FLAG FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Georgia	58-2094179
(State of incorporation)	(I.R.S. Employer Identification No.)

3475 Piedmont Road N.E. Suite 550
Atlanta, Georgia	30305
(Address of principal executive offices)	(Zip Code)

Flag Financial Corporation and Subsidiary
Table of Contents
	Page
PART I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2003 and
December 31, 2002 and September 30, 2002	3
Consolidated Statements of Operations for the Nine Months and
Quarters Ended September 30, 2003 and 2002	4
Consolidated Statements of Comprehensive Income for the
Nine Months and Quarters Ended September 30, 2003 and 2002	5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2003 and 2002	6
Notes to Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition
And Results of Operations	9
Item 3. Quantitative and Qualitative Disclosures about Market Risk	16
Item 4. Controls and Procedures	16
PART II Other Information
Item 1. Legal Proceedings	17
Item 2. Changes in Securities	17
Item 3. Defaults Upon Senior Securities	17
Item 4. Submission of Matters to a Vote of Security Holders	17
Item 5. Other Information	17
Item 6. Exhibits and Reports on Form 8-K	17

Consolidated Balance Sheets
		September 30,			December 31,			September 30,
		2003			2002			2002
ASSETS		(UNAUDITED)			(AUDITED)			(UNAUDITED)
Cash and due from banks		$	17,433,857			14,006,428			12,401,953
Interest-bearing deposits in banks			19,200,963			6,000,000			-
Federal funds sold			-			18,304,000			-
Total cash and cash equivalents			36,634,820			38,310,428			12,401,953
Interest-bearing deposits			99,000			12,411,492			-
Investment securities available-for-sale			123,728,068			138,853,580			118,096,869
Other investments			15,265,257			6,795,257			7,142,682
Mortgage loans held-for-sale			4,829,334			12,606,080			7,561,919
Loans, net			428,291,726			374,783,897			376,582,848
Premises and equipment, net			16,766,237			21,063,278			13,171,474
Other assets			29,037,483			31,306,554			24,074,034
Total assets		$	654,651,925			636,130,566			559,031,779
LIABILITIES
Non interest-bearing deposits		$	41,475,017			40,039,052			39,347,937
Interest-bearing demand deposits			244,361,676			170,856,638			126,039,129
Savings			25,240,735			24,500,243			25,401,806
Time			200,513,656			274,334,991			232,300,619
Total deposits			511,591,084			509,730,924			423,089,491
Advances from Federal Home Loan Bank			53,000,000			58,000,000			62,000,000
Federal funds purchased and other borrowings			18,364,743			1,334,386			5,703,000
Borrowings under line of credit			1,350,000			-			-
Accrued interest payable and other liabilities			6,150,673			6,316,303			7,752,575
Total liabilities			590,456,500			575,381,613			498,545,066
STOCKHOLDERS' EQUITY
Preferred stock (10,000,000 shares authorized, none
issued and outstanding)			-			-			-
Common stock ($1 par value, 20,000,000 shares authorized,
9,757,004, 9,638,501 and 9,631,451 shares issued at
September 30, 2003, December 31, 2002 and
September 30, 2002, respectively)			9,757,004			9,638,501			9,631,451
Additional paid-in capital			24,433,382			23,463,132			23,426,500
Retained earnings			38,276,056			35,224,936			34,424,737
Accumulated other comprehensive income			1,305,693			1,999,094			2.471,535
Less: Treasury stock at cost; 1,246,961 shares at September 30,2003,
1,246,961 shares at December 31, 2002 and 1,236,961 shares
at September 30, 2002, respectively			(9,576,710	)		(9,576,710	)		(9,467,510	)
Total stockholders' equity			64,195,425			60,748,953			60,486,713
Total liabilities and stockholders' equity		$	654,651,925			636,130,566			559,031,779

See Accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Operations
					(UNAUDITED)
		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2003			2002			2003			2002
Interest Income
Interest and fees on loans		$	7,756,520			7,869,733			22,196,571			22,173,738
Interest on securities			1,383,247			1,726,540			4,371,419			5,294,916
Interest on federal funds sold and interest-bearing deposits			127,268			14,705			506,034			88,575
Total interest income			9,267,035			9,610,978			27,074,024			27,557,229
Interest Expense
Interest on deposits:
Demand			820,420			487,950			2,345,182			1,489,478
Savings			37,096			56,102			111,692			165,768
Time			1,413,094			2,026,869			4,847,793			6,857,305
Interest on other borrowings			219,072			295,143			634,583			880,906
Total interest expense			2,489,682			2,866,064			7,939,250			9,393,457
Net interest income before provision for loan losses.			6,777,353			6,744,914			19,134,774			18,163,772
Provision for Loan Losses			375,000			195,000			946,000			4,399,000
Net interest income after provision for loan losses.			6,402,353			6,549,914			18,188,774			13,764,772
Other Income
Fees and service charges on deposit accounts			850,477			848,152			2,571,673			2,529,494
Mortgage banking activities			1,143,613			808,331			3,486,767			1,862,331
Insurance commissions and brokerage fees			48,661			182,686			424,016			429,418
Other income			289,559			145,204			1,839,721			897,860
Total other income			2,332,310			1,984,373			8,322,177			5,719,103
Other Expenses
Salaries and employee benefits			3,938,901			3,989,371			12,018,174			14,767,480
Occupancy			825,281			876,378			2,522,245			2,767,502
Professional fees			123,200			165,790			563,954			1,574,797
Postage, printing and supplies			229,852			220,347			758,723			762,613
Amortization of intangibles			22,500			-			60,000			-
Communications and data			625,951			484,814			1,831,806			1,611,714
Other operating			737,621			706,050			2,120,360			3,526,278
Total other expenses			6,503,306			6,442,750			19,875,262			25,010,384
Earnings (loss) before provision for
income taxes and extraordinary item			2,231,357			2,091,537			6,635,689			(5,526,509	)
Provision for income taxes (benefit)			684,971			655,433			2,060,197			(2,394,649	)
Earnings (loss) before extraordinary item			1,546,386			1,436,104			4,575,492			(3,131,860	)
Extraordinary item – loss on redemption of debt, net of
income tax benefit of $101,377 in 2002			-			-			-			165,404
Net earnings (loss)		$	1,546,386			1,436,104			4,575,492			(3,297,264	)
Basic earnings (loss) per share before extraordinary item		$	0.18			0.17			0.54			(0.39	)
Extraordinary item			-			-			-			(0.02	)
Basic earnings (loss) per share		$	0.18			0.17			0.54			(0.41	)
Diluted earnings (loss) per share before extraordinary item		$	0.17			0.17			0.51			(0.39	)
Extraordinary item			-			-			-			(0.02	)
Diluted earnings (loss) per share		$	0.17			0.17			0.51			(0.41	)

See Accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Comprehensive Income
		(UNAUDITED)
		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2003			2002			2003			2002
Net earnings (loss)		$	1,546,386			1,436,104			4,575,492			(3,297,264	)
Other comprehensive income (loss), net of tax:
Unrealized (losses) gains on investment
securities available-for-sale:
Unrealized gains arising during the period,
net of tax of $386,891, $179,619, $374,718 and
$659,785, respectively			(631,244	)		293,063			(611,382	)		1,076,491
Plus: Reclassification adjustment for losses (gains) included in
net earnings(loss) net of tax of $1,653, $4,430 and $4,240, respectively			(2,697	)		-			(7,228	)		6,917
Reclassification of gain on cash flow hedges, net of tax of $45,837, $45,840
and $137,512, respectively			-			(74,787	)		(74,791	)		(224,361	)
Other comprehensive (loss) income			(633,941	)		218,276			(693,401	)		859,047
Comprehensive income (loss)		$	912,445			1,654,380			3,882,091			(2,438,217	)

