A small Georgia thrift will take the biggest hit announced so far in the Bennett Funding debacle. Flag Financial Corp. said it would take a $2.3 million charge against earnings and post third-quarter loss.

Flag Financial, the holding company for First Federal Savings Bank of La Grange, last week classified the recovery of $4.5 million in Bennett leases as "doubtful." It also downgraded to "substandard" $5 million in loans serviced by Resort Funding Inc., an affiliate of the bankrupt leasing company.

Bennett went bankrupt in April under a cloud of fraud allegations. Dozens of thrifts hold the paper on Bennett leases.

Officials of Flag Financial, which has $226 million in assets and three branches in La Grange, said the charge will result in an as-yet- undetermined net loss for the third quarter.

"We feel like we'll have a recovery" of the affected leases, said Ellison C. Rudd, Flag Financial's chief financial officer. "We know we will need something because (Bennett) is in the bankruptcy. It may be hundreds of thousands that we lose, or it could be a couple of million dollars."

Last quarter the bank recognized a special provision of $678,000 related to the Bennett leases. With the addition of $2.3 million - taken directly from earnings - the bank will have taken about $3 million in provisions relating to Bennett leases or Resort Funding loans.

Mr. Rudd expects Flag to reclaim in full the $750,000 of that total associated with Resort Funding.

The Bennett Funding Group, based in Syracuse, filed for Chapter 11 bankruptcy April 1, after its chief financial officer was charged with securities fraud. As a result, revenues from its leases have become less certain.

While dozens of thrifts bought the leases, only a few have confirmed publicly that they expect losses. First Keystone Financial of Media, Pa., which holds about $3.9 million of leases bought from Bennett, put all the leases on nonaccrual status last April soon after the lessor declared bankruptcy.

Flag Financial president John S. Holle said in a statement he expected no additional provisions related to the Bennett leases. He claimed that "the increase in the bank's nonperforming assets does not reflect any deterioration in the bank's underwriting standards, but relates specifically to alleged fraud by Bennett Funding."

John Howard, president of Equity Research Services, agreed with Mr. Holle. "I do not feel like it's a reflection of any fundamental deterioration of the underwriting standards of the bank."

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