mean the 1933 Act,  the 1934 Act,  the  Investment
Company  Act of 1940,  as  amended,  the  Investment  Advisors  Act of 1940,  as
amended,  the  Trust  Indenture  Act of 1939,  as  amended,  and the  rules  and
regulations of any Regulatory Authority promulgated thereunder.

     "Shareholders  Meeting" shall mean the meeting of the shareholders of HEART
OF GEORGIA to be held  pursuant to Section 8.3,  including  any  adjournment  or
adjournments thereof.

     "Subsidiaries"  shall mean all those corporations,  associations,  or other
business  entities of which the entity in  question  either (i) owns or controls
50% or more of the outstanding  equity  securities either directly or through an
unbroken  chain of entities  as to each of which 50% or more of the  outstanding
equity securities is owned directly or indirectly by its parent (provided, there
shall not be included any such entity the equity  securities  of which are owned
or controlled in a fiduciary capacity), (ii) in the case of partnerships, serves
as a general partner,  (iii) in the case of a limited liability company,  serves
as a managing  member,  or (iv) otherwise has the ability to elect a majority of
the directors, trustees or managing members thereof.

     "Surviving  Corporation"  shall  mean  FLAG  as the  surviving  corporation
resulting from the Merger.

     "Tax Return" shall mean any report,  return,  information  return, or other
information  required to be supplied to a taxing  authority in  connection  with
Taxes,  including  any return of an affiliated or combined or unitary group that
includes a Party or its Subsidiaries.

     "Tax" or Taxes" shall mean any federal,  state,  county,  local, or foreign
taxes, charges, fees, levies, imposts,  duties, or other assessments,  including
income,  gross receipts,  excise,  employment,  sales, use,  transfer,  license,
payroll,   franchise,    severance,   stamp,   occupation,   windfall   profits,
environmental,  federal highway use,  commercial rent,  customs duties,  capital
stock, paid-up capital, profits,  withholding,  Social Security, single business
and unemployment, disability, real property, personal property, registration, ad
valorem, value added, alternative or add-on minimum,  estimated, or other tax or
governmental fee of any kind  whatsoever,  imposed or required to be withheld by
the  United  States  or any  state,  county,  local  or  foreign  government  or
subdivision or agency thereof, including any interest,  penalties, and additions
imposed thereon or with respect thereto.


                                       51
<PAGE>

     (b) The terms set forth below shall have the meanings  ascribed  thereto in
the referenced sections:

                  Allowance                          Section 5.9
                  Certificates                       Section 4.1
                  Closing                            Section 1.2
                  Effective Time                     Section 1.3
                  ERISA Affiliate                    Section 5.15(c)
                  Exchange Agent                     Section 4.1
                  Exchange Ratio                     Section 3.1(b)
                  FLAG Benefit Plans                 Section 6.15(a)
                  FLAG ERISA Plan                    Section 6.15(a)
                  FLAG Pension Plan                  Section 6.15(a)
                  FLAG SEC Reports                   Section 6.5(a)
                  HEART OF GEORGIA Benefit Plans     Section 5.15(a)
                  HEART OF GEORGIA Contracts         Section 5.16
                  HEART OF GEORGIA ERISA Plan        Section 5.15(a)
                  HEART OF GEORGIA Pension Plan      Section 5.15(a)
                  Indemnified Party                  Section 8.14(a)
                  Merger                             Section 1.1
                  Tax Opinion                        Section 9.1(g)

     (c) Any  singular  term in this  Agreement  shall be deemed to include  the
plural,  and any  plural  term  the  singular.  Whenever  the  words  "include,"
"includes"  or  "including"  are used in this  Agreement,  they  shall be deemed
followed by the words "without limitation."

     11.2 Expenses.

     (a) Except as  otherwise  provided in this Section  11.2,  each Party shall
bear and pay all direct  costs and  expenses  incurred by it or on its behalf in
connection  with the  transactions  contemplated  hereunder,  including  filing,
registration and application  fees,  printing fees, and fees and expenses of its
own  financial  or  other  consultants,  investment  bankers,  accountants,  and
counsel.

     (b) If this  Agreement is terminated by FLAG pursuant to Sections  10.1(b),
(c) or (d)(ii), HEART OF GEORGIA shall pay to FLAG an amount equal to the lesser
of $100,000 or FLAG's actual out of pocket expenses  incurred in connection with
the transactions contemplated by this Agreement.