Consolidated Statements of Cash Flows
		Nine Months Ended
		September 30,
		2003			2002
		(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)		$	4,575,492		$	(3,297,264	)
Adjustment to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation, amortization and accretion			2,606,396			1,525,439
Provision for loan losses			946,000			4,399,000
(Gain) loss on sale of available-for-sale securities			(11,658	)		11,157
(Gain) loss on sale of fixed assets			(922,182	)		365,866
Gain on sale of other real estate			(112,569	)		(56,639	)
Change in:
Mortgage loans held-for-sale			7,776,746			(1,107,792	)
Other			650,325			(8,048,558	)
Net cash provided by (used in) operating activities			15,508,550			(6,208,791	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in interest-bearing deposits			12,312,492			160,093
Proceeds from sales and maturities of investment
securities available-for-sale			69,032,778			53,921,872
Purchases of investment securities available-for-sale			(55,874,263	)		(39,355,680	)
Purchases of other investments			(8,920,000	)		(1,113,700	)
Proceeds from sale of other investments			450,000			-
Net change in loans			(54,453,829	)		(12,014,759	)
Proceeds from sale of other real estate			1,933,018			1,271,452
Proceeds from sale of premises and equipment			4,344,757			430,763
Purchases of premises and equipment			(691,036	)		(1,297,089	)
Purchases of cash surrender value life insurance			(122,974	)		(133,023	)
Net cash (used in) provided by investing activities			(31,989,057	)		1,869,929
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits			1,860,160			(17,491,834	)
Change in federal funds purchased and repurchase agreements			17,030,357			(12,298,000	)
Change in other borrowed funds			1,350,000			(5,000,000	)
Proceeds from FHLB advances			-			46,000,000
Payments of FHLB advances			(5,000,000	)		(23,448,435	)
Purchase of treasury stock			-			(3,022,872	)
Proceeds from issuance of stock			138,000			11,707,740
Proceeds from exercise of stock options			938,754			481,705
Proceeds from issuance of warrants			12,000			1,236,000
Cash dividends paid			(1,524,372	)		(1,501,130	)
Net cash provided by (used in) financing activities			14,804,899			(3,336,826	)
Net change in cash and cash equivalents			(1,675,608	)		(7,675,688	)
Cash and cash equivalents at beginning of period			38,310,428			20,077,641
Cash and cash equivalents at end of period		$	36,634,820		$	12,401,953

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2003			2002			2003			2002
Basic earnings (loss) per share:
Net earnings (loss)		$	1,546,386			1,436,104			4,575,492			(3,297,264	)
Weighted average common shares outstanding			8,500,030			8,393,364			8,455,895			8,136,955
Per share amount		$	0.18			0.17			0.54			(0.41	)
Diluted earnings (loss) per share:
Net earnings (loss)		$	1,546,386			1,436,104			4,575,492			(3,297,264	)
Effect of stock options and warrants			664,901			252,268			585,831			-
Diluted earnings (loss) per share		$	0.17			0.17			0.51			(0.41	)

		Three months ended						Nine months ended
		September 30,						September 30,
		2003			2002			2003			2002
Net earnings (loss) as reported		$	1,546,386			1,436,104			4,575,492			(3,297,264	)
Compensation expense determined by fair value method			(76,546	)		(459,648	)		(229,638	)		(1,378,944	)
Pro forma net earnings (loss)		$	1,469,840			976,456			4,345,854			(4,676,208	)
Basic earnings (loss) per share:
As reported		$	.18			.17			.54			(.41	)
Pro forma		$	.17			.12			.51			(.57	)
Diluted earnings (loss) per share:
As reported		$	.17			.17			.51			(.41	)
Pro forma		$	.16			.11			.48			(.57	)

		September 30,			December 31,			September 30,
		2003			2002			2002
Commercial/financial/agricultural		$	58,224			57,473			42,750
Real estate – Construction			81,111			68,169			76,036
Real estate – Mortgage			58,941			57,560			53,858
Real estate – Other			217,503			182,622			194,142
Installment loans to individuals			19,300			15,848			17,094
Total loans			435,079			381,672			383,880
Less: Allowance for loan losses			6,787			6,888			7,297
Total net loans		$	428,292			374,784			376,583

