Capital City Bank Group Inc.
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As filed with the Securities and Exchange Commission on August 26, 2004
Registration No. 333-                   


SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933

CAPITAL CITY BANK GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
         
Florida   6022   59-2273542

 
 
 
 
 
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

217 North Monroe Street
Tallahassee, Florida 32301
(850) 671-0300

(Address, including zip code, and telephone number, including area
code, of Registrant’s principal executive offices)

J. Kimbrough Davis
Executive Vice President and Chief Financial Officer
Capital City Bank Group, Inc.
217 North Monroe Street
Tallahassee, Florida 32301
(850) 671-0300

(Name, address, including zip code, and telephone number, including area
code, of agent for service)

Copies to:


       
 
Gregory K. Bader
  Walter G. Moeling, IV
 
Gunster, Yoakley & Stewart, P.A.
  Powell, Goldstein, Frazer & Murphy LLP
 
Broward Financial Centre, Suite 1400
  191 Peachtree Street, N.E., 16th Floor
 
Fort Lauderdale, Florida 33394-3076
  Atlanta, Georgia 30303
 
Telephone: (954) 462-2000
  Telephone: (404) 572-6600


     Approximate date of commencement of proposed sale of securities to the public: As soon as practicable after this Registration Statement becomes effective.

 


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     If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  o

     If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o                          

     If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o                                      


CALCULATION OF REGISTRATION FEE

                 
        Proposed Maximum   Proposed Maximum   Amount of
Title of Each Class of Securities to be   Amount to be   Offering Price Per   Aggregate Offering   Registration
Registered
  Registered(1)
  Share
  Price(2)
  Fee(2)
Common stock, par value $.01 per share   876,973 shares   N/A   $35,935,000   $4,552.97

(1)    This Registration Statement covers the maximum number of shares of the common stock of the Registrant which is expected to be issued in connection with the merger.

(2)     Pursuant to Rule 457(f), the proposed maximum aggregate offering price and the amount of the registration fee were computed based on the aggregate book value of the common stock of Farmers and Merchants Bank being exchanged in the merger. On June 30, 2004, the book value of Farmers and Merchants common stock was $1,385.20 per share and Farmers and Merchants had 50,000 shares of common stock issued and outstanding. In addition, the proposed maximum aggregate offering price and the amount of the registration fee were reduced in accordance with Rule 457(f) due to the cash component of the merger consideration, which is fixed at $666.50 in cash per share of Farmers and Merchants common stock.


     The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 


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(FARMERS & MERCHANTS BANK LOGO)

FARMERS AND MERCHANTS BANK

600 Bellevue Avenue
Dublin, Georgia 31021

     
To the shareowners of
  [              ],2004
Farmers and Merchants Bank
   

     I am pleased to invite you to attend a Special Meeting of the shareowners of Farmers and Merchants Bank to be held at Farmers and Merchants Bank, located at 600 Bellevue Avenue, Dublin, Georgia, on [          ], 2004, at [        ]:00 [        ].m., Eastern Time.

     At the Special Meeting, you will be asked to approve the Agreement and Plan of Merger among Farmers and Merchants, Capital City Bank Group, Inc. and Capital City Bank, whereby Farmers and Merchants will merge with Capital City. When the merger is completed, each share of common stock held by you will be exchanged for the right to receive $666.50 in cash, plus up to 17.54 shares (but no less than 14.81 shares) of Capital City common stock. The exact exchange ratio of Farmers and Merchants Bank common stock for Capital City common stock will be based on the average of the daily closing sales prices of Capital City common stock, as reported by the Nasdaq National Market, for an agreed upon period prior to the closing date of the merger. Capital City will pay Farmers and Merchants shareowners cash instead of issuing any fractional shares in the merger.

     As the bank’s board of directors, we believe that the merger will have many benefits. We believe that the combined company will have greater financial strength and greater opportunity and flexibility to expand and diversify. The merger is subject to certain conditions, including approval of the Agreement and Plan of Merger by the affirmative vote of holders of a majority of the outstanding common stock of Farmers and Merchants represented, in person or by proxy, at the Special Meeting, and approval of the merger by various regulatory agencies.

     As the bank’s board of directors, we have unanimously approved the Agreement and Plan of Merger and recommend it to you for your approval as well.

     This Proxy Statement/Prospectus provides detailed information about the merger. We urge you to read this entire document carefully, including the risk factors considered by Capital City’s and Farmers and Merchants’ boards of directors beginning on page 18. You can also get information about Capital City from the SEC. Capital City’s common stock is traded on the Nasdaq National Market under the symbol “CCBG.”

     Whether or not you plan to attend the Special Meeting, you are urged to complete, sign, and promptly return the enclosed proxy card. If you attend the Special Meeting, you may vote in person if you wish, even if you have previously returned your proxy card. The merger is a significant step for Farmers and Merchants Bank and your vote on this matter is of great importance.

     On behalf of the board of directors, I strongly urge you to vote FOR approval of the Agreement and Plan of Merger by marking the enclosed proxy card “FOR” item one.

     We look forward to seeing you at the Special Meeting.

Sincerely,

McGrath Keen, Jr.
President and Director

Neither the Securities and Exchange Commission nor any state securities regulatory body has approved or disapproved of the securities to be issued under this Proxy Statement/Prospectus or determined if this Proxy Statement/Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The securities offered hereby are not savings accounts or deposit accounts or other obligations of any bank or savings association and they are not insured by the Federal Deposit Insurance Corporation, the Bank Insurance Fund, the Savings Association Insurance Fund, or any other government agency.

This Proxy Statement/Prospectus is dated [              ], 2004, and was first mailed to shareowners on [                   ], 2004.

 


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(CAPITAL CITY BANK LOGO)
  (FARMERS & MERCHANTS BANK LOGO)

PROPOSED MERGER OF FARMERS AND MERCHANTS BANK
WITH CAPITAL CITY BANK GROUP, INC.

NOTICE OF SPECIAL MEETING OF SHAREOWNERS
TO BE HELD [
                          ], 2004

     A special meeting of the shareowners (the “Special Meeting”) of Farmers and Merchants Bank will be held at Bank, located at 600 Bellevue Avenue, Dublin, Georgia, on [                          ], 2004, at [       ]:00 [        ].m., Eastern Time, for the following purposes:

    To vote on an Agreement and Plan of Merger, pursuant to which, among other matters, Farmers and Merchants Bank will merge with and into Capital City Bank Group, Inc. with Capital City being the resulting corporation.

    To transact any other business that properly comes before the Special Meeting, or any adjournments or postponements of the Special Meeting.

     In connection with the merger, each share of Farmers and Merchants common stock outstanding at the effective time of the merger will be exchanged for $666.50 in cash, plus up to 17.54 shares (but no less than 14.81 shares) of Capital City common stock. The exact exchange ratio of Farmers and Merchants Bank common stock for Capital City common stock is more fully described in the accompanying Proxy Statement/Prospectus. A copy of the Agreement and Plan of Merger is attached to the Proxy Statement/Prospectus as Appendix A.

     The Board of Directors of Farmers and Merchants is not aware of any other business to be presented to a vote at the Special Meeting.

     Only shareowners of record at the close of business on [                          ], 2004, will be entitled to notice of and to vote at the Special Meeting or any adjournments. Approval of the Agreement and Plan of Merger requires the affirmative vote of a majority of the issued and outstanding shares of Farmers and Merchants common stock on that record date represented, in person or by proxy, at the Special Meeting.

     The Board of Directors of Farmers and Merchants unanimously recommends that shareowners vote FOR approval of the Agreement and Plan of Merger.

     
  BY ORDER OF THE BOARD OF DIRECTORS
 
   
 
 
  McGrath Keen, Jr.
  President and Director
Dublin, Georgia
   
[                           ], 2004
   
Whether or not you plan to attend the Special Meeting, please complete, date, and sign the enclosed form of proxy and promptly return it in the enclosed postage paid return envelope in order to ensure that your shares will be represented at the Special Meeting.

Title 7, Chapter 1, Article 537 of the Financial Institutions Code of Georgia, by reference to Title 14, Chapter 2, Article 13 of the Georgia Business Corporation Code provides that each Farmers and Merchants shareowner may dissent from the Agreement and Plan of Merger and demand payment of the fair value of his or her shares in cash if the merger is consummated. The right of any shareowner to receive such payment is contingent upon strict compliance with the provisions of Title 14, Chapter 2, Article 13 of the Georgia Business Corporation Code. We have included for your review the full text of Title 14, Chapter 2, Article 13 of the Georgia Business Corporation Code in Appendix E to the accompanying Proxy Statement/Prospectus. See “DESCRIPTION OF THE MERGER Dissenters’ Rights” in the accompanying Proxy Statement/Prospectus, page 38.

 


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 Opinion of Gunster Yoakley & Stewart
 Opinion of Gunster Yoakley & Stewart
 Consent of KPMG LLP
 Consent of Nichols Gauley & Associates
 Consent of Trident Securities
 Proxy of Farmers and Merchant Bank

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WHERE YOU CAN FIND MORE INFORMATION ABOUT CAPITAL CITY

     Capital City files annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any materials Capital City files with the SEC at the SEC’s Public Reference Room at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. You should call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. The SEC also maintains a Web site that contains reports, proxy and information statements and other information about Capital City. The address of the SEC Web site is http://www.sec.gov.

     Capital City filed a Registration Statement on Form S-4 to register with the SEC the shares that Capital City will issue to Farmers and Merchants shareowners in the merger. This Proxy Statement/Prospectus is a part of the Registration Statement but does not include all of the information contained in the Registration Statement. For further information about Capital City and the securities offered in this Proxy Statement/Prospectus, you should review the Registration Statement at the SEC’s Public Reference Room or on its Web site.

     The SEC allows Capital City to “incorporate by reference” information into the Proxy Statement/Prospectus, which means that Capital City can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered part of this Proxy Statement/Prospectus, except when superseded by information contained in this Proxy Statement/Prospectus or in later filed documents incorporated by reference in this Proxy Statement/Prospectus.

     This Proxy Statement/Prospectus incorporates by reference the documents listed below that Capital City previously filed with the SEC. These documents contain important information about Capital City and its finances. Some filings have been amended by later filings, which are also listed.

    Annual Report on Form 10-K for the fiscal year ended December 31, 2003

    Quarterly Report on Form 10-Q for the quarter ended March 31, 2004

    Quarterly Report on Form 10-Q for the quarter ended June 30, 2004

    Amendment 1 to Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2004

    Amendment 2 to Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2004

    Current Reports on Form 8-K filed on January 13, 2004, May 14, 2004 and August 6, 2004

     Capital City also incorporates by reference additional documents that it may file with the SEC between the date of this Proxy Statement/Prospectus and the completion of the merger or the termination of the Agreement and Plan of Merger. These additional documents include periodic reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as proxy statements.

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     We are providing you with a copy of Capital City’s Annual Report to Shareowners for the fiscal year ended December 31, 2003 and a copy of Capital City’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. These documents provide more information about Capital City and its finances. Capital City’s Amendments to its Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 were filed to include the Agreement and Plan of Merger as an exhibit to the Form 10-Q. These amendments did not alter any of the disclosures set forth in the original Form 10-Q. Because the Agreement and Plan of Merger is included as Appendix A to this Proxy Statement, we are not providing you with copies of these amendments.

     Capital City’s internet website is www.ccbg.com. Capital City’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, including any amendments to those reports filed or furnished pursuant to section 13(a) or 15(d), and reports filed pursuant to Section 16, 13(d), and 13(g) of the Exchange Act are available free of charge through the website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. In addition, you may obtain other documents incorporated by reference in this Proxy Statement/Prospectus by requesting them from Capital City at the address or telephone number listed on page 6.

PLEASE NOTE

     Neither Capital City nor Farmers and Merchants has authorized anyone to give any information or make any statement about the merger or either company that differ from, or adds to, the information in the Proxy Statement/Prospectus or in other documents filed with the SEC. Therefore, if anyone gives you different or additional information, you should not rely on it.

     If you reside in a jurisdiction where it is unlawful to offer to exchange or sell, or to ask for offers to exchange or buy, the securities offered by this Proxy Statement/Prospectus or to ask for proxies, or if you are a person to whom it is unlawful to direct such activities, then the offer presented by this Proxy Statement/Prospectus does not extend to you.

     The information contained in this Proxy Statement/Prospectus speaks only as of its date unless the information specifically indicates that another date applies.

     Information in this Proxy Statement/Prospectus about Capital City has been supplied by Capital City, and information about Farmers and Merchants has been supplied by Farmers and Merchants.

A WARNING ABOUT FORWARD-LOOKING STATEMENTS

     We have made forward-looking statements in this Proxy Statement/Prospectus (and in other documents filed with the SEC) that are subject to risks and uncertainties. These statements are based on the beliefs and assumptions of Capital City’s and Farmers and Merchants’ managements and on information currently available to members of management. These forward-looking statements include information about possible or assumed future results of operations or the performance of Capital City after the merger. Many possible events or factors could cause results or performance to differ materially from those expressed in our forward-looking statements.

     You should consider the events or factors detailed in the “RISK FACTORS” section of this Proxy Statement/Prospectus beginning on page 18 when you vote on the merger:

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QUESTIONS AND ANSWERS ABOUT THE MEETING

     
Q(1):
  WHAT AM I BEING ASKED TO APPROVE?
 
   
A:
  You are being asked to approve the Agreement and Plan of Merger providing for, among other things, the merger of Farmers and Merchants into Capital City with Capital City being the resulting corporation.
 
   
Q(2):
  WHY IS FARMERS AND MERCHANTS MERGING WITH CAPITAL CITY?
 
   
A:
  The merger will enable Farmers and Merchants shareowners to hold stock in a larger and more diversified entity whose shares are more widely held and more actively traded. Capital City’s common stock is traded on the Nasdaq National Market under the symbol “CCBG.” We also believe the merger will enable Farmers and Merchants to better serve its customers with more products and services. Based upon these and other factors, we believe that the merger is in the best interest of the Farmers and Merchants shareowners. We provide the background and reasons for the merger, starting on page 24.
 
   
Q(3):
  AS A FARMERS AND MERCHANTS SHAREOWNER, WHAT WILL I RECEIVE IN THE MERGER?
 
   
A:
  For each share of Farmers and Merchants common stock you own, Capital City will pay you a combination of $666.50 in cash, plus shares of Capital City common stock, calculated based on an exchange ratio described in the next sentence. The exchange ratio to calculate the number of Capital City shares you will receive in the merger is based in part on the market price of Capital City common stock, which will be calculated by dividing $666.50 by the average of the daily closing sales prices of one share of Capital City common stock (as reported by the Nasdaq National Market) for the 20 consecutive full trading days ending on the fifth full trading day prior to the closing date of the merger. Based on the terms of the Agreement and Plan of Merger, you can expect to receive up to 17.54 shares (but no less than 14.81 shares) of Capital City common stock for each share of Farmers and Merchants common stock you own, assuming the merger is approved and consummated. Cash will be paid in lieu of issuing fractional shares based upon the average closing price of Capital City common stock as calculated above.
 
   
  Example: If you own 1,000 shares of Farmers and Merchants common stock, and, assuming the average closing price of Capital City common stock (calculated as described above) is $40.00 per share, upon completion of the merger, you will receive 16,662 shares of Capital City common stock and a check for $666,500.00, plus an additional $20 in lieu of your remaining fractional share.
 
   
  In addition, the Agreement and Plan of Merger permits distribution payments by Farmers and Merchants to its shareowners, provided Farmers and Merchants’ net worth is at least $30 million, subject to certain adjustments. We anticipate that Farmers and Merchants will distribute cash to its shareowners through one or more distributions prior to the closing date of the merger to the extent Farmers and Merchants’ net worth exceeds the $30 million dollar threshold. Based on the numbers reported by Farmers and Merchants in its last call report dated June 30, 2004, we expect each share of Farmers and Merchants common stock to receive a pre-merger distribution of approximately $785.20.

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Q(4):
  WHAT HAPPENS AS THE MARKET PRICE OF CAPITAL CITY COMMON STOCK FLUCTUATES?
 
   
A:
  As we stated above, the exchange ratio of the Capital City common stock you will receive in the merger is based in part on the market price of Capital City common stock for a specified period prior to the close of the merger transaction. However, the Agreement and Plan of Merger provides that the Capital City common stock price per share used in calculating the exchange ratio will range from a minimum of $38.00 per share to a maximum of $45.00 per share. As a result, the share exchange ratio will fall somewhere in the range between approximately 14.81 and 17.54 shares of Capital City common stock for each outstanding share of Farmers and Merchants common stock. Because the market value of Capital City common stock will fluctuate before and after the closing date of the merger, the value of the stock you will receive as a result of the merger will fluctuate as well and could decrease in value.
 
   
Q(5):
  WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
 
   
A:
  We expect to complete the merger during the fourth quarter of 2004. The merger must be approved by the Farmers and Merchants shareowners and by certain regulatory agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Florida Department of Financial Services and the Georgia Department of Banking and Finance. Additional approvals by or notices to other Georgia and Florida state authorities may be necessary.
 
   
Q(6):
  WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO ME?
 
   
A:
  We expect that for U.S. federal income tax purposes, your exchange of Farmers and Merchants common stock for Capital City common stock in the merger generally will not cause you to recognize any gain or loss. You will, however, have to recognize gain in connection with any cash received in the merger. In addition, shareowners who exercise dissenters’ rights may recognize gain or loss in the exchange of their shares for cash.
 
   
  We provide a more detailed review of the U.S. federal income tax consequences of the merger at page 48 of this Proxy Statement/Prospectus.
 
   
Q(7):
  AS A FARMERS AND MERCHANTS SHAREOWNER, DO I HAVE TO ACCEPT CAPITAL CITY COMMON STOCK IN EXCHANGE FOR MY SHARES IF THE MERGER IS APPROVED?
 
   
A:
  No. If you are a Farmers and Merchants shareowner and you follow the procedures prescribed by Georgia law, you may dissent from the merger and receive the fair value of your stock. If you follow those procedures, you will not receive Capital City common stock. Instead, the fair value of your Farmers and Merchants stock, determined in the manner prescribed by Georgia law, will be paid to you in cash.
 
   
Q(8):
  WHAT SHOULD I DO NOW?
 
   
A:
  Just indicate on your proxy card how you want to vote, sign it and mail it in the enclosed envelope as soon as possible, so that your shares will be represented at the Special Meeting.

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  If you sign and send in your proxy and do not indicate how you want to vote, your proxy will be voted in favor of the proposal to approve the merger. If you do not sign and send in your proxy or attend and vote in favor of the merger at the Special Meeting, your failure to vote will count as a vote against the merger. Failure to vote against the merger will not result in a waiver of your right to dissent. However, the failure to vote or a vote against the merger, alone, will not perfect your dissenters’ rights under Georgia law.
 
   
  The meeting is scheduled for [       ], 2004. You are invited to the meeting to vote your shares in person rather than signing and mailing your proxy card. If you do sign your card, you can take back your proxy up to and including the time of the vote at the meeting and either change your vote or attend the meeting and vote in person. We provide more detailed instructions about voting starting on page 20.
 
   
Q(9):
  SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
 
   
A:
  No. After the merger is completed, you will be sent written instructions explaining how to exchange your Farmers and Merchants common stock certificates for Capital City common stock certificates and the cash portion of the merger consideration.
 
   
Q(10):
  WHO CAN HELP ANSWER MY QUESTIONS?
 
   
A:
  If you want additional copies of this document, or if you want to ask any questions about the merger, you should contact:
 
  McGrath Keen, Jr.
  Farmers and Merchants Bank
  600 Bellevue Avenue
  Dublin, Georgia 31021
  (478) 272-3100

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SUMMARY

     This summary highlights selected information contained elsewhere in this Proxy Statement/Prospectus. Because this is a summary, it does not contain all of the information that may be important to you. You should read the entire Proxy Statement/Prospectus and its appendices carefully before you decide to vote. We have included page references in this summary to direct you to other places in this Proxy Statement/Prospectus where you can find a more complete description of the topics we have summarized.

The Companies (See Page 70 for Farmers and Merchants, Page 100 for Capital City)

Farmers and Merchants Bank
600 Bellevue Avenue
Dublin, Georgia 31021
(478) 272-3100

     Farmers and Merchants Bank is a Georgia chartered commercial bank headquartered in Dublin, Georgia. Founded in 1910, Farmers and Merchants is one of the oldest and largest community banks in Georgia, with three full-service offices in Laurens County. As of June 30, 2004, Farmers and Merchants had total consolidated assets of approximately $403 million, total consolidated deposits of approximately $305 million, total loans outstanding of approximately $271 million and total consolidated shareowners’ equity of approximately $69.2 million.

Capital City Bank Group, Inc.
217 North Monroe Street
Tallahassee, Florida 32301
(850) 671-0300

     Capital City is a $2.0 billion financial services company headquartered in Tallahassee, Florida providing traditional deposit and credit services, asset management, trust, mortgage banking, merchant services, bankcards, data processing and securities brokerage services. Founded in 1895, Capital City has 57 banking offices, 5 residential lending offices, 73 ATMs, and 11 Bank ‘N Shop locations in Florida, Georgia and Alabama. For more information about Capital City, go to www.ccbg.com.

The Merger (See Page 22)

     The Agreement and Plan of Merger provides for Capital City to acquire Farmers and Merchants in a four-step process. First, Capital City will merge a Georgia-chartered, interim banking subsidiary with and into Farmers and Merchants, with Farmers and Merchants being the resulting bank. Immediately following this bank merger, the deposit liabilities of Farmers and Merchants will be assumed by Capital City’s wholly-owned banking subsidiary, Capital City Bank. Immediately thereafter, Farmers and Merchants will merge with and into Capital City, with Capital City being the resulting corporation. Immediately following this second merger, Capital City will transfer the assets and remaining liabilities of Farmers and Merchants into Capital City Bank. A copy of the Agreement and Plan of Merger is included as Appendix A to this Proxy Statement/Prospectus. We encourage you to read the Agreement and Plan of Merger because it is the legal document that governs the merger.

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Our Reasons for the Merger (See Page 24)

     The Farmers and Merchants Board of Directors believes that the merger is in the best interest of Farmers and Merchants and its shareowners. The Farmers and Merchants Board of Directors has unanimously approved the Agreement and Plan of Merger. In deciding to approve the Agreement and Plan of Merger, the Farmers and Merchants Board of Directors considered a number of factors, including:

    the value of the consideration to be received by Farmers and Merchants shareowners relative to the book value and earnings per share of Farmers and Merchants common stock;

    certain information concerning the financial condition, results of operations and business prospects of Capital City;

    the financial terms of recent business combinations in the financial services industry and a comparison of the multiples of selected combinations with the proposed transaction with Capital City;

    the alternatives to the merger, including remaining an independent institution;

    the previous experience of management of Capital City in completing acquisition transactions;

    the expanded range of banking services that the merger will allow Farmers and Merchants to provide to its customers;

    the competitive and regulatory environment for financial institutions generally;

    the fact that the merger will enable Farmers and Merchants shareowners to exchange their shares of Farmers and Merchants common stock, in a partially tax-free transaction, for cash and shares of common stock of a larger company, the stock of which is more widely held and more liquid than that of Farmers and Merchants; and

    the opinion of Trident Securities that the consideration to be received by Farmers and Merchants shareowners as a result of the merger is fair to Farmers and Merchants shareowners from a financial point of view.