     (c) If this  Agreement  is  terminated  by HEART  OF  GEORGIA  pursuant  to
Sections  10.1(b) or (c),  FLAG shall pay to HEART OF GEORGIA an amount equal to
the lesser of  $100,000  or HEART OF  GEORGIA's  actual  out of pocket  expenses
incurred in connection with the transactions contemplated by this Agreement. (d)
Nothing  contained in this Section 11.2 shall  constitute  or shall be deemed to
constitute  liquidated damages for the willful breach by a Party of the terms of
this Agreement or otherwise limit the rights of the nonbreaching Party.

                                       52
<PAGE>

     11.3 Brokers and Finders.  Each of the Parties represents and warrants that
neither it nor any of its officers,  directors,  employees,  or  Affiliates  has
employed  any  broker or finder or  incurred  any  Liability  for any  financial
advisory  fees,  investment  bankers'  fees,  brokerage  fees,  commissions,  or
finders' fees in connection with this Agreement or the transactions contemplated
hereby.  In the event of a claim by any  broker or finder  based upon his or its
representing or being retained by or allegedly representing or being retained by
HEART OF GEORGIA or by FLAG,  each of HEART OF GEORGIA and FLAG, as the case may
be,  agrees to  indemnify  and hold the  other  Party  harmless  of and from any
Liability in respect of any such claim.

     11.4 Entire Agreement.  Except as otherwise expressly provided herein, this
Agreement   (including  the  documents  and  instruments   referred  to  herein)
constitutes  the  entire  agreement  between  the  Parties  with  respect to the
transactions  contemplated  hereunder and supersedes all prior  arrangements  or
understandings with respect thereto, written or oral. Nothing in this Agreement,
expressed  or implied,  is  intended  to confer upon any Person,  other than the
Parties or their respective successors,  any rights, remedies,  obligations,  or
liabilities under or by reason of this Agreement.

     11.5  Amendments.  To the extent  permitted by Law,  this  Agreement may be
amended by a subsequent  writing signed by each of the Parties upon the approval
of each of the Parties,  whether  before or after  shareholder  approval of this
Agreement  has been  obtained;  provided,  that after any such  approval  by the
holders of HEART OF GEORGIA Common Stock, there shall be made no amendment that,
pursuant to the GBCC, requires further approval by such shareholders without the
further approval of such shareholders; and further provided, that after any such
approval by the holders of FLAG Common Stock,  the  provisions of this Agreement
relating to the manner or basis in which shares of HEART OF GEORGIA Common Stock
will be exchanged for shares of FLAG Common Stock shall not be amended after the
Shareholders'  Meeting in a manner  adverse to the holders of FLAG Common  Stock
without any  requisite  approval  of the  holders of the issued and  outstanding
shares of FLAG Common Stock entitled to vote thereon.

     11.6 Waivers.

     (a) Prior to or at the Effective  Time,  FLAG,  acting through its Board of
Directors,  chief executive officer or other authorized officer,  shall have the
right to waive any Default in the  performance  of any term of this Agreement by
HEART OF GEORGIA,  to waive or extend the time for the compliance or fulfillment
by HEART OF GEORGIA of any and all of its obligations under this Agreement,  and
to waive any or all of the conditions precedent to the obligations of FLAG under
this Agreement,  except any condition  which, if not satisfied,  would result in
the  violation of any Law. No such waiver  shall be effective  unless in writing
signed by a duly authorized officer of FLAG.

                                       53
<PAGE>

     (b) Prior to or at the Effective Time, HEART OF GEORGIA, acting through its
Board of Directors,  chief executive officer or other authorized officer,  shall
have the  right to waive  any  Default  in the  performance  of any term of this
Agreement by FLAG, to waive or extend the time for the compliance or fulfillment
by FLAG, of any and all of its obligations  under this  Agreement,  and to waive
any or all of the  conditions  precedent to the  obligations of HEART OF GEORGIA
under this Agreement, except any condition which, if not satisfied, would result
in the violation of any Law. No such waiver shall be effective unless in writing
signed by a duly authorized officer of HEART OF GEORGIA.

     (c) The failure of any Party at any time or times to require performance of
any  provision  hereof  shall in no manner  affect  the right of such Party at a
later time to enforce  the same or any other  provision  of this  Agreement.  No
waiver of any condition or of the breach of any term contained in this Agreement
in one or more  instances  shall be deemed to be or  construed  as a further  or
continuing waiver of such condition or breach or a waiver of any other condition
or of the breach of any other term of this Agreement.