Item 2
Management’s Discussion and Analysis of Financia		l Condition and Operating Results
		2003									2002
(unaudited)		Third Quarter			Second Quarter			First Quarter			Fourth Quarter			Third Quarter
INCOME SUMMARY
Interest income		$	9,267,035		$	8,725,651		$	9,081,338		$	9,117,033		$	9,610,978
Interest expense		2,489,682			2,606,388			2,843,180			2,978,299			2,866,064
Net interest income		6,777,353			6,119,263			6,238,158			6,138,734			6,744,914
Provision for loan losses		375,000			315,000			256,000			150,000			195,000
Other income		2,332,310			3,536,695			2,453,172			2,041,870			1,984,373
Other expenses		6,503,306			7,083,158			6,288,798			6,258,940			6,442,750
Income before taxes		2,231,357			2,257,800			2,146,532			1,771,664			2,091,537
Income taxes		684,971			735,972			639,254			468,270			655,433
Net income		$	1,546,386		$	1,521,828		$	1,507,278		$	1,303,394		$	1,436,104
OPERATING PERFORMANCE
Earnings per common share:
Basic	$		0.18		$	0.18		$	0.18		$	0.16		$	0.17
Diluted			0.17		0.17			0.17			0.15			0.17
Return on average equity			9.70	%	9.65		%	9.94		%	8.61		%	9.56		%
Return on average assets			0.98	%	0.97		%	0.95		%	0.85		%	1.04		%
Net interest margin			4.67	%	4.52		%	4.36		%	4.29		%	5.24		%
Yield on Earning Assets			6.39	%		6.13	%		6.23	%		6.39	%		7.47	%
Cost of Funds			1.77	%		1.85	%		1.97	%		2.14	%		2.34	%
Efficiency ratio			71.82	%	73.22		%	72.35		%	78.24		%	74.27		%
Net overhead ratio			2.65	%		2.27	%		2.40	%		2.79	%		3.22	%
Dividend payout ratio			33.02	%	33.47		%	33.51		%	38.67		%	35.07		%
ASSET QUALITY
Allowance for loan losses	$		6,787,138		$	6,441,458		$	6,402,226		$	6,888,167		$	7,297,108
Non-performing assets			7,658,223		9,412,217			11,297,126			11,083,389			12,537,024
Allowance for loan losses to loans			1.56	%	1.64		%	1.71		%	1.75		%	1.90		%
Non-performing assets to total assets			1.17	%	1.50		%	1.72		%	1.73		%	2.24		%
Net charge-offs to average loans			0.03	%	0.29		%	0.77		%	0.59		%	0.60		%
AVERAGE BALANCES
Loans	$		406,258,330		$	381,157,519		$	385,493,430		$	379,673,033		$	370,364,207
Earning assets			575,303,708		564,456,772			578,720,591			564,806,935			504,707,300
Total assets			628,899,360		626,368,024			639,847,976			624,422,898			548,626,716
Deposits			499,709,951		500,347,369			512,553,229			492,526,058			422,880,539
Stockholders’ equity			63,797,914		62,799,562			61,287,471			60,482,496			59,940,657
Common shares outstanding:
Basic			8,500,030		8,470,308			8,396,207			8,390,979			8,393,364
Diluted			9,164,931		9,130,266			8,875,015			8,815,672			8,645,632
AT PERIOD END
Loans	$		435,078,864		$	393,515,141		$	375,055,976		$	381,672,065		$	383,879,956
Earning assets			598,201,486		564,220,499			587,051,508			576,642,475			516,925,309
Total assets			654,651,925		623,426,376			648,315,956			636,130,566			559,031,779
Deposits			511,591,084		496,722,408			520,561,166			509,730,924			423,089,491
Stockholders’ equity			64,195,425		63,655,111			61,974,104			60,748,953			60,486,713
Common shares outstanding			8,510,043		8,489,472			8,417,790			8,391,540			8,394,490

Investment Securities

Investment securities at September 30, 2003 totaled $139.0 million, a decrease of $6.7 million or 4.6% from December 31, 2002. Yield and price levels on bonds during the first nine months of 2003 allowed Flag to sell $24.1 million of lower yielding investments with an after tax loss of approximately $1,300. The low rate environment has also contributed to faster prepayments on the mortgage backed securities within Flag’s investment portfolio. Flag’s success in its lending activities combined with the lower rates on investment opportunities have caused an unwillingness on management’s part to reinvest most of the cash flows from the portfolio, deciding instead to carry the proceeds in federal funds sold or interest bearing deposits in other banks. Investment securities compr ised 23.2% and 25.3% of earning assets at September 30, 2003 and December 31, 2002, respectively.

Federal Funds Sold and Interest Bearing Deposits

Short term investments (federal funds sold and interest bearing deposits) totaled $19.3 million at September 30, 2003, a decrease of $17.4 million from December 31, 2002. Historically, Flag has maintained lower levels of short term investments, choosing instead to invest more heavily in loans and investment securities. Our level of short term investments has remained high during the first nine months of 2003 as we have been unwilling to invest at current market interest rates. Our short-term investments decreased from December 31, 2002, as we were able to loan more funds at acceptable rates. Short-term investments amounted to 3.2% of earning assets at September 30, 2003 and 6.3% of earning assets at December 31, 2002.

Premises and Equipment

Premises and equipment at September 30, 2003 totaled $16.8 million compared to $21.1 million at December 31, 2002. This decrease related to the sale of one of Flag’s banking centers for $4.5 million during the third quarter of 2003. Flag maintained a branch location in the center under a lease negotiated with the buyer.