     The Capital City Board of Directors believes that the merger is in the best interests of Capital City and its shareowners. The Capital City Board of Directors has unanimously approved the Agreement and Plan of Merger. In deciding to approve the Agreement and Plan of Merger, the Capital City Board of Directors considered a number of factors, including:

    a review, based in part on a presentation by Capital City’s management, of

    the business, operations, earnings, and financial condition, including the capital levels and asset quality, of Farmers and Merchants on an historical, prospective, and pro forma bases and in comparison to other financial institutions in the area,

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    the demographic, economic, and financial characteristics of the Laurens County market, including existing competition, history of the market area with respect to financial institutions, and average demand for credit, on an historical and prospective bases, and

    the results of Capital City’s due diligence review of Farmers and Merchants; and

    the likelihood of regulators approving the merger without undue conditions or delay;

    the compatibility and the community bank orientation of both Capital City and its subsidiary and Farmers and Merchants; and

    a variety of factors affecting and relating to the overall strategic focus of Capital City.

     The Boards of Directors of Farmers and Merchants and Capital City believe that the merger will result in a company with expanded opportunities for profitable growth and that the combined resources and capital of Farmers and Merchants and Capital City will provide the combined company with greater ability to compete in the changing and competitive financial services industry.

Recommendation to Farmers and Merchants Shareowners (See Page 25)

     The Farmers and Merchants Board believes that the merger of Farmers and Merchants with and into Capital City is in the best interests of Farmers and Merchants and Farmers and Merchants’ shareowners. The Farmers and Merchants Board unanimously recommends that you vote FOR the merger.

Fairness Opinion (See Page 27)

     In deciding to approve the merger, we have considered an opinion from our financial adviser, Trident Securities, that the price to be paid to Farmers and Merchants shareowners is fair to Farmers and Merchants shareowners, from a financial point of view. The full text of this opinion is attached to this Proxy Statement/Prospectus as Appendix F. We encourage you to read this opinion.

Farmers and Merchants Special Shareowner Meeting (See Page 20)

     The Special Meeting will be held at Farmers and Merchants Bank, located at 600 Bellevue Avenue, Georgia, on [          ], [                    ], 2004, at [          ]:00 [          ].m., Eastern Time. The Farmers and Merchants Board of Directors is soliciting proxies for use at the Special Meeting. At the Special Meeting, the Farmers and Merchants Board of Directors will ask the Farmers and Merchants shareowners to vote on a proposal to approve the Agreement and Plan of Merger.

Record Date for Special Shareowner Meeting (See Page 20)

     You may vote at the Special Meeting if you owned shares of Farmers and Merchants common stock of record as of the close of business on [                    ], [                    ], 2004. You will have one vote for each share of Farmers and Merchants common stock you

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owned as of that date. You may revoke your proxy at any time prior to the vote at the Special Meeting.

Vote Required (See Page 20)

     Shareowners holding a majority of the outstanding shares of Farmers and Merchants common stock entitled to vote at the Special Meeting must be present in person or by proxy at the Special Meeting in order to form a quorum.

     In order to approve the merger, however, shareowners holding two-thirds of the outstanding shares of Farmers and Merchants common stock represented in person or by proxy at the Special Meeting must approve the Agreement and Plan of Merger. At the record date, all directors and executive officers of Farmers and Merchants as a group (6 persons) could vote approximately 32,947 shares of Farmers and Merchants common stock, constituting approximately 65.89% of the total number of shares of Farmers and Merchants common stock outstanding at that date. The Farmers and Merchants directors and executive officers have committed to vote their shares of Farmers and Merchants common stock in favor of the merger.

What Farmers and Merchants Shareowners will Receive (See Page 33)

     Under the Agreement and Plan of Merger, Capital City will pay Farmers and Merchants shareowners $666.50 in cash, plus a determinable number of shares of Capital City common stock for each share of Farmers and Merchants common stock that they own.

     The exchange ratio to calculate the number of Capital City shares you will receive in the merger is based in part on the market price of Capital City common stock, and will be calculated by dividing $666.50 by the average of the daily closing sales prices of one share of Capital City common stock, as reported by the Nasdaq National Market, for the 20 consecutive full trading days ending on the fifth full trading day prior to the closing date of the merger, and then multiplying that quotient by the number of shares of Farmers and Merchants common stock you own. In addition, the per share price of Capital City common stock used in calculating the exchange ratio will range from a minimum of $38.00 to a maximum of $45.00. As a result, the share exchange ratio will fall somewhere in the range of approximately 14.81 and 17.54 shares of Capital City common stock for each outstanding share of Farmers and Merchants common stock, or between 740,555 and 876,973 shares of Capital City’s stock in total, assuming 50,000 shares of Farmers and Merchants common stock are outstanding on the closing date.

     Farmers and Merchants shareowners will not receive fractional shares of Capital City common stock. Instead, they will receive a payment for any fractional shares based on the market value of Capital City common stock as calculated above.

     In addition, as a condition to the merger, Farmers and Merchants must have, immediately prior to the effective date of the merger, a net worth of at least $30 million, subject to certain adjustments. We anticipate that Farmers and Merchants will distribute in cash any equity above this $30 million amount, subject to adjustment, to its shareowners in one or more distributions prior to the closing date of the merger. Based on Farmers and Merchants last call report filed with the FDIC, as of June 30, 2004, Farmers and Merchants had an unaudited net worth of approximately $69.26 million. Assuming that to be the total immediately prior to the effective

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date of the merger, Farmers and Merchants shareowners would receive an additional distribution of approximately $39.26 million, or $785.20 per share (assuming 50,000 shares are outstanding).

     Once the merger is complete, Capital City’s transfer agent will mail you materials and instructions for exchanging your Farmers and Merchants stock certificates for Capital City stock certificates and the cash portion of the consideration. You should not send in your Farmers and Merchants stock certificates until you receive the transmittal materials and instructions from Capital City’s transfer agent.

Regulatory Approvals (See Page 36)

     We cannot complete the merger until we receive the approval of the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Georgia Department of Banking and Finance, the Florida Department of Financial Services and the Florida Secretary of State. Capital City and Farmers and Merchants have filed applications with the Federal Reserve, the Federal Deposit Insurance Corporation, the Georgia Department and the Florida Department seeking approval of the merger. The approvals of the bank regulators may impose conditions or restrictions that, in the opinion of Capital City and/or Farmers and Merchants, would have a material adverse effect on the economic or business benefits of the merger. In that event, Capital City and Farmers and Merchants may terminate the Agreement and Plan of Merger by mutual consent.

Conditions to the Merger (See Page 34)

     The completion of the merger depends upon Capital City and Farmers and Merchants satisfying a number of conditions, including:

    the holders of two-thirds of the outstanding Farmers and Merchants common stock represented in person or by proxy at the Special Meeting must approve the Agreement and Plan of Merger;

    Farmers and Merchants must have a minimum net worth of at least $30 million, subject to certain adjustments;

    Capital City and Farmers and Merchants must receive all required regulatory approvals and any waiting periods required by law must have passed; and
 
    Capital City and Farmers and Merchants must receive a legal opinion confirming the tax-free nature of the merger.

Termination of the Agreement and Plan of Merger (See Page 36)

     Either Capital City or Farmers and Merchants may terminate the Agreement and Plan of Merger without completing the merger if, among other things, any of the following occurs:

    the merger is not completed by December 31, 2004;

    the holders of two-thirds of Farmers and Merchants common stock do not approve the Agreement and Plan of Merger; or

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    the other party breaches or materially fails to comply with any of its representations or warranties or obligations under the Agreement and Plan of Merger.
 
      In addition, Farmers and Merchants may terminate the Agreement and Plan of Merger without completing the merger if the adjusted average closing price of Capital City common stock is less than $32.00, and Capital City may terminate the Agreement and Plan of Merger without completing the merger in the event of a material adverse effect.

Dissenter’s Rights (See Page 38 and Appendix E)

     Each holder of Farmers and Merchants common stock who perfects his or her rights is entitled to the rights and remedies of a dissenting shareowner under Title 7, Chapter 1, Article 537 of the Financial Institutions Code of Georgia, by reference to Title 14, Chapter 2, Article 13 of the Georgia Business Corporation Code, subject to compliance with the procedures set forth in those dissenters’ rights provisions (referred to in this document as the “Appraisal Statute”). A dissenting shareowner who has perfected his or her dissenter’s rights is entitled to receive an amount in cash equal to the “fair value” of his or her shares of Farmers and Merchants common stock. A copy of the Appraisal Statute is set forth in Appendix E to this Proxy Statement/Prospectus and a summary is included under “DESCRIPTION OF THE MERGER – Dissenters’ Rights.” To perfect dissenters’ rights, a shareowner must comply with the provisions of the Appraisal Statute which require, among other things, that the shareowner deliver to Farmers and Merchants, prior to the vote at the Special Meeting, written notice of his or her intention to demand payment for his or her shares if the merger is effectuated and that such shareowner not vote his or her shares in favor of the Agreement and Plan of Merger. Any Farmers and Merchants shareowner who returns a signed proxy but fails either to provide instructions as to the manner in which his or her shares are to be voted, or to revoke such proxy, will be deemed to have voted in favor of the Agreement and Plan of Merger and thus will not be entitled to assert dissenters’ rights.

Interests of Officers and Directors in the Merger that are Different from Yours (See Page 45)

     Certain members of Farmers and Merchants’ management and Board of Directors have interests in the merger that are in addition to their interests as shareowners of Farmers and Merchants.

     Wallace E. Miller, Chairman and Chief Executive Officer, and Roger W. Miller, Executive Vice President and a director, will be paid bonuses of $1,000,000 and $500,000, respectively, by Capital City Bank after the successful completion of the merger.

     McGrath Keen, Jr., President and a director of Farmers and Merchants, will be appointed to the Board of Directors of Capital City after the merger, and is expected to be compensated for his services in accordance with Capital City’s standard director compensation policy.

     The Agreement and Plan of Merger contains provisions for the indemnification of Farmers and Merchants directors, officers and employees by Capital City, and provisions for the officers and employees of Farmers and Merchants to receive certain employee benefits that Capital City already provides to its officers and employees.

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     In addition, the Agreement and Plan of Merger contains provisions for the same or substantially similar directors’ and officers’ liability insurance (with certain cost restraints), for three years after the effective time of the merger.

     The Capital City and Farmers and Merchants Boards of Directors were aware of these interests and took them into account in approving the Agreement and Plan of Merger.

Important Federal Income Tax Consequences of the Merger (See Page 48)

     We expect that Capital City, Farmers and Merchants and their shareowners will not recognize any gain or loss for U.S. federal income tax purposes from the merger, except for the cash portion of the consideration paid to Farmers and Merchants shareowners for their Farmers and Merchants common stock and where Farmers and Merchants shareowners receive cash instead of fractional shares. Both parties have received a legal opinion that this will be the case. This legal opinion is filed as an exhibit to the Registration Statement of which this Proxy Statement/Prospectus is a part. However, the opinion does not bind the Internal Revenue Service, which could take a different view. In addition, this tax treatment will not apply to any Farmers and Merchants shareowner who receives cash for his or her shares due to the exercise of dissenters’ rights. Determining the actual tax consequences of the merger to you as an individual taxpayer can be complicated. The tax treatment also may depend upon facts that are unique to your specific situation. Accordingly, you should consult your own tax adviser for a full understanding of the tax consequences of the merger.

Accounting Treatment of the Merger (See Page 49)

     The merger will be accounted for as a “purchase,” as that term is used under generally accepted accounting principles, for accounting and financial reporting purposes. Under purchase accounting, the assets and liabilities of Farmers and Merchants as of the effective time of the merger will be recorded at their respective fair values and added to those of Capital City. Any excess of purchase price over the fair values is recorded as goodwill. Financial statements of Capital City issued after the merger would reflect such fair values and would not be restated retroactively to reflect the historical financial position or results of operations of Farmers and Merchants.

Certain Differences in Shareowners’ Rights (See Page 51)

     When the merger is consummated, Farmers and Merchants shareowners, whose rights are governed by Farmers and Merchants’ Charter Application and Bylaws, as amended, and by the Financial Institutions Code of Georgia, will automatically become Capital City shareowners, and their rights as Capital City shareowners will be determined by Capital City’s Articles of Incorporation and Bylaws and by the Florida Business Corporations Act. The rights of Capital City shareowners differ from the rights of Farmers and Merchants shareowners in certain important respects. For example, Capital City’s governing documents contain certain anti-takeover provisions that may deter the efforts of, or make it more difficult for, a person to acquire Capital City in the future.

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Comparative Market Prices of Common Stock (See Page 66)

     Capital City common stock is traded on the Nasdaq National Market under the symbol “CCBG.” Farmers and Merchants common stock is not traded in any established market. On May 12, 2004, the last day prior to public announcement of the merger, the last reported sale price per share of Capital City common stock on the Nasdaq National Market was $37.88. Because this is below the minimum exchange ratio, the $38.00 minimum exchange price would have been used to calculate the resulting equivalent pro forma price per share of Farmers and Merchants common stock. Based on the combined $666.50 in cash and the exchange ratio of approximately 17.54 shares of Capital City stock for each share of stock (using the minimum exchange ratio, without factoring in any withholdings), the resulting equivalent pro forma price per share of Farmers and Merchants common stock would have been $1,330.98.

     To the knowledge of Farmers and Merchants, the most recent trade of Farmers and Merchants common stock prior to May 12, 2004, the last day prior to public announcement of the merger between Capital City and Farmers and Merchants, was on February 28, 2003, which was a sale of 200 shares for a purchase price of $2,000 per share. To the knowledge of Farmers and Merchants, there have been no trades since the announcement of the merger. There can be no assurance as to what the market price of the Capital City common stock will be if and when the merger is consummated.

Listing of Capital City Common Stock (See Page 51)

     Capital City will list the shares of Capital City common stock to be issued in connection with the merger on the Nasdaq National Market.

Risk Factors (See Page 18)

     An investment in Capital City common stock involves risks. In determining whether to approve the Agreement and Plan of Merger, you should consider the various risks associated with an investment in Capital City common stock as more fully described in the “Risk Factors” section beginning on page 18.

Recent Developments in Capital City’s Business

     On March 19, 2004, Capital City completed its merger with Quincy State Bank, an affiliate of Synovus Financial Corp. Results of Quincy State Bank’s operations have been included in Capital City’s consolidated financial statements since March 20, 2004. Quincy State Bank had $116.6 million in assets with one office in Quincy, Florida and one office in Havana, Florida. The transaction was accounted for as a purchase and resulted in approximately $14.9 million of intangible assets, including approximately $12.5 million in goodwill and a core deposit intangible of $2.4 million. The core deposit intangible is being amortized over a 7-year period.

Selected Financial Data

     The following tables present, for Capital City and for Farmers and Merchants, selected consolidated financial data for the six-month periods ended June 30, 2003 and 2004, and for the five-year period ended December 31, 2003. The Farmers and Merchants information is based on

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the historical financial information that has been presented in Farmers and Merchants’ annual financial statements, included as Appendix C to this Proxy Statement/Prospectus, and interim financial statements included as Appendix D to this Proxy Statement/Prospectus. The Capital City information is based on the consolidated financial statements contained in reports Capital City filed with the SEC, including its June 30, 2004 Quarterly Report on Form 10-Q. All of these documents are incorporated by reference in this Proxy Statement/Prospectus. See “WHERE YOU CAN FIND MORE INFORMATION ABOUT CAPITAL CITY,” on page 1.

     You should read the following tables in conjunction with the consolidated financial statements of Capital City and Farmers and Merchants described above with the notes to them.

     Historical results are not necessarily indicative of results to be expected for any future period. In the opinion of the respective managements of Capital City and Farmers and Merchants, all adjustments (which include only normal recurring adjustments) necessary to arrive at a fair statement of interim results of operations of Capital City and Farmers and Merchants, respectively, have been included. With respect to Capital City and Farmers and Merchants, results for the six-month period ended June 30, 2004 are not necessarily indicative of results which may be expected for any other interim period or for the year as a whole.

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Historical and Pro Forma Comparative Per Share Data (unaudited)

                 
    Six Months   Twelve Months
    Ended   Ended
    June 30, 2004
  December 30, 2003
    (In Thousands)
NET INCOME:
               
 
               
Capital City
               
Basic
  $ 0.85     $ 1.91  
Diluted
    0.85       1.90  
 
               
Farmers and Merchants
               
Basic
    115.36       226.94  
Diluted
    115.36       226.94  
 
               
Pro Forma (Capital City and Farmers and Merchants)
               
Basic
    0.95       2.08  
Diluted
    0.95       2.07  
 
               
Farmers and Merchants Equivalent Pro Forma
               
Basic
    16.66       36.48  
Diluted
    16.66       36.31  
 
               
CASH DIVIDENDS PER SHARE
               
Capital City
    0.36       0.65  
Farmers and Merchants
    67.00       153.50  
Pro Forma (Capital City and Farmers and Merchants) (1)
    0.57       1.23  
Farmers and Merchants equivalent pro forma
    10.00       21.57  
 
               
BOOK VALUE PER DILUTED SHARE
               
Capital City
    15.80       15.27  
Farmers and Merchants
    1,385.20       1,387.12  
Pro Forma (Capital City and Farmers and Merchants)
    17.17       16.68  
Farmers and Merchants equivalent pro forma
    301.16       292.57  

(1)   Calculated based on actual cash dividends paid by Capital City and Farmers and Merchants for the periods shown, divided by the anticipated number of Capital City shares to be outstanding after the merger.

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Farmers and Merchants Bank

                                                         
    At or for the six   At or for the year
    months ended June 30,
  ended December 31,
(Dollars in Thousands, Except Per Share Data)
  2004
  2003
  2003
  2002
  2001
  2000
  1999
Interest Income
  $ 11,174     $ 11,646     $ 23,033     $ 25,180     $ 27,620     $ 27,129     $ 24,296  
Net Interest Income
    8,148       8,038       16,297       16,717       14,810       13,325       13,551  
Provision for Loan Losses
    150       300       450       900       400       400       400  
Net Income
    5,768       5,729       11,347       11,265       10,200       9,326       9,293  
Per Common Share:
                                                       
Basic and Diluted Net Income
  $ 115.36     $ 114.58     $ 226.94     $ 225.30     $ 204.00     $ 186.52     $ 185.86  
Cash Dividends Declared
    67.00       61.00       153.50       153.50       122.00       112.00       111.66  
Book Value
    1,385.20       1,401.82       1,386.44       1,341.48       1,191.00       1,090.64       1,013.68  
Based on Net Income:
                                                       
Return on Average Assets
    2.87 %     2.99 %     2.95 %     3.02 %     2.94 %     2.83 %     3.07 %
Return on Average Equity
    17.25 %     18.13 %     17.95 %     19.25 %     17.74 %     17.70 %     18.93 %
Dividend Payout Ratio
    58.08 %     53.24 %     67.64 %     58.37 %     59.83 %     60.05 %     60.08 %
Averages for the Period:
                                                       
Loans, Net
  $ 277,683     $ 251,224     $ 257,038     $ 236,167     $ 217,445     $ 201,218     $ 182,122  
Earning Assets
    390,869       373,167       372,091       356,818       333,397       317,418       291,108  
Assets
    404,055       386,979       388,619       372,722       347,092       329,907       303,135  
Deposits
    302,905       285,820       286,472       279,344       271,673       265,050       244,591  
Other Borrowings
    22,448       22,306       22,411       20,298       8,480       4,340       2,002  
Stockholders’ Equity
    66,869       63,197       63,207       58,519       54,422       50,705       46,985  
Period-End Balances:
                                                       
Loans, Net
    275,598       253,918       257,662       242,074       224,344       205,889       190,447  
Earning Assets
    390,287       374,665       374,219       364,403       342,317       326,984       304,314  
Assets
    403,370       387,800       385,067       384,698       360,374       343,911       320,164  
Deposits
    305,224       287,283       293,027       283,859       273,476       271,544       255,583  
Other Borrowings
    22,562       22,284       22,289       22,293       17,010       8,785       5,236  
Stockholders’ Equity
    69,260       70,091       63,197       67,074       59,550       54,532       50,684  

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Capital City Bank Group, Inc. and Subsidiary

                                                         
    At or for the six   At or for the year
    months ended June 30,
  ended December 31,
(Dollars in Thousands, Except Per Share Data)
  2004
  2003
  2003
  2002
  2001
  2000
  1999
Interest Income
  $ 46,935     $ 48,324     $ 94,830     $ 104,165     $ 117,156     $ 107,720     $ 98,221  
Net Interest Income
    40,536       40,330       79,991       81,662       68,907       61,486       56,974  
Provision for Loan Losses
    1,541       1,665       3,436       3,297       3,983       3,120       2,440  
Net Income
    11,290       12,801       25,193       23,082       16,866       18,153       15,252  
Per Common Share:
                                                       
Basic Net Income
  $ 0.85     $ 0.97     $ 1.91     $ 1.75     $ 1.27     $ 1.43     $ 1.20  
Diluted Net Income
    0.85       0.97       1.90       1.74       1.27       1.43       1.20  
Cash Dividends Declared
    .360       .306       .656       .502       .476       .436       .442  
Diluted Book Value
    15.80       14.73       15.27       14.08       12.86       11.61       10.36  
Based on Net Income:
                                                       
Return on Average Assets
    1.21 %     1.44 %     1.40 %     1.34 %     0.99 %     1.24 %     1.06 %
Return on Average Equity
    10.90 %     13.40 %     12.82 %     12.85 %     10.00 %     12.99 %     11.64 %
Dividend Payout Ratio
    41.40 %     31.42 %     34.51 %     28.87 %     37.48 %     30.49 %     36.83 %
Averages for the Period:
                                                       
Loans, Net of Unearned Interest
  $ 1,424,175       1,303,008     $ 1,318,080     $ 1,256,107     $ 1,184,290     $ 1,002,122     $ 884,323  
Earning Assets
    1,678,062       1,613,701       1,624,680       1,556,500       1,534,548       1,315,024       1,291,262  
Assets
    1,879,991       1,791,797       1,804,895       1,727,180       1,704,167       1,463,612       1,444,069  
Deposits
    1,497,895       1,411,802       1,431,808       1,424,999       1,442,916       1,207,103       1,237,405  
Long-Term Debt
    50,387       63,354       55,594       30,423       15,308       13,070       17,274  
Shareowners’ Equity
    208,303       192,610       196,588       179,652       168,652       139,738       131,058  
Period-End Balances:
                                                       
Loans, Net of Unearned Interest
    1,521,497       1,332,387     $ 1,341,632     $ 1,285,221     $ 1,243,351     $ 1,051,832     $ 928,486  
Earning Assets
    1,818,628       1,671,905       1,648,818       1,636,472       1,626,841       1,369,294       1,263,296  
Assets
    2,026,830       1,870,590       1,846,502       1,824,771       1,821,423       1,527,460       1,430,520  
Deposits
    1,612,736       1,498,577       1,474,205       1,434,200       1,550,101       1,268,367       1,202,658  
Long-Term Debt
    58,427       57,664       46,475       71,745       13,570       11,707       14,258  
Shareowners’ Equity
    209,721       195,469       202,809       186,531       171,783       147,607       132,216  
Equity to Assets Ratio
    10.35 %     10.45 %     10.98 %     10.22 %     9.43 %     9.66 %     9.24 %
Other Data:
                                                       
Basic Average Shares Outstanding
    13,268,272       13,208,909       13,222,487       13,225,285       13,241,957       12,732,749       12,718,681  
Shareowners of Record
    1,512       1,457       1,512       1,457       1,473       1,599       1,362  
Banking Locations
    57       57       57       54       56       56       48  
Full-Time Equivalent Associates
    829       782       795       781       787       791       678  

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RISK FACTORS

     In addition to the other information contained in or incorporated by reference into this Proxy Statement/Prospectus, in deciding whether to approve the Agreement and Plan of Merger, you should consider the various risks associated with an investment in Capital City common stock, including, but not limited to the following:

Capital City may have difficulties integrating Farmers and Merchants operations into Capital City Bank’s operations.