     11.7  Assignment.  Except as expressly  contemplated  hereby,  neither this
Agreement nor any of the rights,  interests or  obligations  hereunder  shall be
assigned by any Party hereto (whether by operation of Law or otherwise)  without
the prior written consent of the other Party. Subject to the preceding sentence,
this Agreement will be binding upon,  inure to the benefit of and be enforceable
by the Parties and their respective successors and assigns.

     11.8  Notices.  All notices or other  communications  which are required or
permitted  hereunder shall be in writing and sufficient if delivered by hand, by
facsimile transmission, by registered or certified mail, postage pre-paid, or by
courier or overnight  carrier,  to the persons at the  addresses set forth below
(or at such other address as may be provided hereunder),  and shall be deemed to
have been delivered as of the date so delivered:

           HEART OF GEORGIA:        Heart of Georgia Bancshares, Inc.
                                    101 Railroad Avenue
                                    Mount Vernon, GA  30445
                                    Telecopy Number: (912) 583-2894
                                    Attention:  Donald M. Thigpen


            Copy to Counsel:        Nelson Mullins Riley & Scarborough, L.L.P.
                                    First Union Plaza, Suite 1400
                                    999 Peachtree Street, N.E.
                                    Atlanta, GA  30309
                                    Telecopy Number: (404) 817-6225
                                    Attention: Neil E. Grayson, Esq.


                                       54
<PAGE>

                       FLAG:        FLAG Financial Corporation
                                    101 North Greenwood St.
                                    LaGrange, GA 30240
                                    Telecopy Number: (706) 845-5155
                                    Attention:  J. Daniel Speight, Jr.

            Copy to Counsel:        Powell Goldstein Frazer & Murphy LLP
                                    Sixteenth Floor
                                    191 Peachtree Street, N.E.
                                    Atlanta, GA 30303
                                    Telecopy Number: (404) 572-5958
                                    Attention:  Walter G. Moeling IV, Esq.

     11.9 Governing  Law. This  Agreement  shall be governed by and construed in
accordance  with  the  Laws of the  State  of  Georgia,  without  regard  to any
applicable conflicts of Laws.

     11.10  Counterparts.  This  Agreement  may  be  executed  in  two  or  more
counterparts,  each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.

     11.11  Captions,  Articles and  Sections.  The  captions  contained in this
Agreement  are for reference  purposes only and are not part of this  Agreement.
Unless otherwise  indicated,  all references to particular  Articles or Sections
shall mean and refer to the referenced Articles and Sections of this Agreement.

     11.12  Interpretations.  Neither  this  Agreement  nor any  uncertainty  or
ambiguity herein shall be construed or resolved against any party, whether under
any rule of  construction  or  otherwise.  No party to this  Agreement  shall be
considered the draftsman.  The parties acknowledge and agree that this Agreement
has been reviewed,  negotiated,  and accepted by all parties and their attorneys
and shall be construed and interpreted  according to the ordinary meaning of the
words used so as fairly to accomplish the purposes and intentions of all parties
hereto.

     11.13  Enforcement of Agreement.  The Parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement was
not performed in accordance  with its specific terms or was otherwise  breached.
It is accordingly  agreed that the Parties shall be entitled to an injunction or
injunctions to prevent  breaches of this  Agreement and to enforce  specifically
the terms and  provisions  hereof in any court of the United States or any state
having  jurisdiction,  this being in addition to any other  remedy to which they
are entitled at law or in equity.


                                       55
<PAGE>

     11.14  Severability.  Any  term or  provision  of this  Agreement  which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,  be
ineffective  to the  extent  of  such  invalidity  or  unenforceability  without
rendering  invalid or  unenforceable  the remaining terms and provisions of this
Agreement or affecting  the  validity or  enforceability  of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.

                        [SIGNATURES APPEAR ON NEXT PAGE]

                                       56
<PAGE>

                   SIGNATURES TO AGREEMENT AND PLAN OF MERGER


         IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
executed  on its behalf by its duly  authorized  officers as of the day and year
first above written.


                                   FLAG FINANCIAL CORPORATION



                                   By:    /s/ J. Daniel Speight, Jr.
                                          --------------------------
                                          J. Daniel Speight, Jr.
                                          President & Chief Executive Officer



                                   HEART OF GEORGIA BANCSHARES, INC.