Deposits and Other Funding

Total deposits at September 30, 2003 were $511.6 million, an increase of $1.9 million over December 31, 2002 balances. Interest-bearing demand deposits (money market and NOW accounts) have increased 43.0% or $73.5 million over this period, due largely to sales efforts focused in the Atlanta deposit market that Flag entered in November of 2002. Flag’s focus and success in growing demand deposits has allowed Flag to reduce rates on time deposits that historically have carried higher rates. Time deposits have decreased $73.8 million or 26.9% to $200.5 million at September 30, 2003. Federal funds purchased and other borrowings of $19.7 million at September 30, 2003 represented an increase of $18.4 million from December 31, 2002. The majority of these borrowings were federal funds purchas ed under lines with various financial institutions and resulted from an acceleration in loan growth during the last part of the third quarter. Flag expects to replace most of this funding during the fourth quarter with more traditional funding from demand and time deposits.

Advances from the Federal Home Loan Bank

Advances from the Federal Home Loan Bank (FHLB) amounted to $53 million at September 30, 2003 compared to $58 million at December 31, 2002. This decrease related to one advance totaling $5 million that matured in the second quarter of 2003.

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Liquidity and Market Risk Sensitivity

Liquidity management involves Flag’s ability to maintain adequate short-term assets to meet the cash flow expectations of depositors and other lending institutions, and to provide funds for the growth in earning assets. Liquidity is managed daily by understanding the cash flow expectations of depositors and other lending institutions and maintaining enough liquid assets to meet these expectations. As of September 30, 2003, Flag had $311.1 million of deposits due on demand and $171.7 million of time deposits and other borrowings due within one year. Potential liquidity needs of these liabilities are met with liquid assets (assets that can be easily converted to cash). Liquid assets at September 30, 2003 totaled $180.6 million and included cash and due from banks, federal funds sold and i nterest bearing deposits with other banks, investment securities available-for-sale, other investments and mortgage loans held-for-sale. In addition to using liquid assets to meet potential liquidity needs, Flag maintains available lines of credit with other financial institutions. These include federal funds and other lines of credit totaling $46 million and a line of credit with the Federal Home Loan Bank totaling $95 million. At September 30, 2003, $71 million of the available $141 million in total lines was advanced to Flag.

Market rate sensitivity is the tendency for changes in the interest rate environment to be reflected in Flag’s net interest income and results of operations. Flag seeks to balance maturities and rates on earning assets and the corresponding funding such that interest rate fluctuations have a minimal impact on earnings and the value of Flag’s equity.

Historically, the average term to maturity or repricing (rate changes) of assets (primarily loans and investment securities) has exceeded the average repricing period of liabilities (primarily deposits and borrowings). Flag’s liabilities over the past year have shifted from mostly time deposits with longer maturities to demand deposits which reprice daily. This shift in funding results from sales and pricing disciplines that in the long run will prove profitable, but currently shows Flag with more liabilities repricing in the early months of a rate change than do earning assets. This would indicate that Flag’s net interest income would be negatively impacted by rising rates. Flag believes, however, that the growing demand deposit base will not reprice upwards to the same degree and intensity as Flag’s assets and that there is opportunity for improvement in net interest income should rates begin to rise.

Management carefully measures and monitors market rate sensitivity and believes that its operating strategies offer protection against interest rate risk. As required by various regulatory authorities, Flag’s Board of Directors established an interest rate risk policy, which sets specific limits on interest rate risk exposure. Adherence to this policy is reviewed by Flag's executive committee and presented at least annually to the Board of Directors.

Capital

At September 30, 2003, the capital ratios of Flag and Flag Bank (the "Bank") were adequate compared to the minimum regulatory capital requirements.  Minimum regulatory capital levels for banks and holding companies require Tier one capital (core capital accounts less intangible assets) to risk-weighted assets of at least 4%, total capital (tier one capital plus a portion of the allowance for loan losses) to risk-weighted assets of 8%, and tier one capital to average assets of at least 4%. The following table reflects Flag’s capital position with respect to the regulatory minimums as of September 30, 2003:

		Actual						Required						Excess
		Amount%						Amount%						Amount%
Total Capital (to Risk Weighted Assets)			$56,718			10.83	%		$49,044			8.00	%		$7,674			2.83	%
Tier 1 Capital (to Risk Weighted Assets)			$50,131			9.57	%		$24,522			4.00	%		$25,609			5.57	%
Tier 1 Capital (to Average Assets)			$50,131			8.18	%		$20,943			4.00	%		$29,188			4.18	%

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Non-Performing Assets

Non-performing assets (nonaccrual loans, loans over 90 days past due and still accruing, real estate owned and repossessions) totaled approximately $7.7 million at September 30, 2003, compared to $11.1 million at December 31, 2002. These levels as a percentage of total assets represented 1.17% and 1.74% respectively.  The improvement in Flag's non-perfo rming assets was due largely to an improved collateral position and operating performance on a large agricultural loan that allowed Flag to move this credit to accrual status in the third quarter. 