     The merger involves the integration of two companies that have previously operated independently of each other. Successful integration of Farmers and Merchants’ operations will depend primarily on Capital City’s ability to consolidate its operations, systems and procedures into those of Capital City Bank and to eliminate redundancies and costs. We may not be able to integrate our operations without encountering difficulties including, without limitation:

    the loss of key employees and customers;

    possible inconsistencies in standards, control procedures and policies; and

    unexpected problems with costs, operations, personnel, technology or credit.

     In determining that the merger is in the best interests of Capital City and Farmers and Merchants, as the case may be, the Board of Directors of each of Capital City and Farmers and Merchants considered that enhanced earnings may result from the consummation of the merger, including from the reduction of duplicate costs, improved efficiency and cross-marketing opportunities. However, we cannot assure that any enhanced earnings or cost savings will actually occur from the merger.

There is a limited market for shares of Capital City common stock.

     While Capital City common stock is listed and traded on the Nasdaq National Market, there has been limited trading activity in Capital City common stock. The average daily trading volume of Capital City common stock over the six-month period ending June 30, 2004 was approximately 12,294 shares. Capital City does not anticipate that the merger will cause any significant improvements in the trading of Capital City common stock.

There are restrictions on Capital City’s ability to pay dividends.

     Capital City must comply with Florida corporate law and rules and regulations of bank regulators before it may pay any dividends. The Board of Directors of Capital City must authorize Capital City to pay any dividends and Capital City must have sufficient funds to pay dividends. Capital City’s only sources of income are dividends and other payments that Capital City Bank and any other subsidiary of Capital City make to Capital City. Certain statutes and regulations restrict the ability of Capital City’s subsidiary to pay dividends to Capital City.

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Capital City is subject to extensive governmental regulation.

          Capital City and its subsidiary are subject to extensive governmental regulation. Capital City, as a bank holding company, is regulated primarily by the Federal Reserve. Capital City Bank is a commercial bank chartered by the State of Florida and regulated by the Federal Reserve and the Florida Department of Financial Services. These federal and state bank regulators have the ability, should the situation require, to place significant regulatory and operational restrictions upon Capital City and its subsidiary. Any such restrictions imposed by federal and state bank regulators could affect the profitability of Capital City and its subsidiary.

The financial institution industry is very competitive.

          Capital City and its subsidiary compete directly with financial institutions that are well established and have significantly greater resources and lending limits than Capital City and its subsidiary. As a result of those greater resources, the large financial institutions may be able to provide a broader range of services to their customers than Capital City and may be able to afford newer and more sophisticated technology than Capital City. The long-term success of Capital City will be dependent on the ability of Capital City’s subsidiary to compete successfully with other financial institutions in their service areas.

Management of Capital City holds a large portion of Capital City common stock.

          As of June 30, 2004, the directors and executive officers of Capital City beneficially owned about 5.9 million shares of Capital City common stock, or 44.7%, of the total outstanding shares of Capital City. As a result, Capital City’s management has significant control of Capital City.

Capital City’s Articles of Incorporation and Bylaws may prevent takeover by another company.

          Capital City’s Articles of Incorporation permit the Board of Directors of Capital City to issue preferred stock without shareowner action. The ability to issue preferred stock could discourage a company from attempting to obtain control of Capital City by means of a tender offer, merger, proxy contest or otherwise. Additionally, Capital City’s Articles of Incorporation and Bylaws divide the Board of Directors of Capital City into three classes, as nearly equal in size as possible, with staggered three-year terms. One class is elected each year. The classification of the Board of Directors could make it more difficult for a company to acquire control of Capital City. Capital City is also subject to certain provisions of the Florida Business Corporations Act and the Capital City Articles of Incorporation which relate to business combinations with interested shareowners.

Future results of the combined company may differ materially from the pro forma financial information presented in this document.

          Future results of the combined company may be materially different from those shown in the pro forma financial statements that only show a combination of our historical results. The pro forma financial information includes adjustments to the fair value of Farmers and Merchants’ assets and liabilities. These adjustments represent management’s estimates based on current information and market conditions. The final allocation of the purchase price will be determined

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after the merger is completed and after completion of a final analysis to determine the fair values of Farmers and Merchants’ assets and liabilities. Accordingly, the final adjustments may be materially different from the pro forma financial information. Furthermore, we have estimated that the combined company will record approximately $1.5 million of merger-related charges. The charges may be higher or lower than we have estimated, depending upon how costly or difficult it is to integrate our two companies. These charges may decrease capital of the combined company that could be used for profitable, income-earning investments in the future.

The fairness opinion obtained by Farmers and Merchants will not reflect changes in circumstances between the signing of the Agreement and Plan of Merger and the closing date.

          Farmers and Merchants has not obtained an updated opinion as of the date of this document from its financial adviser. Changes in the operations and prospects of Farmers and Merchants, general market and economic conditions and other factors which may be beyond the control of Farmers and Merchants, and on which the fairness opinion was based, may alter the value of Farmers and Merchants or the prices of shares of Farmers and Merchants common stock and shares of Capital City common stock by the time the merger is completed. The opinion does not speak as of the time the merger will be completed or as of any date other than the date of such opinion. For a description of the opinion that Farmers and Merchants received from its financial adviser, please refer to “DESCRIPTION OF THE MERGER – Fairness Opinion of Farmers and Merchants’ Financial Adviser” on page 27.

MEETING OF FARMERS AND MERCHANTS SHAREOWNERS

Date, Place, Time, and Purpose

          The Farmers and Merchants Board of Directors is sending you this Proxy Statement/Prospectus in connection with the solicitation by the Farmers and Merchants Board of Directors of proxies for use at the Special Meeting. Each of Farmers and Merchants and Capital City will pay one-half of the filing fees payable and printing costs incurred in connection with this Proxy Statement/Prospectus and the registration statement of which this Proxy Statement/Prospectus is a part. At the Special Meeting, the Farmers and Merchants Board of Directors will ask you to vote on a proposal to approve the Agreement and Plan of Merger. Farmers and Merchants will pay all other costs associated with the solicitation of proxies for the Special Meeting. The Special Meeting will be held at Farmers and Merchants Bank, located at 600 Bellevue Avenue, Dublin, Georgia, on [           ], [           ], 2004, at [    ]:00 [    ].m., Eastern Time.

Record Date, Voting Rights, Required Vote, and Revocability of Proxies

          Farmers and Merchants has set the close of business on [        ], [        ], 2004, as the record date for determining the holders of Farmers and Merchants common stock entitled to notice of and to vote at the Special Meeting. Only holders of Farmers and Merchants common stock of record on the books of Farmers and Merchants at the close of business on the record date are entitled to notice of and to vote at the Special Meeting. As of the record date, there were 50,000 shares of Farmers and Merchants common stock entitled to vote at the Special Meeting. The executive officers and directors of Farmers

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and Merchants have committed to vote their shares in favor of the merger. Capital City holds no shares of Farmers and Merchants common stock.

          You are entitled to one vote for each share of Farmers and Merchants common stock you own on the record date. Shareowners holding a majority of the outstanding shares of Farmers and Merchants common stock entitled to vote at the Special Meeting must be present, in person or by proxy, at the Special Meeting to form a quorum. In order to approve the merger, however, shareowners holding at least two-thirds of the issued and outstanding shares of Farmers and Merchants common stock represented, in person or by proxy, at the Special Meeting must approve the Agreement and Plan of Merger. Consequently, abstentions and broker non-votes, as well as instructions to withhold authority to vote, will have the same effect as a vote “against” the Agreement and Plan of Merger.

Failure either to vote by proxy or in person at the Special Meeting will have the same effect
as a vote cast “against” approval of the Agreement and Plan of Merger and the
transactions contemplated therein.

          Persons named as proxies will vote shares of Farmers and Merchants common stock in accordance with the instructions on the proxies if such proxies are properly executed, received in time, and not revoked. If the proxy does not contain instructions on how to vote, persons named as proxies will vote for approval of the Agreement and Plan of Merger. If any other matters properly come before the Special Meeting, the persons named as proxies will vote upon such matters according to their judgment. If necessary, such persons may vote in favor of a proposal to adjourn the Special Meeting in order to permit further solicitation of proxies in the event there are not sufficient votes to approve the Agreement and Plan of Merger at the time of the Special Meeting. However, no proxy that is voted against the approval of the Agreement and Plan of Merger will be voted in favor of an adjournment of the Special Meeting in order to permit further solicitation of proxies.

          A Farmers and Merchants shareowner who has given a proxy may revoke it at any time prior to its exercise at the Special Meeting by:

  giving written notice of revocation to the Secretary of Farmers and Merchants;
 
  properly submitting to Farmers and Merchants a duly executed proxy bearing a later date; or
 
  attending the Special Meeting and voting in person.

          All written notices of revocation and other communications with respect to revocation of proxies should be addressed as follows: Farmers and Merchants Bank, 600 Bellevue Avenue, Dublin, Georgia 31021, Attention: McGrath Keen, Jr., President.

          At the record date, all directors and executive officers of Farmers and Merchants as a group (6 persons) were entitled to vote approximately 32,947 shares of Farmers and Merchants common stock, constituting approximately 65.89% of the total number of shares of Farmers and

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Merchants common stock outstanding at that date. The Farmers and Merchants directors and executive officers have committed to vote their shares of Farmers and Merchants common stock in favor of the Agreement and Plan of Merger. See “BUSINESS OF FARMERS AND MERCHANTS – Management Stock Ownership,” on page 70.

DESCRIPTION OF THE MERGER

          The following information describes certain aspects of the merger. However, the Agreement and Plan of Merger is attached as Appendix A to this Proxy Statement/Prospectus, and you are urged to read carefully the Agreement and Plan of Merger in its entirety.

General

          This Agreement provides for Capital City to acquire Farmers and Merchants in a series of transactions.

          The Bank Merger

          First, Capital City will merge a Georgia chartered, interim banking subsidiary of Capital City with and into Farmers and Merchants in accordance with the provisions of, and with the effect provided in, Sections 7-1-530 et seq. of the Financial Institutions Code of Georgia on terms and subject to the provisions of the Bank Plan of Merger, attached as Appendix B to this Proxy Statement/Prospectus. Farmers and Merchants will be the surviving bank resulting from the Bank Merger and will continue to be governed by the Laws of the State of Georgia.

          Assumption of Deposit Liabilities

          Second, immediately following the consummation of the Bank Merger, Farmers and Merchants will transfer and Capital City Bank will assume the following deposit liabilities:

  all deposits held by Farmers and Merchants and all terms and agreements relating to the deposit accounts; and
 
  Farmers and Merchants’ duties and responsibilities relating to the deposits with respect to:

-   the abandoned property laws of any state;
 
-   any legal process which is served on Farmers and Merchants on or before the effective time with respect to claims against or for the deposits; and
 
-   any other applicable law.

          The Holding Company Merger

          Third, immediately following the consummation of the Bank Merger and immediately after the assumption of the deposit liabilities, Farmers and Merchants will be merged with and into Capital City in accordance with the provisions of and with the effect provided in Section 607.1108 of the Florida Business Corporations Act and Sections 14-2-1101 et seq. of the Georgia

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Business Corporation Code. Capital City will be the surviving corporation resulting from this Holding Company Merger and will continue to be a corporation governed by the laws of the State of Florida.

          Transfer of Assets and Remaining Liabilities

          Fourth, immediately after the Holding Company Merger, Capital City will transfer to Capital City Bank the assets and remaining liabilities that were on the books of Farmers and Merchants at that moment (after taking into account the transfer of the Deposit Liabilities to Capital City Bank described above).

          At the effective time of the Bank Merger, the outstanding shares of the capital stock of Farmers and Merchants will be converted into the right to receive:

  $666.50 in cash, and
 
  that multiple of a share of Capital City common stock equal to the quotient obtained by dividing $666.50 by the average of the daily closing sales prices of one share of Capital City common stock as reported on the Nasdaq National Market for the 20 consecutive full trading days ending on the fifth full trading day preceding the effective date of the Bank Merger. However, the per share price of Capital City common stock used in calculating the exchange ratio will range from a minimum of $38.00 to a maximum of $45.00.

          As a result, shareowners of Farmers and Merchants will become shareowners of Capital City, and Capital City and Capital City Bank will conduct the business and operations of Farmers and Merchants.

          Shares held by Farmers and Merchants, Capital City, or their subsidiary, other than shares held in a fiduciary capacity or in satisfaction of debts previously contracted, will not be converted to Capital City common stock. Shares held by Farmers and Merchants shareowners who perfect their dissenters’ rights will not be converted to Capital City common stock. The Agreement and Plan of Merger provides that the exchange ratio will be adjusted to prevent dilution in the event Capital City changes the number of shares of Capital City common stock issued and outstanding prior to the effective time of the merger as a result of a stock split, stock dividend, recapitalization, reclassification, or similar transaction.

          Capital City will not adjust the exchange ratio of the shares of Capital City to be received in the merger based on changes in the market value of Capital City common stock before the effective time of the merger beyond a minimum of $38.00 and a maximum of $45.00. The market value of the Capital City common stock that shareowners of Farmers and Merchants will receive may therefore vary significantly between the date of this Proxy Statement/Prospectus and the effective time of the merger. Further, because Capital City and Farmers and Merchants must satisfy various conditions, including receipt of necessary regulatory approvals, the merger may not be consummated until a substantial period of time following the Special Meeting. During the time between the date of the Special Meeting and the effective time of the merger, shareowners of Farmers and Merchants who do not properly perfect their dissenters’ rights, or who do not sell

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their shares of Farmers and Merchants common stock, will be subject to the risk of a decline in the market value of Capital City common stock.

          Capital City will not issue fractional shares. Instead of issuing any fractional share to which any Farmers and Merchants shareowner would otherwise be entitled upon consummation of the merger, Capital City will pay such shareowner cash equal to the fractional part of a share of Capital City common stock multiplied by the average closing price of one share of Capital City common stock.

          In addition, as a condition to the merger, Farmers and Merchants must have, immediately prior to the effective date of the merger, a net worth of at least $30 million, subject to certain adjustments. See “– Conditions to Consummation of the Merger,” on page 34. Capital City anticipates that Farmers and Merchants will distribute any equity above this $30 million amount, subject to adjustment, to its shareowners in one or more distributions prior to the closing date of the merger. Based on the last call report filed by Farmers and Merchants with the FDIC, as of June 30, 2004, Farmers and Merchants had a net worth of approximately $69.2 million. Assuming that to be the total immediately prior to the effective date of the merger, Farmers and Merchants shareowners would receive an additional distribution of approximately $39.26 million, or $785.20 per share (assuming all 50,000 shares remain outstanding).

          At the record date, Farmers and Merchants had 50,000 shares of common stock issued and outstanding. Based on the number of shares of Farmers and Merchants common stock outstanding on the record date and the exchange ratio range of 14.81 to 17.54 shares, Capital City anticipates that it will issue a minimum of 740,555 and a maximum of 876,973 shares of Capital City common stock to holders of Farmers and Merchants common stock once the merger is complete. Accordingly, Capital City would then have issued and outstanding between approximately [        ] and [        ] shares of Capital City common stock based on the number of shares of Capital City common stock issued and outstanding on the record date. Following the merger, and assuming no exercise of dissenters’ rights, the current shareowners of Farmers and Merchants will beneficially own between approximately [        %] and [        %] of the outstanding Capital City common stock.

Background of And Reasons for the Merger

          In exercising their fiduciary responsibility to shareowners, Farmers and Merchants’ management and board of directors has assessed the financial services industry as a whole, including the regulatory and competitive environment for banking services, Farmers and Merchants’ future prospects for earnings and asset growth, and the viability of continued independent operations in accordance with Farmers and Merchants’ business plan.

          On June 23, 2003, the Board of Directors engaged Trident Securities to assist Farmers and Merchants in setting a strategic course and in identifying suitable partners. Trident identified potential candidates which could provide liquidity, enhanced earnings growth, and outstanding service to the Laurens County market. During September and October of 2003, two of those institutions identified expressed interest in a transaction with Farmers and Merchants. Based on these preliminary expressions of interest, Farmers and Merchants entered into exclusive negotiations with Capital City during which Capital City was permitted to conduct further due diligence.

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          The Board of Directors of Farmers and Merchants met on May 4, 2004, to discuss the Agreement and Plan of Merger and the merger. After review of the matters before the Board of Directors, the Board of Directors of Farmers and Merchants unanimously approved the Agreement and Plan of Merger and authorized the President and the Chief Executive Officer of Farmers and Merchants to take the appropriate actions necessary to execute the Agreement and Plan of Merger.

          The Board of Directors of Capital City met on April 27, 2004, to discuss the Agreement and Plan of Merger. After review of the matters before the Directors of Capital City, the Board of Directors of Capital City unanimously approved the Agreement and Plan of Merger and authorized the President and Chief Executive Officer of Capital City to take the appropriate actions necessary to execute the Agreement and Plan of Merger in substantially the form approved by the Board.

          On May 12, 2004, Capital City and Farmers and Merchants executed the Agreement and Plan of Merger. Capital City and Farmers and Merchants each conducted a due diligence review of the material financial, operating and legal information relating to the other party.

Farmers and Merchants’ Reasons for the Merger and Recommendation of Directors

          Farmers and Merchants’ Board of Directors, with the assistance of outside advisers, evaluated the financial and market considerations bearing on the decision to recommend the merger to the shareowners of Farmers and Merchants. In reaching its conclusion that the Agreement and Plan of Merger is in the best interests of Farmers and Merchants and its shareowners, the Farmers and Merchants Board of Directors considered the following factors:

  the value of the consideration to be received by Farmers and Merchants shareowners relative to the book value and earnings per share of Farmers and Merchants common stock;
 
  the Farmers and Merchants board’s familiarity with and review of Farmers and Merchants’ business, operations, financial condition and earnings on an historical and a prospective basis, including, without limitation, its potential growth and profitability;
 
  the Farmers and Merchants board’s review, based on the presentation of its financial adviser, of the business, operations, financial condition and earnings of Capital City on an historical and a prospective basis and of the combined company on a pro forma basis and the historical stock price performance and liquidity of Capital City common stock, and the resulting relative interests of Farmers and Merchants shareowners and Capital City in the common equity of the combined company;
 
  the financial terms of recent business combinations in the financial services industry and a comparison of the multiples of selected combinations with the terms of the proposed transaction with Capital City;
 
  the alternatives to the merger, including remaining an independent institution;
 
  the competitive and regulatory environment for financial institutions generally;

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  the fact that the merger will enable Farmers and Merchants shareowners to exchange their shares of Farmers and Merchants common stock, in a partially tax-free transaction, for cash and shares of common stock of a larger company, the stock of which is more widely held and more liquid than that of Farmers and Merchants;
 
  the previous experience of management of Capital City in completing acquisition transactions;
 
  the general impact that the merger could be expected to have on the constituencies served by Farmers and Merchants, including its customers, employees and communities;
 
  the expanded range of banking services that the transaction will allow Farmers and Merchants to provide to its customers;
 
  that the directors and officers of Farmers and Merchants might be deemed to have interests in the merger other than their interests generally as Capital City shareowners;
 
  the results of the due diligence investigation of Capital City by management of Farmers and Merchants and Trident Securities;
 
  the Farmers and Merchants board’s assessment, with the assistance of counsel, concerning the likelihood that Capital City would obtain all requisite regulatory approvals required for the merger;
 
  the terms of the $3.2 million termination fee in favor of Capital City, including the risk that the termination fee might discourage third partiers from offering to acquire Farmers and Merchants by increasing the cost of a third party acquisition, and recognizing that the termination fee was a condition to Capital City’s willingness to enter into the Agreement and Plan of Merger;
 
  the terms of the $3.2 million termination fee in favor of Capital City if Farmers and Merchants shareowners fail to approve the merger; and
 
  the opinion of Trident Securities that the consideration to be received by Farmers and Merchants shareowners as a result of the merger is fair to Farmers and Merchants shareowners from a financial point of view.

          While each member of Farmers and Merchants’ Board of Directors considered the foregoing and other factors, the Farmers and Merchants Board of Directors did not assign any specific or relative weights to the factors considered and did not make any determination with respect to any individual factor. Farmers and Merchants’ Board of Directors collectively made its determination with respect to the merger based on the unanimous conclusion reached by its members, in light of the factors that each of them considered as appropriate, that the merger is in the best interests of Farmers and Merchants’ shareowners.

          The terms of the merger, including the exchange ratio, were the result of arm’s-length negotiations between representatives of Farmers and Merchants and representatives of Capital City. Based upon its consideration of the foregoing factors, the Board of Directors of Farmers

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and Merchants approved the Agreement and Plan of Merger and the merger as being in the best interests of Farmers and Merchants and its shareowners.

          Farmers and Merchants’ Board of Directors unanimously recommends that shareowners vote “FOR” approval of the Agreement and Plan of Merger.

Fairness Opinion Of Farmers and Merchants’ Financial Adviser

          Acquisition — General. Pursuant to an engagement letter dated June 23, 2003 between Farmers and Merchants and Trident Securities, a division of McDonald Investments Inc., Farmers and Merchants retained Trident to render an opinion with respect to the fairness, from a financial point of view, of the merger consideration to be received by Farmers and Merchants shareowners in connection with a sale of Farmers and Merchants. Trident is a nationally recognized specialist in the financial services industry and is regularly engaged in evaluations of similar businesses and in advising institutions with regard to mergers and acquisitions, as well as raising debt and equity capital for such institutions. Farmers and Merchants selected Trident to render a fairness opinion based upon Trident’s qualifications, expertise and reputation in such capacity.

          Trident delivered a written opinion, dated May 12, 2004 that the merger consideration was fair to Farmers and Merchants shareowners, from a financial point of view, as of the date of such opinion. Neither Farmers and Merchants nor its Board imposed any limitations on Trident with respect to the investigations made or the procedures followed in rendering its opinion.