                                   By:    /s/ Donald M. Thigpen
                                          ---------------------
                                          Donald M. Thigpen
                                          President and Chief Executive Officer



<PAGE>


                                    Exhibit 1

ARTICLE 12.

12.1     AFFILIATE AGREEMENT


FLAG Financial Corporation
101 North Greenwood Street
LaGrange, GA  30240

Attention:  J. Daniel Speight, Jr., President and Chief Executive Officer

Gentlemen:

         The undersigned is a shareholder of Heart of Georgia  Bancshares,  Inc.
("HEART OF GEORGIA"),  a Georgia  Corporation,  and will become a shareholder of
FLAG Financial  Corporation  ("FLAG"),  a Georgia  corporation,  pursuant to the
transactions  described  in the  Agreement  and  Plan  of  Merger,  dated  as of
________________ ___, 1998 (the "Agreement"),  by and between FLAG, and HEART OF
GEORGIA. Under the terms of the Agreement,  HEART OF GEORGIA will be merged with
and into FLAG (the "Merger"), and the shares of the $_.__ par value common stock
of HEART OF GEORGIA ("HEART OF GEORGIA Common Stock") will be converted into and
exchanged  for shares of the $1.00 par value common stock of FLAG ("FLAG  Common
Stock").   This  Affiliate   Agreement   represents  an  agreement  between  the
undersigned and FLAG regarding certain rights and obligations of the undersigned
in  connection  with the shares of FLAG to be received by the  undersigned  as a
result of the Merger.

         In  consideration  of the  Merger and the  mutual  covenants  contained
herein, the undersigned and FLAG hereby agree as follows:

         1. Affiliate Status. The undersigned  understands and agrees that as to
HEART OF GEORGIA he is an  "affiliate"  under Rule 145(c) as defined in Rule 405
of the Rules and Regulations of the Securities and Exchange  Commission  ("SEC")
under the Securities Act of 1933, as amended ("1933 Act"),  and the  undersigned
anticipates that he will be such an "affiliate" at the time of the Merger.

         2. Initial Restrictions on Disposition.  The undersigned agrees that he
will not sell,  transfer or otherwise dispose of his interests in, or reduce his
risk  relative  to, any of the shares of FLAG Common Stock into which his shares
of HEART OF GEORGIA Common Stock are converted upon  consummation  of the Merger
until such time as FLAG notifies the  undersigned  that the  requirements of SEC
Accounting  Series  Release  Nos. 130 and 135 ("ASR 130 and 135") have been met,
except that transfers may be made in compliance with Staff  Accounting  Bulletin
No. 76  issued  by the SEC.  The  undersigned  understands  that ASR 130 and 135
relate to publication of financial results of post-Merger combined operations of
FLAG and HEART OF GEORGIA.  FLAG agrees that it will publish such results within
45 days  after  the end of the  first  fiscal  quarter  of FLAG  containing  the
required period of post-Merger  combined  operations and that it will notify the
undersigned promptly following such publication.

<PAGE>

         3. Covenants and Warranties of Undersigned. The undersigned represents,
warrants and agrees that:

         (a) At any meeting of  shareholders  of HEART OF GEORGIA called to vote
upon the Merger and the Merger Agreement or at any adjournment thereof or in any
other circumstances upon which a vote, consent or other approval with respect to
the Merger and the Merger Agreement is sought (the "Shareholders' Meeting"), the
undersigned shall vote (or cause to be voted) the Shareholder's  Shares in favor
of the  Merger,  the  execution  and  delivery by HEART OF GEORGIA of the Merger
Agreement,  and  the  approval  of the  terms  thereof  and  each  of the  other
transactions  contemplated by the Merger  Agreement,  provided that the terms of
the Merger  Agreement  shall not have been  amended to reduce the  consideration
payable in the Merger to a lesser  amount of FLAG Common  Stock or  otherwise to
materially  and  adversely  impair  the  Shareholder's  rights or  increase  the
Shareholder's  obligations thereunder.  The undersigned hereby waives any rights
of appraisal,  or rights to dissent from the Merger,  that the  undersigned  may
have.

         (b) The FLAG Common Stock  received by the  undersigned  as a result of
the Merger will be taken for his own  account  and not for  others,  directly or
indirectly, in whole or in part.