Flag has a loan review function that continually monitors selected accruing loans for which general economic conditions or changes within a particular industry could cause the borrowers financial difficulties. The loan review function also identifies loans with high degrees of credit or other risks. The focus of loan review is to maintain a low level of non-performing assets and to return current non-performing assets to earning status.

Non-performing assets		September 30,			December 31,			September 30,
		2003			2002			2002
Loans on nonaccrual		$	5,190			9,243			9,464
Loans past due 90 days and still accruing			330			122			2,084
Other real estate owned and repossessions			2,138			1,718			989
Total non-performing assets		$	7,658			11,083			12,537
Total non-performing assets as a percentage of
total assets			1.17	%		1.74	%		2.24	%

Results of Operations for the Nine Month Periods Ended September 30, 2003 and 2002

Net income - Net income for the nine month period ended September 30, 2003 was $4.6 million or $0.51 per diluted share compared to a net loss of $3.3 million or $0.41 per share for the same period in 2002.

Net interest income - Net interest income for the nine month period ended September 30, 2003 totaled $19.1 million, an increase of 5.3% over the same period in 2002. Total interest income decreased only slightly, by 1.7% to $27.1 million; however, interest expense decreased substantially. Total interest expense for the nine month period ended September 30, 2003 was $7.9 million, a decrease of 15.9% or $1.5 million. This improvement in interest expense is attributed largely to the shift towards demand deposits and aggressive repricing of time deposits.

Provision for loan losses - Flag’s provision for loan losses in the first nine months of 2003 amounted to $946,000, compared to $4.4 million for the same period in 2002. The unusually large provision in 2002 related to a special provision of $4.0 million which reflected both the results of an in-depth study of the loan portfolio at the Bank, where recent management changes had occurred, and a revision of the estimation process used by the Company. See "Allowance for Possible Loan and Lease Losses."

Non-interest income - Non-interest income totaled $8.3 million for the nine month period ending September 30, 2003. This increase of $2.6 million or 45.5% relates primarily to an increase in income from Flag’s mortgage banking line of business. Mortgage banking revenues, buoyed by the low interest rate environment and refinancing trends, increased dramatically from $1.9 million in the first nine months of 2002 to $3.5 million in the first nine months of 2003. Service charges on deposit accounts remained mostly constant, improving slightly to $2.6 million in the first nine months of 2003, an increase of 1.7%. Other non-interest income improved by $942,000 to $1.8 million, due mos tly to the non-recurring gain on the sale of fixed assets in the second quarter of 2003 totaling $922,000.

Non-interest expense - Non-interest expense for the nine month period ending September 30, 2003 totaled $19.9 million, a decrease of $5.1 million from the same period in 2002. Flag recorded approximately $5.4 million of pre-tax charges in the first quarter of 2002 related to a management restructuring. These charges included legal and professional fees, contract terminations and severance payments related to Flag’s twenty percent reduction in employee work force.

Provision for income taxes - Flag’s provision for income taxes during the first nine months of 2003 amounted to $2.1 million for an effective tax rate of 31.0%. During the first nine months of 2002, Flag recorded an income tax benefit of approximately $2.4 million for an effective rate of 43.3%.

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Provision and Allowance for Possible Loan and Lease Losses

Flag maintains an allowance for loan losses appropriate for the quality of the loan portfolio and sufficient to meet anticipated future loan losses. Flag also utilizes a comprehensive loan review and risk identification process and the analysis of Flag’s financial trends to determine the adequacy of the allowance. Many factors are considered when evaluating the allowance. The analysis is based on historical loss trends; trends in criticized and classified loans in the portfolio; trends in past due and non-accrual loans; trends in portfolio volume, composition, maturity, and concentrations; changes in local and regional economic market conditions; the accuracy of the loan review and risk identification system, and the experience, ability, and depth of lending personnel an d management.