          The full text of Trident’s written opinion to the Farmers and Merchants Board, dated May 12, 2004, which sets forth the assumptions made, matters considered and extent of review by Trident, is attached as Appendix F and is incorporated into this Proxy Statement/Prospectus by reference. It should be read carefully and in its entirety in conjunction with this document. The following summary of Trident’s opinion is qualified in its entirety by reference to the full text of the opinion. Trident’s opinion is addressed to the Farmers and Merchants Board and does not constitute a recommendation to any shareowner of Farmers and Merchants as to how such shareowner should vote at the Farmers and Merchants Special Meeting described in this document.

          Trident, in connection with rendering its opinion:

  reviewed Farmers and Merchants’ audited financial statements for each of the years ended December 31, 2002, 2001, and 2000; Farmers and Merchants’ internal financial statements and general ledger balances for the years ended December 31, 2003 and interim periods ending June 30, 2003 and September 30, 2003;
 
  reviewed Capital City’s Annual Report to Shareowners and Annual Report on Form 10-K for each of the years ended December 31, 2003, 2002, and 2001, including the audited financial statements contained therein; and Capital City’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004;

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  reviewed certain other public and non-public information, primarily financial in nature, relating to the respective businesses, earnings, assets and prospects of Farmers and Merchants and Capital City provided to Trident or publicly available;
 
  participated in meetings and telephone conferences with members of senior management of Farmers and Merchants and Capital City concerning the financial condition, business, assets, financial forecasts and prospects of the respective companies, as well as other matters Trident believed relevant to its inquiry;
 
  reviewed certain stock market information for Capital City common stock and compared it with similar information for certain companies, the securities of which are publicly traded;
 
  compared the results of operations and financial condition of Farmers and Merchants and Capital City with that of certain companies which Trident deemed to be relevant for purposes of this opinion;
 
  reviewed the financial terms, to the extent publicly available, of certain acquisition transactions which Trident deemed to be relevant for purposes of this opinion;
 
  reviewed the Agreement and Plan of Merger dated May 12, 2004 and certain related documents; and
 
  performed such other reviews and analyses as Trident has deemed appropriate.

          The oral and written opinions provided by Trident to Farmers and Merchants were necessarily based upon economic, monetary, financial market and other relevant conditions as of the dates thereof.

          In connection with its review and arriving at its opinion, Trident relied upon the accuracy and completeness of the financial information and other pertinent information provided by Farmers and Merchants and Capital City to Trident for purposes of rendering its opinion. Trident did not assume any obligation to independently verify any of the provided information as being complete and accurate in all material respects. With regard to the financial forecasts established and developed for Farmers and Merchants with the input of its management, Trident assumed that these materials had been reasonably prepared on bases reflecting the best available estimates and judgments of Farmers and Merchants as to the future performance of the Company and that the projections provided a reasonable basis upon which Trident could formulate its opinion. Farmers and Merchants does not publicly disclose such internal management projections of the type utilized by Trident in connection with Trident’s role as financial adviser to Farmers and Merchants. Therefore, such projections cannot be assumed to have been prepared with a view towards public disclosure. The projections were based upon numerous variables and assumptions that are inherently uncertain, including, among others, factors relative to the general economic and competitive conditions facing Farmers and Merchants. Accordingly, actual results could vary significantly from those set forth in the respective projections.

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          Trident does not claim to be an expert in the evaluation of loan portfolios or the allowance for loan losses with respect thereto and therefore assumes that such allowances for Farmers and Merchants are adequate to cover such losses. In addition, Trident does not assume responsibility for the review of individual credit files and did not make an independent evaluation, appraisal or physical inspection of the assets or individual properties of Farmers and Merchants, nor was Trident provided with such appraisals. Furthermore, Trident assumes that the merger will be consummated in accordance with the terms set forth in the Agreement and Plan of Merger, without any waiver of any material terms or conditions by Farmers and Merchants, and that obtaining the necessary regulatory approvals for the merger will not have an adverse effect on either separate institution or the combined entity. In particular, Trident assumes that the merger will be recorded as a “purchase” in accordance with generally accepted accounting principles.

          In connection with rendering its opinion to Farmers and Merchants’ Board, Trident performed a variety of financial and comparative analyses, of which the analyses necessitating the primary weight of our opinion are briefly summarized below. Such summary of analyses does not purport to be a complete description of the analyses performed by Trident. Moreover, Trident believes that these analyses must be considered as a whole and that selecting portions of such analyses and the factors considered by it, without considering all such analyses and factors, could create an incomplete understanding of the scope of the process underlying the analyses and, more importantly, the opinion derived from them. The preparation of a financial adviser’s opinion is a complex process involving subjective judgments and is not necessarily susceptible to partial analyses or a summary description of such analyses. In its full analysis, Trident also included assumptions with respect to general economic, financial market and other financial conditions. Furthermore, Trident drew from its past experience in similar transactions, as well as its experience in the valuation of securities and its general knowledge of the banking industry as a whole. Any estimates in Trident’s analyses were not necessarily indicative of actual future results or values, which may significantly diverge more or less favorably from such estimates. Estimates of Farmers and Merchants valuations do not purport to be appraisals, nor to necessarily reflect the prices at which companies or their respective securities actually may be sold. None of the analyses summarized below were assigned a greater significance by Trident than any other in deriving its opinion.

          Description of Transaction: Per the terms of the Agreement and Plan of Merger dated May 12, Farmers and Merchants shareowners will receive all equity capital in excess of $30 million, unrestricted dividend distributions through closing, and consideration from Capital City of $33.325 million in cash and $33.325 million in Capital City stock. For purposes of our analysis, the aggregate consideration in the transaction is estimated to be $110.73 million, which includes $66.65 million from Capital City and $44.08 million of excess capital distributions.

          Comparable Transaction Analysis: Trident reviewed and compared actual information for groups of comparable pending and completed thrift merger transactions (through January 7, 2004) it deemed pertinent to an analysis of the Merger. The pricing ratios for the Merger were compared to the average and median ratios of (i) price to last twelve months net income (“LTM NI”), (ii) price to tangible book value (“TBV”), (iii) capital adjusted price to TBV, and (iv) TBV premium to core deposit ratio (“TBV Prem./Core Deposits”), for each of the following 9 comparable transactions:

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          Buyer / Seller (State)

  Persons Banking Company/Farmers Bank (GA)
 
  First Bancorp/Carolina Community Bancshares (SC)
 
  Hazlehurst Investors/Bank of Hazlehurst (GA)
 
  Putnam-Greene Financial/Citizens Bank of Cochran (GA)
 
  SNB Bancshares/Bank of Gray (GA)
 
  State Capital Corp/Mississippi Southern Bank (GA)
 
  Southwest Georgia Financial/First Bank Holding Co. (GA)
 
  Peoples Bancorp Inc./Kentucky Bancshares Inc. (KY)
 
  First Citizens Bancorp of SC/First Banks, Inc. (GA)

          A summary of the pricing multiples for the Comparable Transactions is listed below:

                         
                    Farmers and
    Mean
  Median
  Merchants
Price / LTM NI
    13.70 x     14.44 x     15.74 x
Price / TBV
    189.78 %     180.4 %     159.7 %
Capital Adjusted Price / TBV
    240.4 %     247.9 %     269.4 %
Premium / Core Deposits
    13.7 %     14.2 %     17.2 %
Price / Assets
    20.9 %     20.8 %     28.1 %

          The value of the transaction indicates that the Merger Consideration paid to Farmers and Merchants shareowners falls within the range of similar transactions, based on all methods of merger valuation used by Trident in its comparable merger transaction analyses.

          Discounted Dividend Analysis: Trident calculated a present value of Farmers and Merchants’ projected stand alone earnings and dividends based on Trident assumptions and management estimates for the five-year period through the calendar year ended December 31, 2008. This analysis utilized a range of discount rates of 12.7%-14.7%, assumed annual earnings growth of 5.0%, utilized a range of terminal earnings multiples of 11.0x – 14.0x calendar year 2008 net income, and a target tangible capital ratio of 10.0%. Additionally an initial dividend of $29.9 million was assumed to bring the company to 10% capital. The discounted dividend analyses resulted in a range of present values for Farmers and Merchants shareowners of between $103.7 million and $124.3 million. Trident found that the total consideration to shareowners fell within this range.

          Trident noted that the discounted earnings analysis was included because it is a widely used valuation methodology, but noted that the results of such methodology are highly dependent upon the numerous assumptions that must be made, including earnings growth rates, terminal multiples, discount rates and target tangible capital ratios.

          Based on the aforementioned analyses and Trident’s experience with numerous mergers involving thrift institutions, it is Trident’s opinion that the merger consideration to be received by Farmers and Merchants shareowners in the Merger is fair from a financial point of view.

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          No institution used as a comparison in the above analyses is identical to Farmers and Merchants, or the combined entity, and no other transaction is identical to the merger. Accordingly, an analysis of the results of the foregoing is not purely mathematical; rather, such analyses involve complex considerations and judgments concerning differences in financial, market and operating characteristics of the companies and other factors that could affect the trading characteristics of the companies to which Farmers and Merchants, and the combined entity are being compared.

          For its financial advisory services provided to Farmers and Merchants, Trident will be paid a total fee of 0.85% of the merger consideration from Capital City, excluding the dividend payments, of which $125,000 has been received to date with the balance of the total fee to be paid to Trident at the time of closing of the Merger. In addition, Farmers and Merchants has agreed to reimburse Trident for all reasonable out-of-pocket expenses, incurred by it on Farmers and Merchants’ behalf, provided such expenses shall not exceed $20,000 without Farmers and Merchants’ prior consent. Farmers and Merchants also agreed to indemnify Trident against certain liabilities, including any which may arise under the federal securities laws.

          Trident is a member of all principal securities exchanges in the United States and in the conduct of its broker-dealer activities may have from time to time purchased securities from, and sold securities to, Farmers and Merchants and Capital City. As a market maker, Trident may also have purchased and sold the securities of Capital City for Trident’s own account and for the accounts of its customers.

          Based on the analyses performed for comparable transactions, Trident Securities determined that the terms of the merger proposal were fair and equitable to the shareowners of Farmers and Merchants. See Appendix F for full report.

Capital City’s Reasons For The Merger

          The Capital City Board of Directors believes that the merger is in the best interests of Capital City and its shareowners. The Capital City Board of Directors has unanimously approved the Agreement and Plan of Merger. In deciding to approve the Agreement and Plan of Merger, the Capital City Board of Directors considered a number of factors, including:

  a review, based in part on a presentation by Capital City’s management, of

-   the business, operations, earnings, and financial condition, including the capital levels and asset quality, of Farmers and Merchants on a historical, prospective, and pro forma bases and in comparison to other financial institutions in the area,
 
-   the demographic, economic, and financial characteristics of the Laurens County market, including existing competition, history of the market areas with respect to financial institutions, and average demand for credit, on an historical and prospective bases, and
 
-   the results of Capital City’s due diligence review of Farmers and Merchants; and

  the likelihood of regulators approving the merger without undue conditions or delay;

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  the compatibility and the community bank orientation of both Capital City and its subsidiary and Farmers and Merchants;
 
  that the merger will provide Capital City with significant opportunities to market its fee based products, such as cash management, asset management and securities products to the existing customers of Farmers and Merchants;
 
  that after the merger, Farmers and Merchants will be able to draw upon the resources and competencies of Capital City and Capital City Bank to provide a broader range of services and product delivery channels; and
 
  a variety of factors affecting and in relating to the overall strategic focus of Capital City.

          While Capital City’s Board of Directors considered the foregoing and other factors, the Board of Directors did not assign any specific or relative weights to the factors considered and did not make any determination with respect to any individual factor. Capital City’s Board of Directors collectively made its determination with respect to the merger based on the unanimous conclusion reached by its members, in light of the factors that each of them considers as appropriate, that the merger is in the best interests of Capital City’s shareowners.

          The terms of the merger, including the exchange ratio, were the result of arm’s-length negotiations between representatives of Capital City and representatives of Farmers and Merchants. Based upon its consideration of the foregoing factors, the Board of Directors of Capital City approved the Agreement and Plan of Merger and the merger as being in the best interests of Capital City and its shareowners.

Effective Time of the Merger

          The effective time of the merger will occur at 11:59 p.m. Eastern Time on the date requested by Capital City’s Georgia-chartered interim bank, as soon as practicable after the delivery of the Bank Plan of Merger and the Agreement and Plan of Merger to the Georgia Department of Banking and Finance. Unless Farmers and Merchants and Capital City otherwise agree in writing, and subject to the conditions to the obligations of Capital City and Farmers and Merchants to effect the merger, the parties will use their reasonable efforts to cause the effective time of the merger to occur at a mutually-agreed upon time within 60 days after the last to occur of:

  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
 
  the date on which the shareowners of Farmers and Merchants approve the Agreement and Plan of Merger.

          Capital City and Farmers and Merchants cannot assure that they can obtain the necessary shareowner and regulatory approvals or that they can or will satisfy the other conditions to the merger. Capital City and Farmers and Merchants anticipate that they will satisfy all conditions

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to consummation of the merger so that the merger can be completed during the fourth quarter of 2004. However, delays in the consummation of the merger could occur.

          The Board of Directors of either Capital City or Farmers and Merchants may terminate the Agreement and Plan of Merger if the merger is not consummated by December 31, 2004, unless the failure to consummate the merger by that date is the result of a breach of the Agreement and Plan of Merger by the party seeking termination. See “– Conditions to Consummation of the Merger,” on page 34 and "– Waiver, Amendment, and Termination,” on page 36.

Distribution of Capital City Stock Certificates

          Promptly after the effective time of the merger, Capital City will mail to each holder of record of Farmers and Merchants common stock appropriate transmittal materials and instructions for the exchange of Farmers and Merchants stock certificates for Capital City stock certificates and the cash portion of the consideration.

          Holders of Farmers and Merchants common stock should NOT send in their Farmers and Merchants stock certificates until they receive the transmittal materials and instructions.

          After Capital City’s exchange agent receives your Farmers and Merchants stock certificates and properly completed transmittal materials, the Exchange Agent will issue and mail to you a certificate representing the number of shares of Capital City common stock to which you are entitled. The Exchange Agent will also send Farmers and Merchants shareowners a check for the amount to be paid, without interest for the cash portion of the consideration, for any fractional shares and for all undelivered dividends or distributions in respect of such shares.

          After the effective time of the merger, to the extent permitted by law, holders of Farmers and Merchants common stock of record as of the effective time of the merger will be entitled to vote at any meeting of Capital City shareowners the number of whole shares of Capital City common stock they will receive in the merger, regardless of whether such shareowners have surrendered their Farmers and Merchants stock certificates. Whenever Capital City declares a dividend or other distribution on Capital City common stock, the record date for which is at or after the effective time of the merger, the declaration will include dividends or other distributions on all shares issuable pursuant to the Agreement and Plan of Merger. However, Capital City will not pay any dividend or other distribution payable after the effective time of the merger with respect to Capital City common stock to the holder of any unsurrendered Farmers and Merchants stock certificate until the holder duly surrenders such Farmers and Merchants stock certificate. In no event will the holder of any surrendered Farmers and Merchants stock certificate(s) be entitled to receive interest on any cash to be issued to such holder, except to the extent required in connection with dissenters’ rights. In no event will Capital City or the Exchange Agent be liable to any holder of Farmers and Merchants 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.

          After the effective time of the merger, no transfers of shares of Farmers and Merchants common stock on Farmers and Merchants’ stock transfer books will be recognized. If Farmers and Merchants stock certificates are presented for transfer after the effective time of the merger,

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they will be canceled and exchanged for shares of Capital City common stock and a check for the amount due in lieu of a fractional share, if any.

          After the effective time of the merger, holders of Farmers and Merchants stock certificates will have no rights with respect to the shares of Farmers and Merchants common stock other than the right to surrender such Farmers and Merchants stock certificates and receive in exchange the shares of Capital City common stock to which such holders are entitled. After the effective time of the merger, holders of Farmers and Merchants stock certificates who have complied with the provisions regarding the right to dissent as detailed in the Financial Institutions Code of Georgia (which provides that the provisions of the Georgia Business Corporation Code apply), may be entitled to receive in cash the fair value of such shareowner’s shares of Farmers and Merchants common stock determined immediately prior to the merger, excluding any appreciation or depreciation in anticipation of the merger. Failure to comply with the procedures prescribed by applicable law will result in the loss of dissenters’ rights. See Appendix E to this Proxy Statement/Prospectus.

Conditions to Consummation of the Merger

          Consummation of the merger is subject to various conditions, including:

  the approval of the Agreement and Plan of Merger by the holders of two-thirds of the outstanding Farmers and Merchants common stock represented in person or by proxy at the Special Meeting;
 
  the receipt of all regulatory approvals required for consummation of the merger (see “– Regulatory Approvals,” on page 36);
 
  receipt of all consents required for consummation of the merger or for the preventing of any default under any contract or permit which consent, if not obtained, is reasonably likely to have, individually or in the aggregate, a material adverse effect;
 
  the absence of any law or order, whether temporary, preliminary or permanent, or any action taken by any court, governmental, or regulatory authority of competent jurisdiction prohibiting, restricting, or making illegal the consummation of the transactions contemplated by the Agreement and Plan of Merger;
 
  the Registration Statement, of which this Proxy Statement/Prospectus forms a part, being declared effective by the SEC and the receipt of all necessary SEC and state approvals relating to the issuance or trading of the shares of Capital City common stock issuable pursuant to the Agreement and Plan of Merger;
 
  the approval of the Capital City common stock issuable pursuant to the Agreement and Plan of Merger for listing on the Nasdaq National Market;
 
  the receipt of a written opinion of Gunster, Yoakley & Stewart, P.A. as to the tax aspects of the merger, including that the merger will constitute a reorganization within the meaning of Section 368(a) of the Internal Revenue Code;

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  the accuracy, in all material respects, as of the date of the Agreement and Plan of Merger and as of the effective time of the merger, of the representations and warranties of Farmers and Merchants and Capital City as set forth in the Agreement and Plan of Merger;
 
  the performance of all agreements and the compliance with all covenants of Farmers and Merchants and Capital City as set forth in the Agreement and Plan of Merger;
 
  the receipt by Capital City and Farmers and Merchants of certain required written opinions of counsel;
 
  the receipt by Capital City of agreements from each person Farmers and Merchants reasonably believes may be deemed an affiliate of Farmers and Merchants with respect to certain matters;
 
  Farmers and Merchants must have, immediately prior to the date the merger becomes effective, a minimum net worth of at least $30 million, provided that “net worth” shall not be reduced by fees, costs and expenses (a) incurred or paid at the request of Capital City, except for adjustments requested by Capital City for purposes of complying with accounting principles generally accepted in the United States, or (b) incurred or paid by Farmers and Merchants to ensure that the allowances for possible loan and lease credit losses shown on Farmers and Merchants balance sheet immediately prior to the effective time will be a minimum of 1.75% of total loans of Farmers and Merchants and will be adequate (within the meaning of accounting principles generally accepted in the United States and applicable regulatory requirements or guidelines) to provide for all known or reasonably anticipated losses relating to or inherent in Farmers and Merchants loan and lease portfolio (including accrued interest receivables) and other extensions of credit (including letters of credit) by Farmers and Merchants as of the dates thereof;
 
  the delivery to Capital City by each Farmers and Merchants director of a Director’s Agreement;
 
  the receipt by Capital City of letters from each of the directors and executive officers of Farmers and Merchants releasing any claims they may have against Farmers and Merchants;
 
  the performance of all agreements and the compliance with all covenants of Farmers and Merchants and Capital City as set forth in the Agreement and Plan of Merger;
 
  the delivery to Capital City by Farmers and Merchants of any required clearance certificate or similar document required by any state taxing authority in order to relieve Capital City of any obligation to withhold any portion of the consideration under the Agreement and Plan of Merger.

          Capital City and Farmers and Merchants cannot assure you when or if all of the conditions to the merger can or will be satisfied. In the event the merger is not completed by December 31, 2004, the Agreement and Plan of Merger may be terminated and the merger abandoned by either Farmers and Merchants or Capital City, unless the failure to consummate

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the merger by that date is the result of a breach of the Agreement and Plan of Merger by the party seeking termination. See “– Waiver, Amendment, and Termination,” on page 36.

Regulatory Approvals

          Capital City and Farmers and Merchants cannot complete the merger unless and until they receive regulatory approvals from the Federal Reserve, the Federal Deposit Insurance Corporation, the Georgia Department of Banking and Finance and the Florida Department of Financial Services. These regulators will evaluate financial, managerial and competitive criteria, as well as the supervisory history of the parties and the public benefits of the merger. Capital City and Farmers and Merchants have filed all required regulatory applications relating to the merger. Capital City and Farmers and Merchants cannot assure when or whether they will receive the required regulatory approvals. Additionally, the parties cannot assure that the regulatory approvals will impose no conditions or restrictions that in the judgment of their Boards of Directors would so adversely impact the economic or business benefits of the merger that, had such conditions or restrictions been known, the parties would not have entered into the Agreement and Plan of Merger.

          Capital City and Farmers and Merchants are not aware of any other material governmental approvals or actions that are required for consummation of the merger.

Waiver, Amendment, and Termination

          To the extent permitted by applicable law, Farmers and Merchants and Capital City may amend the Agreement and Plan of Merger by written agreement at any time, whether before or after approval of the Agreement and Plan of Merger by the Farmers and Merchants shareowners. After the Farmers and Merchants shareowners approve the Agreement and Plan of Merger, the Agreement and Plan of Merger cannot be amended in a way that reduces or modifies the consideration to be received by the holders of Farmers and Merchants common stock without further approval of Farmers and Merchants shareowners. In addition, after the Farmers and Merchants shareowners approve the Agreement and Plan of Merger, the provisions of the Agreement and Plan of Merger relating to the manner or basis in which shares of Farmers and Merchants common stock will be exchanged for shares of Capital City common stock cannot be amended in a manner adverse to the holders of Capital City common stock without any requisite approval of Capital City shareowners entitled to vote on such an amendment. In addition, prior to or at the effective time of the merger, either Farmers and Merchants or Capital City, or both, acting through their respective Boards of Directors, chief executive officers or other authorized officers, may:

  waive any default in the performance of any term of the Agreement and Plan of Merger by the other party;
 
  waive or extend the time for the compliance or fulfillment by the other party of any and all of its obligations under the Agreement and Plan of Merger; and
 
  waive any of the conditions precedent to the obligations of such party under the Agreement and Plan of Merger, except any condition that, if not satisfied, would result in the violation of any applicable law or governmental regulation.

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No such waiver will be effective unless written and unless signed by a duly authorized officer of Farmers and Merchants or Capital City, as the case may be.