         (c) FLAG has  informed the  undersigned  that any  distribution  by the
undersigned of FLAG Common Stock has not been registered  under the 1933 Act and
that shares of FLAG  Common  Stock  received  pursuant to the Merger can only be
sold by the undersigned (1) following registration under the 1933 Act, or (2) in
conformity with the volume and other  requirements of Rule 145(d) promulgated by
the SEC as the same now exist or may hereafter be amended,  or (3) to the extent
some other  exemption from  registration  under the 1933 Act might be available.
The  undersigned  understands  that  FLAG  is  under  no  obligation  to  file a
registration   statement   with  the  SEC  covering  the   disposition   of  the
undersigned's  shares of FLAG Common Stock or to take any other action necessary
to make compliance with an exemption from such registration available.

         (d) The  undersigned  will,  and will cause  each of the other  parties
whose shares are deemed to be beneficially owned by the undersigned  pursuant to
Section 9 hereof,  have all shares of HEART OF GEORGIA Common Stock beneficially
owned  by the  undersigned  registered  in the name of the  undersigned  or such
parties, as applicable, prior to the effective date of the Merger and not in the
name of any bank, broker-dealer, nominee or clearinghouse.

         (e) During the thirty (30) days  immediately  preceding  the  Effective
Time of the Merger,  the  undersigned  has not sold,  transferred,  or otherwise
disposed of his interests in, or reduced his risk relative to, any of the shares
of HEART OF GEORGIA Common Stock beneficially owned by the undersigned as of the
record  date  for  determination  of  shareholders   entitled  to  vote  at  the
Shareholders' Meeting of HEART OF GEORGIA held to approve the Merger.

                                       2
<PAGE>

         (f) The undersigned is aware that FLAG intends to treat the Merger as a
tax-free  reorganization  under  Section 368 of the Code for federal  income tax
purposes.  The undersigned agrees to treat the transaction in the same manner as
FLAG for federal income tax purposes.

         4.  Restrictions on Transfer.  The  undersigned  understands and agrees
that stop-transfer  instructions with respect to the shares of FLAG Common Stock
received  by the  undersigned  pursuant  to the  Merger  will be given to FLAG's
Transfer  Agent  and that  there  will be placed  on the  certificates  for such
shares, or shares issued in substitution thereof, a legend stating in substance:

                  The  shares   represented  by  this  certificate  were  issued
         pursuant to a business combination which is accounted for as a "pooling
         of interests" and may not be sold, nor may the owner thereof reduce his
         risks  relative  thereto in any way,  until such time as FLAG Financial
         Corporation  ("FLAG") has published the financial  results  covering at
         least 30 days of combined  operations  after the effective  date of the
         merger  through  which  the  business  combination  was  effected.   In
         addition,  the shares  represented by this certificate may not be sold,
         transferred or otherwise disposed of except or unless (1) covered by an
         effective  registration  statement under the Securities Act of 1933, as
         amended,  (2) in accordance with (i) Rule 145(d) (in the case of shares
         issued to an  individual  who is an affiliate of FLAG) of the Rules and
         Regulations  of such Act,  or (3) in  accordance  with a legal  opinion
         satisfactory  to  counsel  for  FLAG  that  such  sale or  transfer  is
         otherwise exempt from the registration requirements of such Act.

Such legend will also be placed on any certificate  representing FLAG securities
issued  subsequent to the original issuance of FLAG Common Stock pursuant to the
Merger as a result of any transfer of such shares or any stock  dividend,  stock
split, or other  recapitalization as long as the FLAG Common Stock issued to the
undersigned pursuant to the Merger has not been transferred in such manner as to
justify  the  removal  of  the  legend  therefrom.   Upon  the  request  of  the
undersigned,  FLAG shall cause the certificates  representing the shares of FLAG
Common  Stock  issued to the  undersigned  in  connection  with the Merger to be
reissued free of any legend  relating to  restrictions  on transfer by virtue of
ASR 130 and 135 as soon as practicable after the requirements of ASR 130 and 135
have been met. In addition,  if the  provisions of Rules 144 and 145 are amended
to eliminate  restrictions  applicable to the FLAG Common Stock  received by the
undersigned  pursuant to the Merger,  or at the  expiration  of the  restrictive
period set forth in Rule 145(d), FLAG, upon the request of the undersigned, will
cause the  certificates  representing  the shares of FLAG Common Stock issued to
the  undersigned in connection with the Merger to be reissued free of any legend
relating to the  restrictions  set forth in Rules 144 and 145(d) upon receipt by
FLAG of an opinion of its counsel to the effect that such legend may be removed.