In determining the appropriate level of the allowance for Flag, management relies primarily on analysis of the major components of the loan portfolio such as commercial loans, commercial real estate loans, consumer loans, construction loans, residential real estate loans, and all other loans and unfunded commitments. Flag has established a minimum loss factor for certain problem loan grade categories and for general categories of all other loans. All significant problem loans are reviewed individually to establish either the minimum loss factor (formula) or a specific reserve higher than the formula. All significant non-problem loans are reserved at the greater of the minimum loss rate for the category of loans or the weighted average historical loss rate over a defined loss horizon. Other h omogenous loan pools such as the consumer loans, construction loans, and residential mortgage loans are reserved at the greater of the minimum loss rate or the weighted average historical loss rate as computed in the historical analysis.

Management evaluates the allowance on a quarterly basis. Through this evaluation, the appropriate provision for loan losses is determined by considering the current allowance level, actual loan losses and loan recoveries.

The following table presents an analysis of the allowance for loan losses for the nine month periods ended September 30, 2003 and 2002:

		2003			2002
Balance of allowance for loan losses at beginning of period		$	6,888			7,348
Provision charged to operating expense			946			4,399
Charge offs:
Commercial			222			959
Real estate – mortgage			32			469
Real estate – other			946			3,221
Consumer			151			312
Total charge-offs			1,351			4,961
Recoveries:
Commercial			75			120
Construction			-			1
Real estate – mortgage			17			23
Real estate – other			90			283
Consumer			122			84
Total recoveries			304			511
Net charge-offs			1,047			4,450
Balance of allowance for loan losses at end of period		$	6,787			7,297

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Results of Operations for the Three Month Periods Ended September 30, 2003 and 2002

Net income – Net income for the quarter ended September 30, 2003 was $1.5 million or $.17 per diluted share, compared to $1.4 million or $.17 per diluted share for the quarter ended September 30, 2002. Flag’s return on average assets was .98% and 1.04% for the third quarter of 2003 and 2002, respectively, while return on average equity was 9.70% and 9.56% on average equity of $63.8 and $59.9 for the same quarters.

Interest income - Interest income for the quarter ended September 30, 2003 was $9.3 million, a decrease of $344,000 compared to levels for the same quarter in 2002. Interest income and fees on loans in the current quarter decreased $113,000, or 1.4%, to $7.8 million compared to the same quarter in 2002. Although loans outstanding increased during the quarter, yields on loans declined from 8.4% in the third quarter of 2002 to 7.3% in the third quarter of 2003. Interest on investment securities also declined during the quarter from $1.7 million in the third quarter of 2002 to $1.4 million in the third quarter of 2003, due in part to the lower interest rate environment and lower average balances of investment securities. Interest on federal funds sold and interest bearing deposits in other banks increased during the third quarter of 2003 as Flag maintained higher levels of liquidity than in the past. Interest on federal funds sold and interest bearing deposits in other banks increased $113,000 to $127,000 when comparing the third quarters of 2002 and 2003, respectively.

Yields on earning assets decreased during the quarter ended September 30, 2003 when compared to the third quarter of 2002. Yields on earning assets for the current quarter were 6.39% compared to the quarter ended September 30, 2002 when earning assets yielded 7.47%.

Interest expense – Interest expense for the third quarter of 2003 was $2.5 million, a decrease of $376,000 over the same quarter in 2002. This decrease in interest expense came despite a 19.1% increase in total funding, from $490.8 million to $584.3 million at September 30, 2003 and 2002, respectively. Demand deposits (interest-bearing and non-interest bearing) comprised 48.9% of total funding at September 30, 2003 compared to 33.7% at September 30, 2002. This improvement in funding along with lower renewal rates on time deposits helped reduce Flag’s cost of funds to 1.77% for the third quarter of 2003 compared to 2.34% in the third quarter of 2002.

Net interest income – Net interest income for the quarter ended September 30, 2003 was $6.8 million, an increase of 0.5% from the quarter ended September 30, 2002. Flag’s net interest margin (net interest income divided by average earning assets) decreased from 5.24% to 4.67% on average earning assets of $510.7 million and $575.3 million for the quarters ended September 30, 2002 and September 30, 2003, respectively.

Non-interest income – Non-interest income for the quarter ended September 30, 2003 totaled $2.3 million, an increase of 17.5% compared to the quarter ended September 30, 2002. Flag’s income from mortgage banking activities continued to benefit from the low interest rate environment, increasing income from $808,000 to $1.1 million during the third quarters of 2002 and 2003, respectively. Service charges on deposit accounts remained mostly unchanged at $850,000 compared to $848,000 for the same quarter in 2002.