          The Agreement and Plan of Merger may be terminated at any time prior to the effective time of the merger:

  by the mutual agreement of Capital City and Farmers and Merchants;
 
  by Capital City or Farmers and Merchants:

-   in the event of any material breach of any representation, warranty, covenant or agreement of the other party contained in the Agreement and Plan of Merger which cannot be or has not been cured within 30 days after written notice to the breaching party and which breach is reasonably likely, in the opinion of the non-breaching party, to have, individually or in the aggregate, a material adverse effect on the breaching party (provided that the terminating party is not then in material breach of any representation, warranty, covenant, or other agreement contained in the Agreement and Plan of Merger),
 
-   if any approval of any regulatory authority required for consummation of the merger has been denied by final nonappealable action, or if any action taken by such authority is not appealed within the time limit for appeal,
 
-   if the shareowners of Farmers and Merchants fail to approve the Agreement and Plan of Merger at the Special Meeting,
 
-   if the merger is not consummated by December 31, 2004, provided that the failure to consummate is not due to a breach by the party electing to terminate, or
 
-   in the event that any of the conditions precedent to the obligations of such party to consummate the merger cannot be satisfied or fulfilled by December 31, 2004, provided that the terminating party is not then in material breach of any representation, warranty, covenant, or other agreement contained in the Agreement and Plan of Merger;

  by Capital City, in the event that the Board of Directors of Farmers and Merchants does not reaffirm its approval of the Agreement and Plan of Merger (excluding any other acquisition proposal from a third party), or shall have resolved not to reaffirm the merger, or shall have affirmed, recommended or authorized entering into any acquisition proposal or other transaction involving a merger, share exchange or transfer of substantially all of the assets of Farmers and Merchants;
 
  by Farmers and Merchants if, subject to any adjustments for any stock split, stock dividend, or similar recapitalization with respect to Capital City Common Stock, the Average Closing Price is less than $32.00; and
 
  by Capital City in the event of a material adverse effect, and, if Capital City provides notice of and grants time to cure such material adverse effect, such material adverse

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    effect is not cured to Capital City’s satisfaction within the timeframe specified in the notice.

          In addition to any other payments required by the Agreement and Plan of Merger, in the event that the Agreement and Plan of Merger is terminated as a result of Farmers and Merchants or the holders of at least a majority of the shares of Farmers and Merchants common stock entering into an agreement with respect to the merger of Farmers and Merchants with a party other than Capital City or the acquisition of a majority of the outstanding shares of Farmers and Merchants common stock by any party other than Capital City, or is terminated in anticipation of any such agreement or acquisition, then, in either event, Farmers and Merchants shall immediately pay Capital City, by wire transfer, $3,200,000 in full satisfaction of Capital City’s losses and damages resulting from such termination.

          If Capital City and/or Farmers and Merchants terminate the merger as described in this section, the Agreement and Plan of Merger will become void and have no effect, except that certain provisions of the Agreement and Plan of Merger will survive, including those relating to the obligations to maintain the confidentiality of certain information. In addition, termination of the Agreement and Plan of Merger will not relieve any breaching party from liability for any uncured willful breach of a representation, warranty, covenant, or agreement giving rise to such termination.

Dissenters’ Rights

          If the merger is consummated, any shareowner of Farmers and Merchants who properly dissents from the merger may be entitled to receive in cash the fair value of such shareowner’s Farmers and Merchants common stock, determined immediately prior to the merger, excluding any appreciation or depreciation in anticipation of the merger. Failure to comply with the procedures prescribed by applicable law will result in the loss of dissenters’ rights.

          Any shareowner of Farmers and Merchants entitled to vote on the Agreement and Plan of Merger has the right to receive payment of the fair value of his or her shares of Farmers and Merchants common stock upon compliance with the applicable provisions of the Financial Institutions Code of Georgia, which provides that the provisions of the Georgia Business Corporation Code shall apply. A record shareowner may assert dissenters’ rights as to fewer than all of the shares registered in his or her name only if he or she dissents with respect to all shares beneficially owned by any one beneficial shareowner and notifies the corporation in writing of the name and address of each person on whose behalf he or she asserts dissenters’ rights. The rights of a partial dissenter under Section 14-2-1303 of the Georgia Business Corporation Code are determined as if the shares as to which he or she dissents and his or her other shares were registered in the names of different shareowners. Any Farmers and Merchants shareowner intending to enforce the right to dissent:

  may not vote in favor of the Agreement and Plan of Merger, and
 
  must file with Farmers and Merchants a written notice of intent to demand payment for his or her shares if the merger becomes effective (the “Objection Notice”).

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          A Farmers and Merchants shareowner should send the Objection Notice to: Farmers and Merchants Bank, 600 Bellevue Avenue, Dublin, Georgia 31021 (telephone: (478) 272-3100), Attention: McGrath Keen, Jr., President, before the vote on the proposal to approve the Agreement and Plan of Merger is taken at the Special Meeting. The Objection Notice must state that the shareowner intends to demand payment for his or her shares of Farmers and Merchants common stock if the merger is effectuated. A vote against the Agreement and Plan of Merger, in and of itself, will not constitute an Objection Notice satisfying the requirements of the Georgia Business Corporation Code.

          If the Agreement and Plan of Merger is approved by Farmers and Merchants’ shareowners at the Special Meeting, each shareowner who has properly filed an Objection Notice and who has not voted in favor of the Agreement and Plan of Merger will be notified by Farmers and Merchants of such approval within ten days of the Special Meeting (“Dissenters’ Notice”). The Dissenters’ Notice shall contain the following information:

  where the payment demand must be sent and where and when the certificates representing the Farmers and Merchants common stock must be deposited;
 
  the extent to which the transfer of uncertificated shares will be restricted after the payment demand is received;
 
  the date by which the corporation must receive the payment demand (which date may not be fewer than 30 nor more than 60 days after the Dissenters’ Notice is delivered); and
 
  a copy of Title 14, Chapter 2, Article 13 of the Georgia Business Corporation Code (relating to dissenters’ rights) (the “Appraisal Statute”).

Following the receipt of the Dissenters’ Notice, any shareowner electing to dissent must demand payment of the fair value of the shares and deposit the certificates representing his or her Farmers and Merchants common stock in accordance with the terms of, and by the date set out in, the Dissenters’ Notice. Such shareowner will retain all other rights of a shareowner until those rights are canceled or modified by the consummation of the merger. A record shareowner who does not demand payment or deposit his or her certificates where required, each by the date set out in the Dissenters’ Notice, is not entitled to payment for such holder’s shares under the Appraisal Statute.

          Except as described below, within ten days after the later of the effective time, or the date of receipt of a payment demand, Farmers and Merchants must, by written notice, offer to each shareowner who has properly filed a payment demand, and who has deposited his or her Farmers and Merchants certificates representing Farmers and Merchants common stock, to pay an amount Farmers and Merchants estimates to be a fair value for the shareowner’s shares, plus accrued interest from the effective time. Such offer of payment must be accompanied by:

  certain of Farmers and Merchants’ recent financial statements;
 
  a statement of Farmers and Merchants’ estimate of the fair value of the shares involved;
 
  an explanation of how the interest was calculated;

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  a statement of the dissenter’s right to demand payment under Section 14-2-1327 of the Georgia Business Corporation Code; and
 
  a copy of the Appraisal Statute.

          Any shareowner who accepts such offer by written notice to Farmers and Merchants within 30 days after the offer, or who is deemed to have accepted such offer due to his or her failure to respond to such offer within 30 days, shall receive payment for his or her shares within 60 days after such offer to pay or consummation of the merger, whichever is later. If the merger is not consummated within 60 days following the date set for demanding payment and depositing share certificates, Farmers and Merchants must return the deposited certificates and release the transfer restrictions imposed on uncertified shares. If Farmers and Merchants then consummates the merger, it must send a new Dissenters’ Notice and repeat the payment demand procedure.

          In the event that Farmers and Merchants fails to make any payment offer within ten days after the later of the date the proposed corporate action is taken or the date of receipt of a payment demand, Farmers and Merchants must provide certain information to the shareowner (the financial statements and other information required to accompany Farmers and Merchants’ payment offer) within ten days after receipt of a written demand from such dissenting shareowner for such information. Additionally, such dissenting shareowner may, at any time within the three years following the consummation of the merger, notify Farmers and Merchants of his or her own estimate of the fair value of his or her shares and the interest due thereon, and demand payment of such amounts, if:

  a dissenting shareowner is dissatisfied with an offer for payment made by Farmers and Merchants within the time period set forth above, or
 
  Farmers and Merchants, having failed to effect the merger, does not return the deposited Farmers and Merchants certificates or release the transfer restrictions imposed on uncertificated shares within 60 days after the date set for demanding payment.

          A dissenting shareowner waives the right to demand payment under section 14-2-1327 of the Georgia Business Corporation Code unless he or she notifies Farmers and Merchants of his or her demand in writing within 30 days after Farmers and Merchants makes or offers payment for such holder’s shares.

          If such a demand for payment from any dissenting shareowner remains unsettled, within 60 days following the receipt by Farmers and Merchants of such demand for payment, Farmers and Merchants must institute proceedings in the superior court of the county where Farmers and Merchants’ registered office is located (the “Court”) requesting a nonjury equitable determination of the fair value of such dissenting shareowner’s shares and the accrued interest owed to such dissenting shareowner. If Farmers and Merchants fails to file such action within the 60-day period, Farmers and Merchants must pay each dissenting shareowner whose demand remains unsettled the amount demanded by such dissenting shareowner. Farmers and Merchants is required to make all dissenting shareowners whose demands remain unsettled parties to the proceeding and to serve a copy of the petition upon each such dissenting shareowner. The Court may, in its discretion, appoint an appraiser to receive evidence and recommend a decision on the question of fair value. Each dissenting shareowner made a party to the proceeding will be

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entitled to judgment for the amount which the court finds to be the fair value of his or her shares, plus interest to the date of judgment.

          The Court will determine and assess the costs and expenses of such proceeding (including reasonable compensation for and the expenses of the appraiser, but excluding fees and expenses of counsel and experts) against Farmers and Merchants, except that the Court may assess such costs and expenses as it deems appropriate against any or all of the dissenting shareowners if it finds that their demand for additional payment was arbitrary, vexatious or otherwise not in good faith. The Court may award fees and expenses of counsel and experts in amounts the Court finds equitable:

  against Farmers and Merchants, if Farmers and Merchants did not substantially comply with the requirements of the corporation as set out in the Appraisal Statute;
 
  against either Farmers and Merchants or the dissenting shareowner(s), if the Court finds that either party’s actions were arbitrary, vexatious or otherwise not in good faith; or
 
  if the Court finds that the services of attorneys for any dissenting shareowner were of substantial benefit to other dissenting shareowners similarly situated, and that the fees for those services should not be assessed against Farmers and Merchants, the court may award those attorneys reasonable fees out of the amounts awarded the dissenting shareowners who were benefited.

          No action by any dissenting shareowner to enforce dissenters’ rights may be brought more than three years after the corporate action was taken, regardless of whether notice of the corporate action and of the right to dissent was given by Farmers and Merchants in compliance with the Dissenters’ Notice and payment offer requirements of Sections 14-2-1320 and 14-2-1322 of the Georgia Business Corporation Code.

          The foregoing summary of the applicable provisions of the Appraisal Statute is not intended to be a complete statement of such provisions, and is qualified in its entirety by reference to such sections, which are included as Appendix E to this Proxy Statement/Prospectus. The provisions of the statutes are technical and complex. It is suggested that any Farmers and Merchants shareowner who desires to exercise the right to object to the Agreement and Plan of Merger consult counsel. Failure to comply with the provisions of the statute may defeat a shareowner’s right to dissent. No further notice of the events giving rise to dissenters’ rights or any steps associated therewith will be furnished to Farmers and Merchants shareowners, except as indicated above or as otherwise required by law.

          Any dissenting Farmers and Merchants shareowner who perfects the right to be paid the value of such holder’s shares will recognize taxable gain or loss upon receipt of cash for such shares for federal income tax purposes. See “– Certain Federal Income Tax Consequences,” on page 48.

Conduct of Business Pending the Merger

          Capital City and Farmers and Merchants have agreed in the Agreement and Plan of Merger that unless the other party gives prior written consent, and except as otherwise expressly

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contemplated in the Agreement and Plan of Merger, each of Capital City and Farmers and Merchants will, and Capital City will cause its subsidiary to:

  operate its business only in the usual, regular, and ordinary course;
 
  preserve intact its business organization and assets and maintain its rights and franchises; and
 
  take no action which would:

-   adversely affect the ability of any party to obtain any consents required for the transactions contemplated by the Agreement and Plan of Merger without the imposition of certain conditions or restrictions referred to in the Agreement and Plan of Merger, or
 
-   adversely affect the ability of any party to perform its covenants and agreements under the Agreement and Plan of Merger.

          In addition, Farmers and Merchants has agreed that, from the date of the Agreement and Plan of Merger until the earlier of the effective time of the merger or the termination of the Agreement and Plan of Merger, unless Capital City has given prior written consent, and except as otherwise expressly contemplated by the Agreement and Plan of Merger, Farmers and Merchants 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:

  amend its Articles of Incorporation, Bylaws or other governing instruments;
 
  incur any additional debt obligation or other obligation for borrowed money in excess of an aggregate of $50,000 except in the ordinary course of the business of Farmers and Merchants consistent with past practices (which shall include creation of deposit liabilities, purchases of federal funds, and entry into repurchase agreements fully secured by U.S. government or agency securities), or impose, or suffer the imposition, on any asset of Farmers and Merchants 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 of the Agreement and Plan of Merger that were previously disclosed to Capital City by Farmers and Merchants);
 
  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 Farmers and Merchants or, except as consistent with past practice, declare or pay any dividend or make any other distribution in respect of Farmers and Merchants’ capital stock that would cause Farmers and Merchants’ net worth to fall below $30 million;
 
  except for the Agreement and Plan of Merger, or as previously disclosed to Capital City by Farmers and Merchants, issue, sell, pledge, encumber, authorize the issuance of, enter

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    into any contract to issue, sell, pledge, encumber, or authorize the issuance of, or otherwise permit to become outstanding, any additional shares of Farmers and Merchants common stock, or any stock appreciation rights, or any option, warrant, or other equity right;
 
  adjust, split, combine or reclassify any capital stock of Farmers and Merchants or issue or authorize the issuance of any other securities in respect of or in substitution for shares of Farmers and Merchants common stock, or sell, lease, mortgage or otherwise dispose of or otherwise encumber any asset having a book value in excess of $50,000 (other than in the ordinary course of business for reasonable and adequate consideration);
 
  except for purchases of U.S. Treasury securities or U.S. Government agency securities, which in either case have maturities of one year or less, purchase any securities or make any material investment, either by purchase of stock or securities, contributions to capital, asset transfer, or purchase of any assets, in any entity, or otherwise acquire direct or indirect control over any entity, other than in connection with:

-   foreclosures in the ordinary course of business, or
 
-   acquisitions of control by a depository institution subsidiary in its fiduciary capacity;

  any of the following:

-   make any new loans or extensions of credit or renew, extend or renegotiate any existing loans or extensions of credit:

(1)   with respect to properties or businesses outside of Farmers and Merchants current market area, or to borrowers whose principal residence is outside of Farmers and Merchants current market area,
 
(2)   that are unsecured in excess of $100,000, or
 
(3)   that are secured in excess of $500,000.

-   purchase or sell (except for sales of single-family residential first mortgage loans in the ordinary course of Farmers and Merchants’ business for fair market value) any whole loans, leases, mortgages or any loan participations or agented credits or other interest therein;
 
-   renew or renegotiate any loans or credits that are on any watch list and/or are classified or special mentioned or take any similar actions with respect to collateral held with respect to debts previously contracted or other real estate owned, except pursuant to safe and sound banking practices and with prior disclosure to Capital City Bank;
 
-   Farmers and Merchants may, however, without the prior notice to or written consent of Capital City, renew or extend existing credits on substantially similar terms and conditions as present at the time such credit was made or last extended,

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    renewed or modified, for a period not to exceed one year and at rates not less than market rates for comparable credits and transactions and without any release of any collateral except as Farmers and Merchants is presently obligated under existing written agreements kept as part of Farmers and Merchants’ official records;

  grant any increase in compensation or benefits to the employees or officers of Farmers and Merchants, except in accordance with past practice previously disclosed to Capital City by Farmers and Merchants 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 the Agreement and Plan of Merger and previously disclosed to Capital City by Farmers and Merchants; enter into or amend any severance agreements with officers of Farmers and Merchants; grant any increase in fees or other increases in compensation or other benefits to directors of Farmers and Merchants; or voluntarily accelerate the vesting of any stock options or other stock-based compensation or employee benefits or other equity rights;
 
  enter into or amend any employment contract between Farmers and Merchants and any person (unless such amendment is required by law) that Farmers and Merchants 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 of the merger;
 
  adopt any new employee benefit plan of Farmers and Merchants or terminate or withdraw from, or make any material change in or to, any existing employee benefit plans of Farmers and Merchants 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;
 
  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 accounting principles generally accepted in the United States;
 
  commence any litigation other than in accordance with past practice, or settle any litigation involving any liability of Farmers and Merchants for material money damages or restrictions upon the operations of Farmers and Merchants; or
 
  except in the ordinary course of business, enter into, modify, amend or terminate any material contract calling for payments exceeding $50,000 or waive, release, compromise or assign any material rights or claims.

          The Agreement and Plan of Merger also provides that from the date of the Agreement and Plan of Merger until the earlier of the effective time of the merger or the termination of the Agreement and Plan of Merger, unless Farmers and Merchants has given prior written consent, and except as otherwise expressly contemplated by the Agreement and Plan of Merger, Capital City will not amend the Articles of Incorporation or Bylaws of Capital City in any manner adverse to the holders of Farmers and Merchants common stock.

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Management and Operations after the Merger; Interests of Certain Persons in the Merger

          Following the merger, Farmers and Merchants will be merged with and into Capital City Bank. Certain members of Farmers and Merchants’ management and the Farmers and Merchants Board of Directors have interests in the merger in addition to their interests as shareowners of Farmers and Merchants generally. These include, among other things, provisions in the Agreement and Plan of Merger relating to indemnification of directors and officers and eligibility for certain Capital City employee benefits.

          Indemnification and Advancement of Expenses. With respect to all claims brought during the period of three years after the effective time of the merger, the Agreement and Plan of Merger provides that Capital City will indemnify, defend and hold harmless the present and former directors, officers and employees of Farmers and Merchants against all liabilities arising out of actions or omissions arising out of the Indemnified Party’s service as a director, officer or employee of Farmers and Merchants or, at Farmers and Merchants’ request, of another corporation, partnership, joint venture, trust or other enterprise occurring at or prior to the effective time of the merger (including the transactions contemplated by the Agreement and Plan of Merger) to the fullest extent permitted under Florida law. Without limiting the foregoing, in any case in which approval by Capital City is required to effectuate any indemnification, Capital City shall direct, at the election of the indemnified party, that the determination of any such approval will be made by independent counsel mutually agreed upon between Capital City and the indemnified party.

          Capital City shall, to the extent available (and Farmers and Merchants shall cooperate prior to the effective time of the merger in these efforts), maintain in effect for a period of three years after the effective time of the merger Farmers and Merchants’ existing directors’ and officers’ liability insurance policy provided that Capital City may substitute therefor:

  policies of at least the same coverage and amounts containing terms and conditions which are substantially no less advantageous, or
 
  with the consent of Farmers and Merchants given prior to the effective time of the merger, any other policy with respect to claims arising from facts or events that occurred prior to the effective time of the merger and covering persons who are currently covered by such insurance;

provided that Capital City will not be obligated to make aggregate premium payments for such three-year period in respect of such policy (or coverage replacing such policy) which exceed, for the portion related to Farmers and Merchants’ directors and officers, 125% of the annual premium payments on Farmers and Merchants’ current policy in effect as of the date of the Agreement and Plan of Merger.

          Other Matters Relating to Employee Benefit Plans. The Agreement and Plan of Merger also provides that, following the effective time of the merger, Capital City will provide generally to officers and employees of Farmers and Merchants employee benefits under employee benefit and welfare plans (other than stock option or other plans involving the potential issuance of Capital City common stock), on terms and conditions which when taken as a whole are substantially similar to those currently provided by the Capital City entities to their similarly

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situated officers and employees. Capital City will waive any pre-existing condition exclusion under any employee health plan for which any employees and/or officers and dependents covered by Farmers and Merchants plans as of the effective time of the merger of Farmers and Merchants will become eligible by virtue of the preceding sentence, to the extent:

  the pre-existing condition was covered under the corresponding plan maintained by Farmers and Merchants, and
 
  the individual affected by the pre-existing condition was covered by Farmers and Merchants’ corresponding plan on the date which immediately precedes the effective time; provided further, however, that any portion of a pre-existing condition exclusion period imposed by a Capital City employee health plan will not be enforced to the extent it exceeds in duration any corresponding provision in effect under a Farmers and Merchants benefit plan immediately prior to closing. In addition, Capital City will credit Farmers and Merchants employees for amounts paid under Farmers and Merchants benefit plans for the applicable plan year that contains the closing date for purposes of applying deductibles, co-payments and out-of-pocket limitations under Capital City health plans.

          For purposes of participation and vesting (but not benefit accrual) under Capital City’s employee benefit plans, the service of the employees of Farmers and Merchants prior to the effective time of the merger will be treated as service with a Capital City entity participating in such employee benefits plans.

          Capital City, Capital City Bank and Farmers and Merchants expressly agreed that Capital City and Capital City Bank will not adopt or maintain the Farmers and Merchants Profit Sharing Plan for the benefit of any employee previously or currently employed by Farmers and Merchants. As of the closing date, each Farmers and Merchants Profit Sharing Plan participant will cease to accrue any benefits under the Farmers and Merchants Profit Sharing Plan. Not less than three days prior to the closing date, Farmers and Merchants must have taken all steps necessary to terminate the Farmers and Merchants Profit Sharing Plan (or have taken all steps necessary to terminate the participation of any other entity in the Farmers and Merchants Profit Sharing Plan). In connection with the foregoing, Farmers and Merchants will cause each adopting employer of the Farmers and Merchants Profit Sharing Plan to adopt appropriate resolutions:

  authorizing and directing the termination of (or the termination of participation in) the Farmers and Merchants Profit Sharing Plan,
 
  fully vesting each participant’s account balances within the Farmers and Merchants Profit Sharing Plan,
 
  prohibiting contributions with respect to all periods after the Farmers and Merchants Profit Sharing Plan’s termination date, and
 
  requiring the officers of each adopting employer to provide each participant with a notice of termination with respect to the Farmers and Merchants Profit Sharing Plan prior to the closing date.

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          In addition, Farmers and Merchants will cause the employers that have adopted the Farmers and Merchants Profit Sharing Plan to prepare and adopt, not less than three days prior to the closing date, an amendment to the Farmers and Merchants Profit Sharing Plan that will provide for all necessary and appropriate modifications to the terms of the Farmers and Merchants Profit Sharing Plan in order to provide for the termination of contributions, fully-vested account balances, and the distribution of account balances after a favorable determination letter has been obtained from the Internal Revenue Service with respect to the termination of the Farmers and Merchants Profit Sharing Plan. Farmers and Merchants, Capital City, and Capital City Bank agree to request a favorable determination letter from the Internal Revenue Service with respect to such termination, and to facilitate distributions to participants in accordance with the requirements of applicable Treasury Regulations after they have received a favorable determination letter. Not less than three days prior to the closing, Farmers and Merchants will provide Capital City and Capital City Bank with copies of all documentation associated with the termination of the Farmers and Merchants Profit Sharing Plan.