         5.  Understanding  of Restrictions on Disposition.  The undersigned has
carefully  read the  Agreement  and this  Affiliate  Agreement and has discussed
their  requirements  and impact upon his ability to sell,  transfer or otherwise
dispose of the shares of FLAG Common Stock received by the  undersigned,  to the
extent he believes necessary, with his counsel or counsel for HEART OF GEORGIA.

                                       3
<PAGE>

         6. Filing of Reports by FLAG. FLAG agrees,  for a period of three years
after the  effective  date of the Merger,  to file on a timely basis all reports
required to be filed by it pursuant to Section 13 of the Securities Exchange Act
of 1934, as amended,  so that the public  information  provisions of Rule 145(d)
promulgated  by the SEC as the same are presently in effect will be available to
the undersigned in the event the  undersigned  desires to transfer any shares of
FLAG Common Stock issued to the undersigned pursuant to the Merger.

         7. Transfer Under Rule 145(d).  If the  undersigned  desires to sell or
otherwise transfer the shares of FLAG Common Stock received by him in connection
with the  Merger at any time  during  the  restrictive  period set forth in Rule
145(d), the undersigned will provide the necessary  representation letter to the
transfer agent for FLAG Common Stock, together with such additional  information
as the transfer agent may reasonably  request.  If FLAG's counsel concludes that
such proposed sale or transfer  complies with the  requirements  of Rule 145(d),
FLAG shall cause such  counsel to provide  such  opinions as may be necessary to
FLAG's  transfer agent so that the undersigned may complete the proposed sale or
transfer.

         8. Certain  Actions.  The  undersigned  covenants  and agrees with FLAG
that, for a period of two (2) years after the effective time of the Merger,  the
undersigned  shall not,  without the prior written consent of FLAG,  directly or
indirectly serve as a consultant to, serve as a management official of, or be or
become a major  shareholder  of any  financial  institution  having an office in
Montgomery  County,  Georgia.  It is  expressly  understood  that the  covenants
contained  in  this  paragraph  8 do  not  apply  to (i)  "management  official"
positions which the undersigned  holds with financial  institutions  (other than
FLAG,  HEART  OF  GEORGIA,  and  their  subsidiaries)  as of the  date  of  this
Agreement,  (ii) securities  holdings which cause the undersigned to be deemed a
major shareholder of a financial institution (other than FLAG, HEART OF GEORGIA,
and their  subsidiaries)  as of the date of this  Agreement,  or (iii)  advisory
relationships  with a financial  institution which the undersigned has as of the
date of this  Agreement or may have after the date hereof solely in the capacity
as legal counsel.  For the purposes of the covenants contained in this paragraph
8, the following terms shall have the following respective meanings:

                  (a) The term  "management  official" shall refer to service of
         any type which gives the  undersigned  the  authority  to  participate,
         directly or  indirectly,  in  policy-making  functions of the financial
         institution.  This  includes,  but is not  limited  to,  service  as an
         organizer,  officer,  director,  or advisory  director of the financial
         institution.  It is expressly  understood  that the  undersigned may be
         deemed a management  official of the financial  institution  whether or
         not he holds any  official,  elected,  or appointed  position with such
         financial institution.

                  (b) The term "financial  institution" shall refer to any bank,
         bank holding company,  savings and loan  association,  savings and loan
         holding  company,   banking-related   company,  or  any  other  similar
         financial  institution  which  engages  in the  business  of  accepting
         deposits  or making  loans or which owns or  controls  a company  which
         engages in the business of accepting  deposits or making  loans.  It is
         expressly  understood  that  the  term  "financial  institution"  shall
         include any financial  institution  as defined  herein that,  after the

                                       4
<PAGE>

         date of this Agreement, makes application for an appropriate federal or
         state regulatory authority for approval to organize.

                  (c) The term "major shareholder" shall refer to the beneficial
         ownership  of  five  percent  (5%)  or  more  of any  class  of  voting
         securities  or the  ownership  of five percent (5%) of the total equity
         interest in such company, however denominated.

         The  provisions  of this  paragraph 8 shall be of no further  force and
effect if the undersigned is not offered employment as a director of FLAG or any
of its subsidiaries (to include the subsidiaries of HEART OF GEORGIA acquired at
the Effective Time of the Merger) at the Effective Time of the Merger or, if the
undersigned is so employed,  the undersigned's  employment is terminated by FLAG
after the Effective Time of the Merger.