Non-interest expense - Non-interest expense for the third quarter of 2003 totaled $6.5 million compared to $6.4 million in the same quarter of 2002. Salaries and benefits decreased $50,000 from $4.0 million in 2002 to $3.9 million in the third quarter of 2003, despite larger-than-normal levels of commission expense associated with strong mortgage performance in the third quarter of 2003. Occupancy expense also decreased slightly from $876,000 for the third quarter of 2002 to $825,000 for the same quarter of 2003. During the third quarter, Flag completed the consolidation of its Sandy Springs office into several other branches in the immediate area as well as the move of its back offi ce operations and support functions into a smaller, less costly location. These decreases in occupancy expenses coupled with decreases in professional fees of $43,000 helped offset increases in communications and data expense of $141,000 when comparing the quarters ended September 30, 2002 to September 30, 2003. Most of the increase in communications and data relates to Flag’s move to an outsourced data center operation in the first half of 2003.

Income taxes – Income tax expense for the quarter ended September 30, 2003 totaled $685,000 compared to $655,000 for the same quarter of 2002. Flag’s effective tax rate was 30.7% and 31.3% for the third quarter of 2003 and 2002 respectively.

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures about Market Risk

As of September 30, 2003, there were no substantial changes in the composition of Flag’s market-sensitive assets and liabilities or their related market values from that reported as of December 31, 2002. The foregoing disclosures related to the market risk of Flag should be read in conjunction with Flag’s audited consolidated financial statements, related notes and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2002 included in Flag’s 2002 Annual Report on Form 10-K.

Item 4. Controls and Procedures

As of the end of the period covered by this report, Flag carried out an evaluation, under the supervision and with the participation of Flag’s management, including Flag’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation o f Flag’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, Flag’s Chief Executive Officer and Chief Financial Officer concluded that Flag’s disclosure controls and procedures are effective in timely alerting them to material information relating to Flag (including its consolidated subsidiary) that is required to be included in Flag’s periodic filings with the Securities and Exchange Commission. There have been no significant changes in Flag& #146;s internal controls or, to Flag’s knowledge, in other factors that could significantly affect those internal controls subsequent to the date Flag carried out its evaluation, and there have been no corrective actions with respect to significant deficiencies or material weaknesses.

Part 2. Other Information

Flag Financial Corporation and Subsidiary

PART II. Other Information

Item 1. Legal Proceedings - None

Item 2. Changes in Securities - None

Item 3. Defaults upon Senior Securities – None

Item 4. Submission of Matters to a Vote of Security Holders - None

Item 5. Other Information

Pursuant to Rule 14a-14(c)(1) promulgated under the Securities Exchange Act of 1934, as amended, shareholders desiring to present a proposal for consideration at the Company’s 2004 Annual Meeting of Shareholders must notify the Company in writing to the Secretary of the Company, at 3475 Piedmont Road, N.E., Suite 550, Atlanta, Georgia, 30305, of the contents of such proposal no later than December 15, 2003 to be included in the 2004 Proxy Materials. A shareholder must notify the Company before January 15, 2004 of a proposal for the 2004 Annual Meeting that the shareholder intends to present other than by inclusion in the Company’s proxy material. If the Company does not receive such notice prior to January 15, 2004, proxies solicited by the management of the Company will confer dis cretionary authority upon the management of the Company to vote upon any such matter.

Item 6.	Exhibits and Reports on Form 8-K
	(a)	Exhibits
	31.1	Section 302 Certification by Chief Executive Officer
	31.2	Section 302 Certification by Chief Financial Officer
	32.1	Section 906 Certification by Chief Executive Officer and Chief Financial Officer
	(b)	Reports on Form 8-K
	Reports on Form 8-K filed during the Third Quarter of 2003:
	July 17, 2003: Report on Form 8-K containing Flag’s second quarter 2003 earnings press release pursuant to Item 9 (Regulation FD disclosure).

Flag Financial Corporation and Subsidiary

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

	Flag Financial Corporation
	/s/ Joseph W Evans
	Joseph W. Evans
	Chief Executive Officer
	November 10, 2003

	/s/ J. Daniel Speight, Jr.
	J. Daniel Speight, Jr.
	Chief Financial Officer
	November 10, 2003