          Farmers and Merchants will freeze the Farmers and Merchants Bank Dublin Defined Benefit Pension Plan effective as of the closing date so that no new participant may thereafter enter the Defined Benefit Plan and so that benefit accruals cease as to existing participants from and after the closing date. In connection with the foregoing, Farmers and Merchants shall cause each adopting employer of the Defined Benefit Plan to adopt appropriate resolutions authorizing and directing the freezing of the Defined Benefit Plan and requiring the officers of each adopting employer to provide each participant with a notice of termination with respect to the freezing of the Defined Benefit Plan at least fifteen days prior to the closing date. In addition, Farmers and Merchants will cause the employers that have adopted the Defined Benefit Plan to prepare and adopt, not later than the closing date, an amendment to the Defined Benefit Plan that will provide for all necessary and appropriate modifications to the terms of the Defined Benefit Plan in order to provide for the freezing, as contemplated in this paragraph. Not later than three days prior to the closing date, Farmers and Merchants will provide Capital City and Capital City Bank with copies of all documentation associated with the freezing of the Defined Benefit Plan.

          Farmers and Merchants will take all actions reasonably necessary prior to the closing date to satisfy applicable Treasury Regulations that apply to the lump sum distribution paid from the Defined Benefit Plan on or about December 31, 2003. Such actions will include any and all actions by Farmers and Merchants that may be necessary, including, but not limited to, those contemplated by IRS Revenue Procedure 2003-44 and, if and to the extent applicable, the filing of any report to the Pension Benefit Guaranty Corporation under PBGC Regulations Section 4043.27, unless an appropriate exemption from filing is available. Farmers and Merchants will consult with Capital City prior to taking any such actions and shall provide for Capital City’s input in connection with any IRS or PBGC submissions, filings, or applications, and will provide Capital City at closing with documentation of the actions ultimately implemented.

          Although the actuarial valuation for the Defined Benefit Plan as of January 1, 2004 has not been completed as of the date of the Agreement and Plan of Merger, Farmers and Merchants expects that as of January 1, 2004, the current liability under the Defined Benefit Plan as of that date will be in excess of its assets. Subject to any limitations under the Internal Revenue Code governing the amount of deductible contributions to a tax-qualified pension plan like the Defined Benefit Plan, Farmers and Merchants will make one or more contributions to the Defined Benefit Plan prior to the closing date that, in the aggregate, equal or exceed the amount by which the

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current liability, determined as of a date prior to the closing date that is mutually agreed to by the parties, exceeds the value of the assets of the Defined Benefit Plan as of such date. In making such determination, the actuary for the Defined Benefit Plan will assume that the plan has been frozen, as contemplated above. Farmers and Merchants shall provide Capital City with a copy of the January 1, 2004 actuarial valuation as soon as practicable following its issuance and will provide Capital City at closing with documentation of the contributions it makes to the Defined Benefit Plan from January 1, 2004 through the Closing Date.

Certain Federal Income Tax Consequences

          This section summarizes the material anticipated federal income tax consequences of the merger for shareowners who do not execute dissenter’s rights. This summary is based on the federal income tax laws now in effect. It does not take into account possible changes in these laws or interpretations, including amendments to applicable statutes or regulations or changes in judicial decisions or administrative rulings, some of which may have retroactive effect. This summary does not purport to address all aspects of the possible federal income tax consequences of the merger and is not intended as tax advice to any person. This summary does not address the federal income tax consequences of the merger to shareowners in light of their particular circumstances or status (for example, as foreign persons, tax-exempt entities, dealers in securities, and insurance companies, among others), nor does this summary address any consequences of the merger under any state, local, estate, or foreign tax laws. You are urged to consult your own tax advisers as to the specific tax consequences of the merger to you, including tax return reporting requirements, the application and effect of federal, foreign, state, local, and other tax laws, and the implications of any proposed changes in the tax laws.

          The parties to the merger have not required, and will not request, a federal income tax ruling from the Internal Revenue Service (“IRS”) as to the tax consequences of the merger. Instead, Gunster, Yoakley & Stewart, P.A., counsel to Capital City, will render an opinion to Capital City and Farmers and Merchants concerning the material federal income tax consequences of the proposed merger under federal income tax law. It is such firm’s opinion, based upon the assumption that the merger is consummated in accordance with the Agreement and Plan of Merger and the accuracy of representations made by the management of Capital City and Farmers and Merchants, that the merger will constitute a reorganization within the meaning of Section 368(a) of the Code, and that neither Capital City nor Farmers and Merchants will recognize gain or loss by reason of the merger.

          Assuming the merger qualifies as a reorganization pursuant to Section 368(a) of the Code, the shareowners of Farmers and Merchants will have the following federal income tax consequences:

  Farmers and Merchants shareowners will recognize gain (but not loss) from the exchange, but not in excess of the cash received; the computation of gain is made on a share by share basis; it is not anticipated that any portion of such gain will be characterized as a dividend;
 
  the basis of the Capital City common stock received by the Farmers and Merchants shareowners in the merger will, in each instance, be the same as the basis of the Farmers

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    and Merchants common stock surrendered in exchange therefor, (i) decreased by the cash received and (ii) increased by the gain recognized in the exchange;
 
  the holding period of the Capital City common stock received by the Farmers and Merchants shareowners will, in each instance, include the period during which the Farmers and Merchants common stock surrendered in exchange therefor was held, provided that the Farmers and Merchants common stock was held as a capital asset on the date of the exchange; and
 
  the payment of cash to Farmers and Merchants shareowners in lieu of fractional shares of Capital City common stock will be treated for federal income tax purposes as if the fractional shares were distributed as part of the exchange and then were redeemed by Capital City; it is anticipated that any gain or loss recognized upon such exchange will be capital gain or loss (rather than a dividend), provided the fractional share constitutes a capital asset in the hands of the exchanging shareowner.

          Each Farmers and Merchants shareowner who receives Capital City common stock in the merger will be required to attach to his or her federal income tax return for the year of the merger a complete statement of all facts pertinent to the non-recognition of gain, including the shareowner’s basis in the Farmers and Merchants common stock exchanged, and the number of shares of Capital City common stock and cash received in exchange for Farmers and Merchants common stock. Each shareowner should also keep as part of such shareowner’s permanent records information necessary to establish such shareowner’s basis in, and holding period for, the Capital City common stock received in the merger.

Accounting Treatment

          The merger will be accounted for as a “purchase,” as that term is used under accounting principles generally accepted in the United States, for accounting and financial reporting purposes. Under purchase accounting, the assets and liabilities of Farmers and Merchants as of the effective time of the merger will be recorded at their respective fair values and added to those of Capital City. Any excess of purchase price over the fair values is recorded as goodwill. Financial statements of Capital City issued after the merger would reflect such fair values and would not be restated retroactively to reflect the historical financial position or results of operations of Farmers and Merchants.

          There are certain conditions on the exchange of Farmers and Merchants common stock for Capital City common stock by affiliates of Farmers and Merchants, and there are certain restrictions on the transferability of the Capital City common stock received by those affiliates. See “– Resales of Capital City Common Stock,” on page 50.

Expenses and Fees

          The Agreement and Plan of Merger provides that each of the parties will bear and pay all direct costs and expenses incurred by it or on its behalf in connection with the transactions contemplated by the Agreement and Plan of Merger, including filing, registration and application fees, printing fees, and fees and expenses of financial or other consultants, investment bankers, accountants, and counsel, except that each of the parties shall bear and pay one-half of the filing

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fees payable, and printing costs incurred, in connection with the registration statement of which this Proxy Statement/Prospectus is a part.

          In the event that Farmers and Merchants terminates the Agreement and Plan of Merger by entering into a definitive agreement with respect to the sale of Farmers and Merchants to any person or entity who or which has made a proposal to acquire Farmers and Merchants, Farmers and Merchants will pay Capital City $3,200,000 for losses and damages of Capital City incurred in connection with the merger.

Resales of Capital City Common Stock

          The Capital City common stock issued to shareowners of Farmers and Merchants in connection with the merger will be registered under the Securities Act of 1933, as amended (the “Securities Act”), and will be freely transferable by those shareowners of Farmers and Merchants and Capital City not considered to be “Affiliates” of Farmers and Merchants or Capital City. “Affiliates” generally are defined as persons or entities who control, are controlled by, or are under common control with Farmers and Merchants or Capital City (generally, directors, executive officers and 10% shareowners).

          Rules 144 and 145 under the Securities Act restrict the sale of Capital City common stock received in the merger by Affiliates and certain of their family members and related interests. Generally speaking, during the one-year period following the effective time of the merger, Affiliates of Farmers and Merchants may resell publicly the Capital City common stock received by them in the merger within certain limitations as to the amount of Capital City common stock sold in any three-month period and as to the manner of sale. After this one-year period, Affiliates of Farmers and Merchants who are not Affiliates of Capital City may resell their shares without restriction. The ability of Affiliates to resell shares of Capital City common stock received in the merger under Rule 144 or 145 as summarized in this Proxy Statement/Prospectus generally will be subject to Capital City’s having satisfied its reporting requirements under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) for specified periods prior to the time of sale. Affiliates also would be permitted to resell Capital City common stock received in the merger pursuant to an effective registration statement under the Securities Act or an available exemption from the Securities Act registration requirements. This Proxy Statement/Prospectus does not cover any resales of Capital City common stock received by persons who may be deemed to be Affiliates of Farmers and Merchants or Capital City.

          Farmers and Merchants has caused each person Farmers and Merchants reasonably believes to be an Affiliate of Farmers and Merchants to sign and deliver to Capital City an agreement providing that such Affiliate will not sell, pledge, transfer, or otherwise dispose of any Capital City common stock obtained as a result of the merger except in compliance with the Securities Act and the rules and regulations of the SEC. The certificates representing Capital City common stock issued to Affiliates in the merger may bear a legend summarizing these restrictions. See “– Conditions to Consummation of the Merger,” on page 34.

          The receipt of the Farmers and Merchants Affiliate Agreements by Capital City is a condition to Capital City’s obligations to consummate the merger.

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DESCRIPTION OF CAPITAL CITY CAPITAL STOCK

          Capital City is authorized to issue 90,000,000 shares of Capital City common stock ($.01 par value per share), of which [   ] shares were issued and outstanding as of the record date. Capital City is also authorized to issue 3,000,000 shares of Capital City preferred stock ($.01 par value per share), none of which is issued and outstanding.

          Holders of Capital City common stock are entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefor. The ability of Capital City to pay dividends is affected by the ability of its subsidiary depository institution to pay dividends. The approval of the Florida Department of Financial Services is required if the total of all dividends declared by Capital City’s subsidiary bank, Capital City Bank, in any calendar year exceeds Capital City Bank’s net profits (as defined in the Florida Statutes) for that year combined with its retained net profits for the preceding two calendar years. In 2004, Capital City Bank may declare dividends without regulatory approval of $24.7 million plus an additional amount equal to the net profits of Capital City Bank for 2004 up to the date of any such dividend declaration. See “BUSINESS – Supervision and Regulation – The Bank – Dividends” and “NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Note 15 – Dividend Restrictions” in Capital City’s 2003 Form 10-K.

          For a further description of Capital City capital stock, See “EFFECT OF THE MERGER ON RIGHTS OF SHAREOWNERS – Authorized Capital Stock,” on page 52.

EFFECT OF THE MERGER ON RIGHTS OF SHAREOWNERS

          In the merger, shareowners of Farmers and Merchants will exchange their shares of Farmers and Merchants for shares of Capital City. Farmers and Merchants is a Georgia chartered commercial bank headquartered in Dublin, Georgia and is governed by Georgia law and the Charter Application and Bylaws, as amended, adopted by Farmers and Merchants. Capital City is a registered bank holding company headquartered in Tallahassee, Florida and is governed by Florida law and Capital City’s Articles of Incorporation and Bylaws, as amended. There are significant differences between the rights of Farmers and Merchants’ shareowners and Capital City shareowners. The following is a summary of the principal differences between the current rights of Farmers and Merchants’ shareowners and those of Capital City’s shareowners.

          The following summary is not intended to be complete and is qualified in its entirety by reference to the Financial Institutions Code of Georgia, the Georgia Business Corporation Code and the Florida Act, as well as the Charter Application or Articles of Incorporation and Bylaws, as amended, of Farmers and Merchants and Capital City.

Anti-Takeover Provisions Generally

          Capital City’s Articles of Incorporation and Bylaws contain certain provisions designed to assist the Capital City Board of Directors in playing a role if any group or person attempts to acquire control of Capital City so that the Capital City Board of Directors can protect the interests of Capital City and its shareowners under the circumstances. These provisions may help the Capital City Board of Directors determine that a sale of control is in the best interests of Capital City’s shareowners, or enhance the Capital City Board of Directors’ ability to maximize

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the value to be received by the shareowners upon a sale of control of Capital City. In addition, as of [   ], 2004, William G. Smith, Jr., President and Chief Executive Officer of Capital City, and his brother, Robert Hill Smith, Vice President of Capital City, together beneficially owned approximately [   ]% of Capital City’s outstanding common stock. Such ownership could also have the effect of deterring takeover proposals.

          Although Capital City’s management believes that these provisions are beneficial to Capital City’s shareowners, they also may tend to discourage some takeover bids. As a result, Capital City’s shareowners may be deprived of opportunities to sell some or all of their shares at prices that represent a premium over prevailing market prices. On the other hand, defeating undesirable acquisition offers can be a very expensive and time-consuming process. To the extent that these provisions discourage undesirable proposals, Capital City may be able to avoid those expenditures of time and money.

          These provisions also may discourage open market purchases by a company that may desire to acquire Capital City. Those purchases may increase the market price of Capital City common stock temporarily, and enable shareowners to sell their shares at a price higher than they might otherwise obtain. In addition, these provisions may decrease the market price of Capital City common stock by making the stock less attractive to persons who invest in securities in anticipation of price increases from potential acquisition attempts. The provisions also may make it more difficult and time consuming for a potential acquiror to obtain control of Capital City by replacing the Board of Directors and management. Furthermore, the provisions may make it more difficult for Capital City’s shareowners to replace the Board of Directors or management, even if a majority of the shareowners believes that replacing the Board of Directors or management is in the best interests of Capital City. Because of these factors, these provisions may tend to perpetuate the incumbent Board of Directors and management. For more information about these provisions, see “– Authorized Capital Stock,” on page 52, “– Amendment of Articles of Incorporation and Bylaws,” on page 53, “– Classified Board of Directors and Absence of Cumulative Voting,” on page 55, “– Director Removal and Vacancies,” on page 56, “– Indemnification,” on page 56, “– Ability of Directors to Consider Interests Other than Shareowner Interests” on page 60, “– Actions by Shareowners Without a Meeting,” on page 61, “– Shareowner Nominations,” on page 61.

Authorized Capital Stock

          Capital City. Capital City’s Articles of Incorporation authorize the issuance of up to (1) 90,000,000 shares of Capital City $.01 par value common stock, of which [        ] shares were issued and outstanding as of the record date, and (2) 3,000,000 shares of $.01 par value preferred stock, of which no shares are issued. Capital City’s Board of Directors may authorize the issuance of additional shares of Capital City common stock without further action by Capital City’s shareowners, unless such action is required in a particular case by applicable laws or regulations or by any stock exchange upon which Capital City’s capital stock may be listed. Capital City’s shareowners do not have the preemptive right to purchase or subscribe to any unissued authorized shares of Capital City common stock or any option or warrant for the purchase thereof.

          Capital City’s Board of Directors may issue, without any further action by the shareowners, shares of Capital City preferred stock, in one or more classes or series, with such

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voting, conversion, dividend, redemption and liquidation rights as the Board may specify. In establishing and issuing shares of Capital City preferred stock, Capital City’s Board of Directors may designate that Capital City preferred stock will vote as a separate class on any or all matters, thus diluting the voting power of the Capital City common stock. The existence of this ability could render more difficult or discourage an attempt to gain control of Capital City by means of a tender offer, merger, proxy contest or otherwise. The Board also may designate that Capital City preferred stock will have dividend rights that are cumulative and that receive preferential treatment compared to Capital City common stock, and that Capital City preferred stock will have liquidation rights with priority over Capital City common stock in the event of Capital City’s liquidation. The Board of Directors also may designate whether or not Capital City preferred stock shall be subject to the operation of retirement or sinking funds to be applied to the purchase or redemption of such preferred shares, and the terms and provisions relative to the operation thereof.

          Subject to the payment of cash in lieu of fractional shares and payments made to dissenting shareowners, Capital City will issue an estimated [        ] shares of Capital City common stock in the merger. Based on the number of shares of Capital City common stock outstanding on the record date, it is anticipated that, following the consummation of the merger, a minimum of approximately [        ] and a maximum of approximately [        ] shares of Capital City common stock will be outstanding.

          The authority to issue additional shares of Capital City common stock provides Capital City with the flexibility necessary to meet its future needs without the delay resulting from seeking shareowner approval. The authorized but unissued shares of Capital City common stock will be issuable from time to time for any corporate purpose, including, without limitation, stock splits, stock dividends, employee benefit and compensation plans, acquisitions, and public or private sales for cash as a means of raising capital. Such shares could be used to dilute the stock ownership of persons seeking to obtain control of Capital City. In addition, the sale of a substantial number of shares of Capital City common stock to persons who have an understanding with Capital City concerning the voting of such shares, or the distribution or declaration of a dividend of shares of Capital City common stock (or the right to receive Capital City common stock) to Capital City shareowners, may have the effect of discouraging or increasing the cost of unsolicited attempts to acquire control of Capital City.

          Farmers and Merchants. Farmers and Merchants is currently authorized to issue 50,000 shares of Farmers and Merchants $20.00 par value common stock, of which all 50,000 are outstanding as of the record date. Farmers and Merchants has no other classes of authorized capital stock. Farmers and Merchants shareowners do generally have the preemptive right to purchase or subscribe to any unissued authorized shares of Farmers and Merchants common stock, subject to the limitation set forth in Section 7-1-431 of the Financial Institutions Code of Georgia.

Amendment of Articles of Incorporation and Bylaws

          Capital City. Capital City’s Articles of Incorporation provide that the affirmative vote of the holders of at least two-thirds of all the issued and outstanding voting shares of capital stock is required to amend them. However, if such amendment has received the prior approval by an affirmative vote of a majority of “Disinterested Directors,” as defined in Section 607.0901(1)(h),

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Florida Statutes, then the affirmative vote of the holders of a majority of all the shares of capital stock of Capital City issued and outstanding and entitled to vote, or such greater percentage approval as is required by Florida law, is sufficient to amend the Articles. A “Disinterested Director” is defined in Section 607.0901(1)(h), Florida Statutes, as:

  any member of the Board of Directors who was a member of the Board of Directors before the later of January 1, 1987, or the date on which an interested shareowner became an interested shareowner; and
 
  any member of the Board of Directors who was recommended for election by, or was elected to fill a vacancy and received the affirmative vote of, a majority of the Disinterested Directors then on the Board.

          Subject to certain restrictions set forth below, either the Board of Directors or the shareowners of Capital City may amend Capital City’s Bylaws by majority vote. The Board of Directors may amend the Bylaws and adopt new Bylaws provided that:

  the Board of Directors may not alter, amend or repeal any bylaw adopted by shareowners if the shareowners specifically provide that such bylaw is not subject to amendment or repeal by the Board; and
 
  in the case of any shareowner action, two-thirds of the shareowners, acting only by voting at a special meeting, is required to amend any bylaw provision pertaining to:

-   meetings of shareowners,
 
-   directors,
 
-   indemnification of directors, officers and employees, and
 
-   amendments.

          Farmers and Merchants. Farmers and Merchant’s Charter Application is silent as to any vote requirement to amend such charter. Accordingly, amendments to the Farmers and Merchants Charter Application are subject to the Financial Institutions Code of Georgia as it relates to amendments made to articles of incorporation for Georgia state banks. The Financial Institutions Code of Georgia references the Georgia Business Corporation Code regarding the amendment of a bank’s articles of incorporation and bylaws. The Georgia Business Corporation Code provides that other than in the case of certain routine amendments which may be made by the corporation’s Board of Directors without shareowner action (such as changing the corporate name), and other amendments which the Georgia Business Corporation Code specifically allows without shareowner action, an amendment to a corporation’s articles requires the affirmative vote of a majority of the issued and outstanding shares of each voting group.

          The Farmers and Merchants Bylaws may be amended by the affirmative vote of a majority of the shareowners at an annual meeting or at a special meeting; provided, however, that, if such action is to be taken at a meeting of the shareowners, notice of the proposed amendment to the Bylaws shall be given in the notice of meeting. The notice must set forth the exact text of the proposed amendment. If notice of the proposed amendment to the Bylaws is not

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given in the notice of meeting, the Bylaws may be amended by the affirmative vote of three-fourths of the shareowners at an annual meeting or special meeting where a quorum is present. Without limiting the generality of the foregoing, no amendment to the Bylaws shall affect the term of office for which the Directors of Farmers and Merchants then holding office have been elected.

Classified Board of Directors and Absence of Cumulative Voting

          Capital City. Capital City’s Articles of Incorporation provide that Capital City’s Board of Directors is divided into three classes, with each class to be as nearly equal in number as possible. The term of the Class I directors terminates on the date of the 2007 annual meeting of shareowners, the term of the Class II directors terminates on the date of the 2005 annual meeting of shareowners and the term of the Class III directors terminates on the date of the 2006 annual meeting of shareowners. At each annual meeting of shareowners, successors to the class of directors whose term expires at that annual meeting are to be elected for a three-year term. The effect of Capital City having a classified Board of Directors is that only approximately one-third of the members of the Board is elected each year, which effectively requires two annual meetings for Capital City’s shareowners to change a majority of the members of the Board of Directors. The purpose of dividing Capital City’s Board of Directors into classes is to facilitate continuity and stability of leadership of Capital City by ensuring that experienced personnel familiar with Capital City will be represented on Capital City’s Board of Directors at all times, and to permit Capital City’s management to plan for the future for a reasonable time. However, by potentially delaying the time within which an acquiror could obtain working control of the Board of Directors, this provision may discourage some potential mergers, tender offers, or takeover attempts.

          Pursuant to the Capital City Bylaws, each shareowner is entitled to one vote for each share of Capital City common stock held and is not entitled to cumulative voting rights in the election of directors. With cumulative voting, a shareowner has the right to cast a number of votes equal to the total number of such holder’s shares multiplied by the number of directors to be elected. The shareowner has the right to distribute all of his or her votes in any manner among any number of candidates or to accumulate such shares in favor of one candidate. Directors are elected by a plurality of the total votes cast by the shares entitled to vote in the election. With cumulative voting, it may be possible for minority shareowners to obtain representation on the Board of Directors. Without cumulative voting, the holders of more than 50% of the shares of Capital City common stock generally have the ability to elect 100% of the directors. As a result, the holders of the remaining Capital City common stock effectively may not be able to elect any person to the Board of Directors. The absence of cumulative voting thus could make it more difficult for a shareowner who acquires less than a majority of the shares of Capital City common stock to obtain representation on Capital City’s Board of Directors.