         9.  Acknowledgments.  The  undersigned  recognizes  and agrees that the
foregoing  provisions  also apply to all shares of the capital stock of HEART OF
GEORGIA  and FLAG that are deemed to be  beneficially  owned by the  undersigned
pursuant to applicable federal securities laws, which the undersigned agrees may
include,  without  limitation,  shares  owned  or  held  in the  name of (i) the
undersigned's   spouse,   (ii)  any  relative  of  the  undersigned  or  of  the
undersigned's  spouse who has the same home as the undersigned,  (iii) any trust
or  estate in which  the  undersigned,  the  undersigned's  spouse  and any such
relative collectively own at least a ten percent (10%) beneficial interest or of
which  any of the  foregoing  serves as  trustee,  executor,  or in any  similar
capacity,   and  (iv)  any  corporation  or  other  organization  in  which  the
undersigned,  the undersigned's spouse and any such relative collectively own at
least  ten  percent  (10%) of any class of equity  securities  or of the  equity
interest.  The  undersigned  further  recognizes  that,  in the  event  that the
undersigned is a director or officer of FLAG or becomes a director or officer of
FLAG upon  consummation  of the  Merger,  among other  things,  any sale of FLAG
Common  Stock by the  undersigned  within a period of less  than six (6)  months
following  the  Effective  Time of the Merger may  subject  the  undersigned  to
liability  pursuant to Section 16(b) of the Securities  Exchange Act of 1934, as
amended.

         10.  Miscellaneous.  This Affiliate Agreement is the complete agreement
between FLAG and the  undersigned  concerning  the subject  matter  hereof.  Any
notice required to be sent to any party hereunder shall be sent by registered or
certified mail, return receipt  requested,  using the addresses set forth herein
or such other  address as shall be  furnished  in writing by the  parties.  This
Affiliate Agreement shall be governed by the laws of the State of Georgia.

                        SIGNATURES CONTAINED ON NEXT PAGE


                                       5
<PAGE>

         This  Affiliate  Agreement  is  executed  as of  the  _________  day of
________________, 1998.

                                    Very truly yours,


                                    ------------------------------------
                                    Signature

                                    ------------------------------------
                                    Print Name
                                    
                                    Address:----------------------------
                                     
                                    ------------------------------------
                  
                                    ------------------------------------


                                    [add below the signatures of all registered
                                    owners of shares deemed beneficially owned
                                    by the affiliate]

                                    ------------------------------------ 
                                    Name

                                    ------------------------------------ 
                                    Name

                                    -------------------------------------
                                    Name



AGREED TO AND ACCEPTED as of
the _______ day of ________________, 1998.


FLAG FINANCIAL CORPORATION


By:---------------------------


                                       6
<PAGE>

                                    Exhibit 2



ARTICLE 13.


13.1    

    MATTERS AS TO WHICH NELSON MULLINS RILEY & SCARBOROUGH, L.L.P. WILL OPINE

     1. Heart of Georgia Bancshares,  Inc. ("HEART OF GEORGIA") is a corporation
     duly organized, validly existing and in good standing under the laws of the
     State of Georgia with full  corporate  power and  authority to carry on the
     business in which it is engaged, and to own and use its Assets.

     2. The  execution and delivery of the  Agreement  and  compliance  with its
     terms  do not and will not  violate  or  contravene  any  provision  of the
     Articles  of  Incorporation  or  Bylaws  of HEART  OF  GEORGIA  or,  to our
     knowledge but without any independent investigation, result in any conflict
     with, breach of, or default or acceleration under any Contract disclosed in
     the Agreement,  Law, Order or Permit (subject to the approval of Regulatory
     Authorities)  to which  HEART OF  GEORGIA  is a party or by which  HEART OF
     GEORGIA is bound.

     3. The Agreement has been duly and validly  executed and delivered by HEART
     OF GEORGIA and,  assuming  valid  authorization,  execution and delivery by
     FLAG,  constitutes  a valid  and  binding  agreement  of HEART  OF  GEORGIA
     enforceable in accordance with its terms,  except as enforceability  may be
     limited by bankruptcy, insolvency, reorganization or similar laws affecting
     creditors' rights generally;  provided, however, that we express no opinion
     as to the availability of the equitable remedy of specific performance.