          Farmers and Merchants. In accordance with the Financial Institutions Code of Georgia, each director of Farmers and Merchants is subject to annual elections. In addition, pursuant to Farmers and Merchants’ Bylaws, Farmers and Merchants shareowners do not have cumulative voting rights.

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Director Removal and Vacancies

          Capital City. Capital City’s Articles of Incorporation provide that:

  a director may be removed by the shareowners upon the affirmative vote of the holders of two-thirds of the voting power of all shares of capital stock entitled to vote generally in the election of directors; and
 
  subject to the rights of the holders of any series of preferred stock, then outstanding vacancies on the Board of Directors may be filled only by the affirmative vote of a majority of the remaining directors.

          The purpose of this provision is to prevent a majority shareowner from circumventing the classified board system by removing directors and filling the vacancies with new individuals selected by that shareowner. Accordingly, the provision may have the effect of impeding efforts to gain control of the Board of Directors by anyone who obtains a controlling interest in Capital City common stock. The term of a director appointed to fill a vacancy shall coincide with the term of the class of which such director shall have been elected.

          Farmers and Merchants. Farmers and Merchants’ Bylaws do not provide for the removal of a director by the shareowners or directors of Farmers and Merchants. The Financial Institutions Code of Georgia references the Georgia Business Corporation Code regarding the requirements for the removal of a director. Pursuant to the Georgia Business Corporation Code, the shareowners may remove, with or without cause, the entire board of directors or an individual director.

          Farmers and Merchants’ Bylaws also provide that if any vacancy shall occur among the directors for any reason, the vacancy may be filled by a majority vote of the remaining directors pending the next annual meeting of the shareowners.

Indemnification

          Capital City. The Florida Act provides that a director, officer, employee or other agent of a Florida corporation:

  shall be indemnified by the corporation for all expenses of such litigation actually and reasonably incurred when he or she is successful on the merits on any legal proceeding;
 
  may be indemnified by the corporation for liability incurred in connection with such legal proceedings (other than a derivative suit), even if he or she is not successful on the merits, if he or she acted in good faith and in a manner reasonably believed to be in the best interest of the corporation (and in the case of a criminal preceding, he or she had no reasonable cause to believe that such conduct was unlawful); and
 
  may be indemnified by the corporation for expenses of a derivative suit (a suit by a shareowner alleging a breach by a director or officer of a duty owed to the corporation) and amounts paid in settlement not to exceed, in the judgment of the Board of Directors, the estimated costs and expenses of litigating the proceeding to conclusion, even if he or

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    she is not successful on the merits, if he or she acted in good faith and in a manner he or she reasonably believed to be in the best interest of the corporation and the shareowners. If he or she is adjudged liable in the performance of his or her duties to the corporation, indemnification may be made in accordance with this paragraph if and only to the extent that a court determines that in view of all of the circumstances, he or she is fairly and reasonably entitled to indemnification for expenses to the extent permitted by such court.

          The indemnification described in the second and third bullet-points above will be made only upon a determination by:

  a majority of a quorum of disinterested directors;
 
  if a quorum of disinterested directors is not obtainable, or even if obtainable, by majority vote of a committee duly designated by the Board of Directors (in which directors who are parties may participate) consisting solely of two or more directors who are not at the time parties to the proceeding;
 
  independent legal counsel in a written opinion;
 
  the shareowners (excluding the shares owned by the person seeking indemnification); or
 
  the court in which the proceeding is or was pending, if indemnification is proper under the circumstances because the applicable standard of conduct has been met.

          The Board of Directors may authorize the advancement of litigation expenses to a director or officer upon receipt of an undertaking by the director or officer to repay such expenses if it is ultimately determined that he or she is not entitled to be indemnified for them.

          The Florida Act’s statutory scheme of indemnification is not exclusive and allows expanded indemnification by bylaw, agreement, vote of shareowners or disinterested directors, or otherwise if the Articles of Incorporation are amended to permit expanded indemnification. Notwithstanding the expansion of indemnification rights, the Florida Act does not permit indemnification for:

  acts or omissions that involve a violation of the criminal law, unless the director, officer employee or agent had reasonable cause to believe his or her conduct was lawful or had no reasonable cause to believe his or her conduct was unlawful;
 
  any transaction from which a director, officer or agent derived an improper personal benefit;
 
  willful misconduct that shows a conscious disregard for the best interest of the corporation in a proceeding by or in the right of the corporation to procure a judgment in its favor or in a proceeding by or in the right of a shareowner; or
 
  approving an improper distribution to shareowners.

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          Capital City’s Bylaws provide for the mandatory indemnification of any of its officers and directors for costs and expenses actually and reasonably incurred in connection with a legal proceeding, including amounts paid in settlement of such a proceeding, to the fullest extent permitted by the Florida Act, and requires advancement of such costs and other expenses during pending proceedings. The Board of Directors has discretionary ability to provide indemnification with respect to other persons, such as agents and employees.

          Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, or persons controlling Capital City pursuant to the foregoing provisions, Capital City has been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

          Farmers and Merchants. The Financial Institutions Code of Georgia references the Georgia Business Corporation Code regarding indemnification of directors and officers. The Georgia Business Corporation Code provides that a director or officer of a Georgia bank:

  shall be indemnified by the bank for reasonable expenses incurred in connection with a proceeding when he or she is wholly successful, on the merits or otherwise, in the defense of any proceeding to which he or she is a party because he or she was a director or officer of the bank; and
 
  may be indemnified by the bank against liability incurred in the proceeding if he or she is a party to the proceeding because he or she is or was a director or officer if such individual conducted himself or herself in good faith and such individual reasonably believed, in the case of conduct in his or her official capacity, that such conduct was in the best interest of the bank and, in all other cases, that such conduct was at least not opposed to the best interest of the bank and, in the case of criminal proceedings, such individual had no reasonable cause to believe such conduct was unlawful.

          Indemnification pursuant to the Georgia Business Corporation Code will be made only upon a determination by:

  the Board of Directors, if there are two or more disinterested directors, by a majority vote of all disinterested directors (a majority of whom for such purpose shall constitute a quorum) or by a majority of the members of a committee of two or more disinterested directors appointed by such a vote;
 
  by special legal counsel, selected by the Board of Directors, if there are two or more disinterested directors or by a majority of the members of a committee of two or more disinterested directors;
 
  by the shareowners, but shares owned by or voted under the control of a director who at the time does not qualify as a disinterested director may not be voted in the determination; or
 
  the court in which the proceeding is or was pending, if indemnification is fair and reasonable under the circumstances, even if the director has not met the relevant standard of conduct.

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          The Board of Directors or shareowners may, before final disposition of a proceeding and in accordance with the bullet points above, authorize the bank to advance funds to pay for or reimburse the reasonable expenses incurred by an officer or director upon receipt of an affirmation by the director or officer of his or her good faith belief that he or she met the relevant standard of conduct described in the bullet points above and an undertaking to repay any funds advanced if it is determined that the director or officer is not entitled to indemnification.

          The Georgia Business Corporation Code’s statutory scheme of indemnification is not exclusive and allows expanded indemnification by the articles of incorporation, bylaws, contract or resolution approved or ratified by the shareowners by a majority of the votes entitled to be cast, but shares owned or voted under the control of a director who at the time does not qualify as a disinterested director with respect to any existing or threatened proceeding that would be covered by the authorization may not be voted on the authorization. A bank can reimburse and indemnify litigation liabilities and expenses of directors, officers and employees pursuant to agreements with them or otherwise and can purchase and maintain liability insurance for them, unless otherwise limited by the Georgia Business Corporation Code.

          The Articles of Incorporation of Farmers and Merchants provide that a director of Farmers and Merchants shall not be personally liable to the shareowners of Farmers and Merchants for monetary damages for breach of fiduciary duty, duty of care or other duty as a director owed to the shareowners of Farmers and Merchants. Any repeal or modification of such provision in the Articles of Incorporation by the shareowners of Farmers and Merchants would not adversely affect any right or protection of a director existing at the time of such repeal or modification.

          If a bank indemnifies or advances expenses to a director or officer in connection with a proceeding by or in the right of the bank, the bank must report the indemnification or advance in writing to the shareowners with or before the notice of the next shareowners’ meeting.

          Pursuant to the Georgia Business Corporation Code and the Articles of Incorporation of Farmers and Merchants, a bank may not indemnify the director or officer for any liability incurred in a proceeding in which the director is adjudged liable to the bank or is subject to injunctive relief in favor of the corporation:

  for any appropriation, in violation of the director or officer’s duties, of any business opportunity of the bank;
 
  for acts or omissions which involve intentional misconduct or a knowing violation of the law;
 
  voting or assenting to an unlawful distribution to shareowners; or
 
  any transaction from which the director or officer received an improper personal benefit.

Special Meetings of Shareowners

          Capital City. Capital City’s Bylaws provide that special meetings of the shareowners shall be held:

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  when directed by the Board of Directors through a resolution adopted by a majority of the total number of directors (whether or not any vacancies of previously authorized directorships exist at the time the Board is presented with such resolution); or
 
  when requested in writing and upon appropriate notice by the holders of not less than 50% of all the shares entitled to vote on any issue at the meeting.

          As a result, this provision, taken together with the restriction on the removal of directors, would prevent a substantial shareowner who held less than 50% of Capital City’s common stock from compelling shareowner consideration of any proposal (such as a proposal for a merger) over the opposition of Capital City’s Board of Directors by calling a special meeting of shareowners at which such shareowner could replace the entire Board of Directors with nominees who were in favor of such proposal.

          Farmers and Merchants. Farmers and Merchants’ Bylaws provide that special meetings of the shareowners may be called at any time by a majority of the Board of Directors and as provided by Georgia law. The Financial Institutions Code of Georgia references the Georgia Business Corporation Code regarding special meetings of shareowners. The Georgia Business Corporation Code provides that a special meeting of the shareowners of a bank shall be held:

  on the call of the president, the chairman of the Board of Directors or the Board of Directors;
 
  on the call of the person or persons authorized to do so by the Articles of Incorporation or Bylaws;
 
  on the demand of holders of at least 25% (or such lesser or greater amount provided in the Bylaws or Articles of Incorporation) of all votes entitled to be cast on any issue to be considered at the Special Meeting; or
 
  on the order of the superior court of the county where a bank’s office is located on application of the shareowners of the bank if an annual meeting has not been called and held during any calendar year.

Ability of Directors to Consider Interests Other Than Shareowners’ Interests

          Capital City. Capital City’s Articles of Incorporation expressly require the Board of Directors to consider all factors it deems relevant in evaluating a proposed share exchange, tender offer, merger, consolidation, or other similar transaction, including:

  the best interests of the shareowners;
 
  the social, legal and economic effects on employees, customers, depositors and communities served by Capital City and its subsidiary;
 
  the consideration offered in relation to the then current market value of Capital City or its subsidiary in a freely negotiated transaction;

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  estimations of future value of the stock of Capital City or any subsidiary as an independent entity; and
 
  any other factor deemed relevant by the Board of Directors.

          This gives the Board the ability to consider factors other than shareowner value in considering acquisition overtures and places such considerations within the duty of the Board of Directors. This requires the Board to evaluate all factors in considering a potential future acquisition offer, including the long-term value of Capital City as a going concern versus the short-term benefit to shareowners, in order to maximize shareowner value.

          This provision might have the effect of discouraging some tender offers which are above market price or which might otherwise be favorable to shareowners in the short run. A decrease in the likelihood of tender or acquisition offers could lower shareowner value by minimizing or eliminating acquisition market premiums associated with Capital City’s capital stock.

          This constituency provision of Capital City’s Articles of Incorporation may discourage or make more difficult certain acquisition proposals or business combinations and, therefore, may adversely affect the ability of shareowners to benefit from certain transactions opposed by the Capital City Board of Directors. The constituency provision would allow the Capital City Board of Directors to take into account the effects of an acquisition proposal on a broad number of constituencies and to consider any potential adverse effects in determining whether to accept or reject such proposal.

          Farmers and Merchants. Farmers and Merchants’ Charter Application and Bylaws do not contain provisions allowing the directors to consider the effect of potential transactions on any constituency other than the Farmers and Merchants shareowners.

Actions by Shareowners Without a Meeting

          Capital City. Capital City’s Bylaws provide that any action required or permitted to be taken at a meeting of shareowners may not be effected by the written consent of the shareowners entitled to vote on the action.

          Farmers and Merchants. Farmers and Merchants’ Bylaws do not provide for action required or permitted to be taken at a meeting of shareowners to be taken without a meeting. The Financial Institutions Code of Georgia references the Georgia Business Corporation Code regarding the ability of shareowners to take action without a meeting. The Georgia Business Corporation Code provides that action required or permitted to be taken at a meeting of the shareowners can be taken without a meeting if the action is taken by all shareowners entitled to vote.

Shareowner Nominations

          Capital City. Capital City’s Articles of Incorporation and Bylaws provide that nominations of persons for election to the Board of Directors at an annual or special meeting of shareowners may be made:

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  by or at the direction of the Board of Directors by any nominating committee of or person appointed by the Board of Directors, or
 
  by any shareowner of Capital City entitled to vote for the election of directors at the meeting who complies with the applicable notice procedures set forth in the Articles of Incorporation and the Bylaws.

          Despite these provisions, nominations for Board of Directors positions at special meetings may be made only if the election of directors is one of the purposes described in the special meeting notice.

          Nominations of individuals for election at annual meetings, other than nominations made by or at the direction of the Board of Directors, including by any nominating committee, shall be made according to the notice procedures set forth in the Articles of Incorporation and Bylaws.

          Farmers and Merchants. The Georgia Business Corporation Code and Farmers and Merchants’ Charter Application Bylaws do not provide for nominations of persons for election to the Board of Directors.

Shareowner Votes Required For Certain Actions

          Capital City. The Florida Act provides that a corporation may merge into another corporation if a plan of merger is:

  adopted by the Board of Directors, and
 
  approved by a majority of the votes entitled to be cast on the plan, unless the Florida Act, the Articles of Incorporation, or the Board of Directors (acting pursuant to the Florida Act) requires a greater vote.

          Affiliated Transactions. Section 607.0901 of the Florida Act provides a super-majority requirement for certain proposed transactions (“Section 607.0901”) which applies to all Florida corporations unless a corporation expressly chooses to “opt out” of the applicability of such law or the corporation falls under one of the exemptions from the statute’s application. Under the Florida Act, any merger, share exchange, dissolution or sale of all or substantially all of the assets of a corporation other than in the usual and regular course of business must be approved by the affirmative vote of the holders of a majority of the shares of stock entitled to vote on the matter. Section 607.0901 requires that, in addition to any vote required by the Florida Act and subject to the exceptions described below, any “Affiliated Transaction” between Capital City and any beneficial owner of 10% or more of Capital City’s voting shares, including shares held by any associate or affiliate of such a person (an “Interested Shareowner”), be approved by the affirmative vote of the holders of two-thirds of the voting shares of Capital City’s stock, excluding for such purposes any shares held by the Interested Shareowner.

          An “Affiliated Transaction” includes, among other transactions:

  any merger or consolidation of Capital City or its subsidiary with an Interested Shareowner or an associate or affiliate of an Interested Shareowner,

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  any sale, exchange, mortgage, pledge, transfer or other disposition of assets of Capital City to an Interested Shareowner or an associate or affiliate of an Interested Shareowner, having an aggregate market value of 5% or more of the outstanding shares of Capital City having an aggregate value of 5% or more of the assets, on a consolidated basis, of Capital City, or representing 5% or more of the earning power or net income of Capital City, and
 
  the issuance or transfer to the Interested Shareowner or an associate or affiliate of the Interested Shareowner, by Capital City, of the shares of Capital City or its subsidiary which have an aggregate market value equal to 5% or more of the aggregate market value of all of the outstanding shares of Capital City.

          However, the voting requirements of Section 607.0901 do not apply to an Affiliated Transaction if, among other things:

  the Affiliated Transaction has been approved by a majority of Capital City’s disinterested directors,
 
  the Interested Shareowner has been the beneficial owner of at least 80% of Capital City’s outstanding voting shares for at least five years,
 
  certain fair price requirements have been met, or
 
  Capital City has not had more than 300 shareowners of record at any time during the three years preceding the date of the first general public announcement of a proposed Affiliated Transaction.

          Capital City may also “opt out” entirely from the applicability of Section 607.0901 through a provision in Capital City’s original Articles of Incorporation or through an amendment to its Articles of Incorporation or Bylaws. However, any such amendment to its Articles of Incorporation or Bylaws to expressly exclude Capital City from the applicability of Section 607.0901 must be approved by the affirmative vote of the holders, other than Interested Shareowners, of a majority of the outstanding voting shares of Capital City and such amendment will not be effective until 18 months following such a vote. The opt out provision shall not apply to any Affiliated Transaction with an Interested Shareowner who became an Interested Shareowner on or prior to the effective time of such amendment.

          Capital City is subject to Section 607.0901, thus any Affiliated Transaction would be subject to a two-thirds vote of the holders of the outstanding shares of Capital City entitled to vote, unless otherwise exempt. Section 607.0901 protects shareowners of Capital City because it increases the difficulty and expense for a potential acquiror seeking to gain control of Capital City by freezing out certain minority shareowners in a “two-step” merger transaction. Thus, Section 607.0901 serves to protect shareowners from the inequitable results of certain transactions between a corporation and an Interested Shareowner.

          Control Share Acquisitions. The control share acquisition provisions of the Florida Act (“Section 607.0902”) impose conditions and restrictions on “control share acquisitions.” These provisions provide that any “control shares” (shares which represent at least 20% of the outstanding stock of a Florida corporation) that are acquired in a “control share acquisition” have

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no voting rights except to the extent approved by the affirmative vote of a majority of all votes entitled to be cast on the matter, excluding all “interested shares,” which are shares which may be voted directly or indirectly by the person proposing to make the “control share acquisition,” by any officer of the corporation or by any employee who is also a director of the corporation. Section 607.0902 also exempts from its application shares acquired:

  by gift, will, or intestacy;
 
  in satisfaction of a security interest;
 
  as a result of a merger or share exchange which the issuer is a party to such transaction;
 
  by participating in a savings, employee stock or other benefit plans of the corporation or its subsidiary; or
 
  by a group of two or more persons acting together with respect to the voting of shares provided that such persons are
 
  related by blood or marriage, and
 
  have been shareowners of the corporation since July 1, 1987.

          These provisions are inapplicable if a Florida corporation’s charter or bylaws are amended to “opt out” of Section 607.0902 in order to permit the acquisition of shares prior to the acquiring person’s acquisition thereof.

          The purpose of Section 607.0902 is to protect shareowners of Florida corporations by providing them with an opportunity to decide whether a change in corporate control is desirable. This statute effectively places Capital City’s shareowners on equal ground with a potential acquiror by nullifying the voting power of “control shares” acquired by those who may seek to acquire Capital City without first approaching the Board of Directors. The application of Section 607.0902 to Capital City by virtue of the Florida Act has the effect of limiting the voting power of any Capital City shareowner, even those who are not intent on soliciting a change in control of Capital City without first conferring with management, upon such shareowner’s acquisition of a threshold amount of Capital City voting stock.

          Farmers and Merchants. The Financial Institutions Code of Georgia directly governs shareowner vote requirements for Farmers and Merchants; however, in some cases, the Financial Institutions Code of Georgia references the Georgia Business Corporation Code regarding the shareowner vote required for certain actions. Pursuant to Section 7-1-531 of the Financial Institutions Code of Georgia, the shareowner vote requirement applicable to the approval of any merger or other similar reorganization or transaction requires the approval of a majority of the board of directors and the affirmative vote of at least two-thirds of the outstanding shares of each voting group.

          Georgia’s “Business Combination Statute” contained in Sections 14-2-1131 through 14-2-1133 of the Georgia Business Corporation Code and “Fair Price Statute” contained in Sections 14-2-1110 through 14-2-1113 of the Georgia Business Corporation Code are only applicable to

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Georgia banks that have adopted Bylaws specifically evidencing a desire to be governed by these statutes. The Farmers and Merchants Bylaws are silent with respect to these provisions and they are therefore inapplicable to Farmers and Merchants.

Dissenters’ Rights of Appraisal

          Capital City. The Florida Act generally gives shareowners of a Florida corporation the right to dissent from, and obtain payment of the fair value of their shares in the event of, a merger, share exchange, sale or exchange of property and certain other corporate transactions. The rights contained in the Florida Act do not apply, however, with respect to a plan of merger or share exchange or a proposed sale or exchange of property, to the holders of securities registered on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or held of record by more than 2,000 holders as of the record date for determining shareowners entitled to vote on the proposed action and the market value of such securities is at least $10 million, excluding the value of shares held by certain company insiders. Farmers and Merchants’ shareowners are to receive shares of Capital City common stock in the merger, and Capital City common stock is traded on the Nasdaq National Market. Therefore, subsequent to this merger, shareowners of Farmers and Merchants that receive Capital City common stock in the merger will not have dissenters’ rights with respect to the Capital City common stock.

          Farmers and Merchants. The Financial Institutions Code of Georgia, through reference to the Georgia Business Corporation Code, generally gives shareowners of a Georgia bank the right to dissent from, and obtain payment of the fair value of their shares in the event of, a merger, share exchange, sale or exchange of property and certain other bank transactions. To do this, shareowners must follow certain procedures, including filing certain notices and refraining from voting their shares in favor of the transaction. The applicable provisions of the Georgia Business Corporation Code are attached in their entirety to this Proxy Statement/Prospectus as Appendix E.

          For a more detailed discussion of Dissenters’ Rights, see “DESCRIPTION OF THE MERGER – Dissenters’ Rights,” on page 38.

Shareowners’ Rights To Examine Books And Records

          Capital City. The Florida Act gives a shareowner of a Florida corporation the right to inspect and copy books and records of the corporation during regular business hours, if he or she gives the corporation written notice of his or her demand at least five business days before the date of the inspection. In order to inspect certain records, written demand must also be made in good faith and for a proper purpose and must describe with reasonable particularity the purpose of the request and the records the shareowner desires to inspect.

          Farmers and Merchants. The Georgia Business Corporation Code gives shareowners the same type of rights to inspect and copy books and records as the Florida Act.

Dividends

          Capital City. Capital City’s ability to pay dividends on its common stock is governed by Florida corporate law. Under Florida corporate law, dividends may be paid so long as the

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corporation would be able to pay its debts as they become due in the usual course of business and the corporation’s total assets would not be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution to shareowners whose preferential rights are superior to those receiving the distribution.

          There are various statutory limitations on the ability of Capital City’s banking subsidiary, Capital City Bank, to pay dividends to Capital City. See “BUSINESS – Regulatory Considerations – Dividends” in Capital City’s 2003 Form 10-K.

          Farmers and Merchants. The Financial Institutions Code of Georgia gives a Georgia bank the ability to pay dividends in cash, property or in its shares, except when the bank is insolvent or when the payment of a dividend would render the bank insolvent or when the declaration or payment of a dividend would be contrary to any provision in the bank’s articles of incorporation. There are various statutory limitations on the ability of Farmers and Merchants to pay dividends, including a restriction against paying dividends so long as its paid-in capital and appropriated retained earnings do not, in combination, equal at least 20 percent of its capital stock.