     4. The authorized  capital stock of HEART OF GEORGIA  consists of 1,000,000
     shares of the HEART OF GEORGIA  Common Stock,  of which 220,000 shares were
     issued and outstanding as of  _______________________,  1998. The shares of
     the HEART OF GEORGIA Common Stock that are issued and outstanding  were not
     issued in violation of any  statutory  preemptive  rights of  shareholders,
     were duly issued,  and are fully paid and nonassessable  under the GBCC. To
     our knowledge, except as set forth above, or as disclosed in Section 5.3 of
     the HEART OF GEORGIA Disclosure  Memorandum,  as of  ______________,  1998,
     there were no shares of capital  stock or other equity  securities of HEART
     OF GEORGIA  outstanding  and no outstanding  Equity Rights  relating to the
     capital stock of HEART OF GEORGIA.


<PAGE>

                                    Exhibit 3



ARTICLE 14.


14.1

                                            ____________________, 1998




FLAG Financial Corporation
101 North Greenwood Street
LaGrange, GA 30240

         RE:      Heart of Georgia Bancshares, Inc.  ("HEART OF GEORGIA ")
                  Mount Vernon, Georgia

Ladies and Gentlemen:

         This letter is delivered  pursuant to Section  9.2(g) of the  Agreement
and Plan of Merger,  dated as of  ____________  __,  1998,  by and between  FLAG
Financial Corporation and HEART OF GEORGIA.

         In my capacity as an officer or a director of HEART OF GEORGIA,  and as
of the date of this  letter,  I do not,  to the best of my  knowledge,  have any
claims,  and I am not aware of any  facts or  circumstances  that I believe  are
likely to give rise to any claim, for  indemnification  under HEART OF GEORGIA's
Articles of  Incorporation or Bylaws as existing on the date hereof or as may be
afforded by the laws of the State of Georgia or the United States.


                                       Very truly yours,



                                       --------------------------------------
14.2                                   Signature of Officer or Director


                                       --------------------------------------
14.3                                   Name of Officer or Director

                                       --------------------------------------
14.4                                   Position at HEART OF GEORGIA


<PAGE>

                                    Exhibit 4



ARTICLE 15.

           MATTERS AS TO WHICH POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
                                   WILL OPINE


     1. FLAG Financial  Corporation  ("FLAG") is a corporation  duly  organized,
     validly  existing  and in good  standing  under  the  laws of the  State of
     Georgia with full corporate power and authority to carry on the business in
     which it is engaged, and to own and use its Assets.

     2. The  execution and delivery of the  Agreement  and  compliance  with its
     terms  do not and will not  violate  or  contravene  any  provision  of the
     Articles  of  Incorporation  or  Bylaws of FLAG or,  to our  knowledge  but
     without any independent investigation,  result in any conflict with, breach
     of, or default under any Contract disclosed in the Agreement, Law, Order or
     Permit (subject to the approval of Regulatory Authorities) to which FLAG is
     a party or by which FLAG is bound.

     3. The Agreement has been duly and validly  executed and delivered by FLAG,
     and  assuming  valid  authorization,  execution  and  delivery  by Heart of
     Georgia Bancshares, Inc., constitutes a valid and binding agreement of FLAG
     enforceable in accordance with its terms,  except as enforceability  may be
     limited  by  bankruptcy,   insolvency,   reorganization,  or  similar  laws
     affecting creditors' rights generally,  provided,  however, that we express
     no opinion  as to the  availability  of the  equitable  remedy of  specific
     performance.

     4. The  authorized  capital stock of FLAG consists of 20,000,000  shares of
     FLAG Common Stock, of which 5,174,807  shares are issued and outstanding as
     of ____________  1998, and (ii) 10,000,000  shares of FLAG Preferred Stock,
     of which no shares are issued and  outstanding as of  _____________________
     1998. The shares of FLAG Common Stock that are issued and outstanding  were
     not issued in violation of any statutory preemptive rights of shareholders,
     were duly  issued and are fully paid and  nonassessable  under the  Georgia
     Business Corporation Code. To our knowledge,  except as set forth above, or
     as  disclosed  in  Section  6.3 of the FLAG  Disclosure  Memorandum,  as of
     _________________________,  1998,  there were no shares of capital stock or
     other equity  securities  of FLAG  outstanding  and no  outstanding  Equity
     Rights  relating  to the capital  stock of FLAG.  The shares of FLAG Common
     Stock to be issued to the shareholders of Heart of Georgia Bancshares, Inc.
     as contemplated by the Agreement have been registered  under the Securities
     Act of 1933, as amended,  and when properly issued and delivered  following
     consummation of the Merger will be fully paid and non-assessable  under the
     Georgia Business Corporation Code.


<PAGE>



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