COMPARATIVE MARKET PRICES AND DIVIDENDS

Price Range of Common Stock

          Capital City common stock is traded on the Nasdaq National Market under the symbol “CCBG.” Farmers and Merchants common stock is not publicly traded. The following table sets forth, for the indicated periods, the high and low closing sale prices for Capital City common stock as reported by the Nasdaq National Market. The stock prices do not include retail mark-ups, mark-downs or commissions. Effective June 13, 2003, Capital City declared a 5-for-4 stock split. The amounts below have been adjusted to reflect this stock split.

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    Capital City
    Price Range
    High
  Low
2004
               
Second Quarter
  $ 43.15     $ 35.50  
First Quarter
    45.55       39.05  
2003
               
Fourth Quarter
    46.83       36.62  
Third Quarter
    40.93       35.00  
Second Quarter
    36.43       29.74  
First Quarter
    32.32       26.81  
2002
               
Fourth Quarter
    32.04       22.26  
Third Quarter
    29.55       22.32  
Second Quarter
    27.84       20.60  
First Quarter
    22.00       18.12  
2001
               
Fourth Quarter
    19.74       17.52  
Third Quarter
    20.20       16.70  
Second Quarter
    20.00       15.90  
First Quarter
    20.90       18.50  
2000
               
Fourth Quarter
    21.40       15.10  
Third Quarter
    16.40       15.00  
Second Quarter
    16.40       14.40  
First Quarter
    18.40       12.00  

          On May 12, 2004, the last day prior to the public announcement of Capital City’s proposed acquisition of Farmers and Merchants, the last reported sale price per share of Capital City common stock on the Nasdaq National Market was $37.88, thus the minimum exchange price of $38.00 would be used to calculate the resulting equivalent pro forma price per share of Farmers and Merchants common stock, which, including the cash portion of the consideration, was approximately $1,330.98. On [        ], 2004, the latest practicable date prior to the mailing of this Proxy Statement/Prospectus, the last reported sale price per share of Capital City common stock on the Nasdaq National Market was [$        ], and the resulting equivalent pro forma price per share of Farmers and Merchants common stock was [$        ]. The equivalent per share price of a share of Farmers and Merchants common stock at each specified date represents the last reported sale price of a share of Capital City common stock on such date multiplied by the exchange ratio plus $666.50 in cash (exclusive of any withholdings). The market price of Capital City common stock on the effective time of the merger may be higher or lower than the market price at the time the merger proposal was announced, at the time the Agreement and Plan of Merger was executed, at the time of mailing of this Proxy Statement/Prospectus, or at the time of the Special Meeting. Holders of Farmers and Merchants common stock are not assured of receiving any specific market value of Capital City common stock on the effective time of the merger, and such value may be substantially more or less than the current value of Capital City common stock.

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          There is no established public trading market for the Farmers and Merchants common stock. To the knowledge of Farmers and Merchants, the most recent trade of Farmers and Merchants common stock prior to May 12, 2004, the last day prior to the public announcement of the proposed merger between Capital City and Farmers and Merchants, was the sale of 200 shares on February 28, 2003, at $2,000 per share. To the knowledge of Farmers and Merchants, there have been no trades of Farmers and Merchants common stock since the announcement of the merger.

          Farmers and Merchants’ practice is to declare and pay dividends to its shareowners quarterly, and Farmers and Merchants intends to continue this policy through the consummation of the merger (subject to such approvals as may be required). In the first and second quarters of 2004, the Board of Directors for Farmers and Merchants declared a cash dividend of $33.50 per share (which were paid in March and June of 2004, respectively), and the total dividend paid by Farmers and Merchants each quarter was $1,675,000. In addition to the regular quarterly dividends planned for Farmers and Merchants as discussed above, Farmers and Merchants intends to pay a cash distribution to shareowners prior to effecting the merger with Capital City in an amount that represents that portion of Farmers and Merchants’ net worth that is in excess of the $30 million threshold, subject to adjustment, set forth in the Agreement and Plan of Merger.

          The information regarding Farmers and Merchants common stock is provided for informational purposes only and, due to the absence of an active market for Farmers and Merchants’ shares, you should not view it as indicative of the actual or market value of Farmers and Merchants common stock.

Stock Purchase Program

          Capital City has been engaged in an ongoing program to purchase shares of its common stock on the open market from time to time, depending upon market conditions and other factors, however, Capital City did not make any purchases of its common stock during 2003 or the first two quarters of 2004.

Comparative Dividends

          The holders of Capital City common stock are entitled to receive dividends when and if declared by the Board of Directors out of funds legally available therefor. Although Capital City currently intends to continue to pay quarterly cash dividends on the Capital City common stock, there can be no assurance that Capital City’s dividend policy will remain unchanged after completion of the merger. The declaration and payment of dividends thereafter will depend upon business conditions, operating results, capital and reserve requirements, and the Capital City Board of Directors’ consideration of other relevant factors.

          Capital City is a legal entity separate and distinct from its subsidiary and its revenues depend in significant part on the payment of dividends from their respective subsidiary institutions. Capital City’s subsidiary depository institution is subject to certain legal restrictions on the amount of dividends it is permitted to pay. See “BUSINESS – Regulatory Considerations – Dividends” in Capital City’s 2003 Form 10-K.

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          The following table sets forth cash dividends declared per share of Capital City common stock, as adjusted for Capital City’s stock split on June 13, 2003, and Farmers and Merchants common stock for the periods indicated.

                 
    Capital City   Farmers and
    Quarterly Cash   Merchants Quarterly
    Dividends Declared   Dividends Declared
    Per Share
  Per Share
YEAR ENDING DECEMBER 31, 2004
               
Second Quarter
  $ 0.180     $ 33.50  
First Quarter
    0.180       33.50  
 
   
 
     
 
 
Total
  $ 0.360     $ 67.00  
 
   
 
     
 
 
YEAR ENDED DECEMBER 31, 2003
               
Fourth Quarter
  $ 0.180     $ 62.00  
Third Quarter
    0.170       30.50  
Second Quarter
    0.170       30.50  
First Quarter
    0.136       30.50  
 
   
 
     
 
 
Total
  $ 0.656     $ 153.50  
 
   
 
     
 
 
YEAR ENDED DECEMBER 31, 2002
               
Fourth Quarter
  $ 0.136     $ 40.00  
Third Quarter
    0.122       30.50  
Second Quarter
    0.122       30.50  
First Quarter
    0.122       30.50  
 
   
 
     
 
 
Total
  $ 0.502     $ 131.50  
 
   
 
     
 
 
YEAR ENDED DECEMBER 31, 2001:
               
Fourth Quarter
  $ 0.122     $ 40.00  
Third Quarter
    0.118       28.00  
Second Quarter
    0.118       27.00  
First Quarter
    0.118       27.00  
 
   
 
     
 
 
Total
  $ 0.476     $ 122.00  
 
   
 
     
 
 
YEAR ENDED DECEMBER 31, 2000:
               
Fourth Quarter
  $ 0.118     $ 28.00  
Third Quarter
    0.106       28.00  
Second Quarter
    0.106       28.00  
First Quarter
    0.106       28.00  
 
   
 
     
 
 
Total
  $ 0.436     $ 112.00  
 
   
 
     
 
 

          Farmers and Merchants is restricted under the Agreement and Plan of Merger from paying dividends or making any distributions in respect of Farmers and Merchants’ common stock, except as consistent with past practice, that would cause Farmers and Merchants’ net worth to fall below $30 million.

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BUSINESS OF FARMERS AND MERCHANTS

General

     Farmers and Merchants is a Georgia chartered commercial bank headquartered in Dublin, Georgia. Founded in 1910, Farmers and Merchants is one of the oldest and largest community banks in Georgia operating three full-service banking offices in Laurens County, Georgia. As of June 30, 2004, Farmers and Merchants had total assets of approximately $403 million, total deposits of approximately $305 million, and total shareowners’ equity of approximately $69.2 million.

Management Stock Ownership

     The following table presents information about the amount of Farmers and Merchants common stock beneficially owned by each of the directors and executive officers of Farmers and Merchants and all executive officers and directors as a group as of the record date. Unless otherwise indicated, each person has sole voting and investment power over the indicated shares. Information relating to beneficial ownership of the Farmers and Merchants common stock is based upon “beneficial ownership” concepts set forth in rules promulgated under the Exchange Act. Under those rules, a person is considered to be a beneficial owner of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose or to direct the disposition of such security. Under the rules, more than one person may be deemed to be a beneficial owner of the same securities.

                     
    Position with Farmers        
Beneficial Owner
  and Merchants
  Number of Shares
  Percentage
Keen, McGrath Jr.
  President & Director     27,096       54.19 %
Miller, Roger W.
  Exec. V.P. & Director     4,290       8.58 %
Miller, Wallace E.
  Chairman & CEO     861       1.72 %
Hall, Ben
  Director     400       *  
Herrin, Ed
  Director     200       *  
Carswell, Nelson M.D.
  Director     100       _*  

* - less than one percent

     The Farmers and Merchants directors and executive officers have committed to vote their shares of Farmers and Merchants common stock in favor of the Agreement and Plan of Merger.

Voting Securities and Principal Shareowners of Farmers and Merchants

     The following lists each shareowner of record that directly or indirectly owned, controlled, or held with power to vote 5% or more of the 50,000 outstanding shares of Farmers and Merchants common stock as of the record date who are not a director or executive officer of the bank. Unless otherwise indicated, each person has sole voting and investment powers over the indicated shares. Information relating to beneficial ownership of the Farmers and Merchants common stock is based upon “beneficial ownership” concepts set forth in rules under the Exchange Act (discussed above).

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    Number of Shares    
    Beneficially Owned at    
Name and Address
  Record Date
  Percent of Class (%)
L.M. Keen Marital Trust (McGrath Keen and Regena Keen)
    9,456       18.92 %
1629 Bellevue Road, Dublin, GA
               

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Management’s discussion and analysis is provided to assist in the understanding and evaluation of Farmers and Merchants’ financial condition and results of operations. The following discussion should be read in conjunction with Farmers and Merchants’ audited financial statements and accompanying notes which are also included in this joint Proxy Statement/Prospectus and Appendix C, and interim financial statements, included in this Proxy Statement/Prospectus as Appendix D.

Results of Operations

     Farmers and Merchants’ results of operations are determined by its ability to effectively manage interest income and expense, to minimize loan and investment losses, to generate noninterest income and to control noninterest expense. Since market forces and economic conditions beyond the control of Farmers and Merchants determine interest rates, the ability to generate net interest income is dependent upon Farmers and Merchants’ ability to obtain an adequate spread between the rate earned on earning assets and the rate paid on interest-bearing liabilities. Thus, the key performance measure for net interest income is the interest margin or net yield, which is taxable-equivalent net interest income divided by average earning assets.

     Net Income

     Farmers and Merchants’ net income was $11,347,000 and $11,265,000 for the years 2003 and 2002, respectively. Farmers and Merchants’ return on average assets totaled 2.94 percent for 2003 and 3.02 percent for 2002. The return on average equity was 17.95 percent and 19.25 percent, respectively.

     Farmers and Merchants’ net income was $5,768,000 and $5,729,000 for the six months ended June 30, 2004 and 2003, respectively. Farmers and Merchants’ return on average assets totaled 2.87 percent for 2004 and 2.98 percent for 2003. The return on average equity was 17.25 percent and 18.13 percent, respectively.

     Net Interest Margin

     The following table represents Farmers and Merchants’ average yield on interest earning assets, average cost on interest bearing liabilities and net interest spread:

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    Average yield on   Average cost on   Net
    interest earning   interest bearing   interest
    assets
  liabilities
  spread
Fiscal year ended
                       
2003
    6.21 %     2.48 %     3.73 %
2002
    7.04 %     3.18 %     3.86 %
Six months ended:
                       
June 30, 2004
    5.77 %     1.93 %     3.84 %
June 30, 2003
    6.29 %     2.45 %     3.84 %

     Net interest income was $16,297,000 and $16,717,000 in 2003 and 2002, respectively. Average earning assets at December 31, 2003 and 2002 represented 97.20% and 96.57% of total assets. For each of the fiscal years average loans were $259,166,000 in 2003 and $239,466,000 in 2002, average deposits were $286,472,000 in 2003 and $279,345,000 in 2002 and average investment securities were $110,113,000 in 2003 and $116,690,000 in 2002.

     Net interest income was $8,148,000 and $8,038,000 for the six months ended June 30, 2004 and 2003, respectively. Average earning assets for the six months ended June 30, 2004 and 2003 represented 97.12% and 97.13% of total assets. For each of the six month periods average loans were $273,287,000 in 2004 and $253,713,000 in 2003, average deposits were $302,906,000 in 2004 and $285,820,000 in 2003 and average investment securities were $110,999,000 in 2004 and $113,763,000 in 2003.

     Provision for Loan Losses

     The allowance for loan losses represents a reserve for probable losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated periodically based on a review of all significant loans, with a particular emphasis on nonaccruing, past due and other loans that management believes require attention. The provision for loan losses is a charge to earnings in the current period to replenish the allowance for loan losses and maintain it at a level management has determined to be adequate. The provision for loan losses was $450,000 in 2003 and $900,000 in 2002. Net loan charge-offs represented less than 47% and 61%, of the provision for loan losses in 2003 and 2002, respectively.

     The provision for loan losses was $150,000 and $300,000 for the six months ended June 30, 2004 and 2003, respectively.

     Farmers and Merchants experienced net loan charge-offs as a percent of average loans of .08% and .23% for the years ended December 31, 2003 and 2002, respectively. Net loan charge-offs were $210,000 in 2003 and $542,000 in 2002.

     Farmers and Merchants experienced net loan charge-offs as a percent of average loans of .06% and .04% for the six months ended June 30, 2004 and 2003, respectively. Net loan charge-offs were $166,000 in 2004 and $105,000 in 2003.

     Farmers and Merchants had nonperforming assets totaling $5,283,000 and $4,051,000, respectively, as of December 31, 2003 and 2002.

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     Farmers and Merchants had nonperforming assets totaling $5,077,000 and $4,036,000, respectively, as of June 30, 2004 and 2003.

     The determination of the reserve rests upon management’s judgment about factors affecting loan quality and assumptions about the economy. Management considers the year-end allowance for loan losses adequate to cover potential losses in the loan portfolio. The allowance for loan losses was $4,137,000 or 1.58% and $3,897,000 or 1.58%, of total loans as of December 31, 2003 and 2002, respectively. The allowance for loan losses was 1.60% and 1.63% of average loans for 2003 and 2002, respectively.

     The allowance for loan losses was $4,121,000 or 1.50% and $4,092,000 or 1.59%, of total loans as of June 30, 2004 and 2003, respectively. The allowance for loan losses was 1.51% and 1.65% of average loans for the six months ended June 30, 2004 and 2003, respectively.

     Noninterest Income

     Noninterest income consists primarily of service charges on deposit accounts. Service charges on deposit accounts totaled $1,359,000 and $1,296,000 in 2003 and 2002, respectively. Noninterest income represented 9.01% and 7.08% of all income sources in 2003 and 2002, respectively. The increase in noninterest income is attributable to overall loan and deposit growth of Farmers and Merchants.

     Service charges on deposit accounts totaled $657,000 and $653,000 for the six months ended June 30, 2004 and 2003, respectively. Noninterest income represented 8.31% and 9.30% of all income sources for the six months ended June 30, 2004 and 2003, respectively. The increase in noninterest income is attribute to overall loan and deposit growth of Farmers and Merchants.

     Noninterest Expense

     The following table depicts Farmers and Merchants’ noninterest expense components and the percentage of the individual components to the total:

                                 
    December 31, 2003
  December 31, 2002
    Amount
  %
  Amount
  %
Salaries and employee benefits
  $ 3,666,000       54.02     $ 3,499,000       53.99  
Occupancy and equipment
    840,000       12.38       755,000       11.65  
Other operating
    2,280,000       33.60       2,227,000       34.36  

     At December 31, 2003 and 2002, Farmers and Merchants had 79 and 83 employees, respectively.

                                 
    June 30, 2004
  June 30, 2003
    Amount
  %
  Amount
  %
Salaries and employee benefits
  $ 1,668,000       51.43     $ 1,630,000       50.87  
Occupancy and equipment
    435,000       13.41       478,000       14.92  
Other operating
    1,140,000       35.16       1,096,000       34.21  

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     At June 30, 2004 and 2003, Farmers and Merchants had 69 and 83 employees, respectively.

     As of June 30, 2004, the decrease in employees over the past twelve months is due to normal attrition and management’s emphasis on increased productivity from existing employees. Management continues to evaluate its staffing levels in an effort to balance optimal customer service coverage and Farmers and Merchants Bank’s internal cost control initiatives.

     The efficiency ratio, or noninterest operating expenses divided by the sum of taxable-equivalent net interest income and noninterest income measures how much of a bank’s revenue is consumed by operating expenses. Farmers and Merchants’ efficiency ratio, calculated using the operating expense totals, was 36.5% in 2003 and 34.8% in 2002. Farmers and Merchants’ efficiency ratio was 35.4% and 34.7%, respectively, for the six months ended June 30, 2004 and 2003.

     Financial Condition

     The following is a presentation of the average daily balance sheet of Farmers and Merchants for the fiscal years ended December 31, 2003 and 2002 and the six months ended June 30, 2004 and 2003. This presentation includes all major categories of interest earning assets and interest bearing liabilities, the amount of interest earned and paid, and the weighted average yields or rates for the fiscal years ended December 31, 2003 and 2002 and the six months ended June 30, 2004 and 2003.

Average Balance Sheet:
(dollars in thousands)

                         
    December 31, 2003
    Average   Income/   Yields/
    Balances
  Expense
  Rates
Assets
                       
Interest-Earning Assets
                       
Loans, net of unearned income taxable
  $ 259,166     $ 18,410       7.10 %
 
   
 
     
 
     
 
 
Investment securities
                       
Taxable
    86,541       3,852       4.45  
Tax-exempt
    23,572       909       3.86  
 
   
 
     
 
     
 
 
Total investment securities
    110,113       4,761       4.32  
 
   
 
     
 
     
 
 
Funds sold
    4,940       51       1.03  
 
   
 
     
 
     
 
 
Total interest-earning assets
    374,219       23,222       6.21  
 
   
 
     
 
     
 
 
Noninterest-Earning Assets
                       
Cash
    7,788                  
Allowance for loan losses
    (4,057 )                
Other assets
    7,724                  
 
   
 
                 
Total noninterest-earning assets
    11,455                  
 
   
 
                 
Total assets
  $ 385,674                  
 
   
 
                 

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    Average   Income/   Yields/
    Balances
  Expense
  Rates
Liabilities and Stockholders’ Equity
                       
Interest-Bearing Liabilities
                       
Interest-bearing deposits
                       
Interest-bearing demand and savings
  $ 73,875     $ 1,165       1.58 %
Other time deposits
    169,481       4,654       2.75  
 
   
 
     
 
     
 
 
Total interest-bearing deposits
    243,356       5,819       2.39  
 
   
 
     
 
     
 
 
Other Interest-Bearing Liabilities
                       
Debt
    22,411       747       3.33  
Funds purchased and securities sold under agreement to repurchase
    6,125       170       2.78  
 
   
 
     
 
     
 
 
Total other interest-bearing liabilities
    28,536       917       3.21  
 
   
 
     
 
     
 
 
Total interest-bearing liabilities
    271,892       6,736       2.48  
 
   
 
     
 
     
 
 
Noninterest-Bearing Liabilities and Stockholders’ Equity
                       
Demand deposits
    43,116                  
Other liabilities
    7,469                  
Stockholders’ equity
    63,197                  
 
   
 
                 
Total noninterest-bearing liabilities and stockholders’ equity
    113,782                  
 
   
 
                 
Total liabilities and stockholders’ equity
  $ 385,674                  
 
   
 
                 
Net interest margin
                    3.73 %
 
                   
 
 
Net interest income
          $ 16,486          
 
           
 
         

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Average Balance Sheet:
(dollars in thousands)

                         
    December 31, 2002
    Average   Income/   Yields/
    Balances
  Expense
  Rates
Assets
                       
Interest-Earning Assets
                       
Loans, net of unearned income taxable
  $ 239,466     $ 19,449       8.12 %
 
   
 
     
 
     
 
 
Investment securities
                       
Taxable
    95,254       4,961       5.21  
Tax-exempt
    21,436       891       4.16  
 
   
 
     
 
     
 
 
Total investment securities
    116,690       5,852       5.01  
 
   
 
     
 
     
 
 
Funds sold
    3,961       61       1.54  
 
   
 
     
 
     
 
 
Total interest-earning assets
    360,117       25,362       7.04  
 
   
 
     
 
     
 
 
Noninterest-Earning Assets
                       
Cash
    8,878                  
Allowance for loan losses
    (3,676 )                
Other assets
    8,208                  
 
   
 
                 
Total noninterest-earning assets
    13,410                  
 
   
 
                 
Total assets
  $ 373,527                  
 
   
 
                 
Liabilities and Stockholders’ Equity
                       
Interest-Bearing Liabilities
                       
Interest — bearing deposits
                       
Interest-bearing demand and savings
  $ 68,599       1,496       2.18 %
Other time deposits
    170,856       6,055       3.54  
Total interest-bearing deposits
    239,455       7,551       3.15  
Other Interest-Bearing Liabilities
                       
Federal Home Loan Bank advances
    20,298       688       3.39  
Funds purchased and securities sold under agreement to repurchase
    6,744       224       3.32  
 
   
 
     
 
     
 
 
Total other interest-bearing liabilities
    27,042       912       3.37  
 
   
 
     
 
     
 
 
Total interest-bearing liabilities
    266,497       8,463       3.18  
 
   
 
     
 
     
 
 
Noninterest-Bearing Liabilities and Stockholders’ Equity
                       
Demand deposits
    39,890                  
Other liabilities
    8,621                  
Stockholders’ equity
    58,519                  
 
   
 
                 
Total noninterest-bearing liabilities and stockholders’ equity
    107,030                  
 
   
 
                 
Total liabilities and stockholders’ equity
  $ 373,527                  
 
   
 
                 
Net interest margin
                    3.86 %
 
                   
 
 
Net interest income
          $ 16,899          
 
           
 
         

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Average Balance Sheet:
(dollars in thousands)

                         
    June 30, 2004
    Average   Income/   Yields/
    Balances
  Expense
  Rates
Assets
                       
Interest-Earning Assets
                       
Loans, net of unearned income taxable
  $ 273,287     $ 9,032       6.61 %
 
   
 
     
 
     
 
 
Investment securities
                       
Taxable
    89,251       1,799       4.03  
Tax-exempt
    21,748       406       3.73  
 
   
 
     
 
     
 
 
Total investment securities
    110,999       2,205       3.97  
 
   
 
     
 
     
 
 
Funds sold
    6,001       27       0.90  
 
   
 
     
 
     
 
 
Total interest-earning assets
    390,287       11,264       5.77  
 
   
 
     
 
     
 
 
Noninterest-Earning Assets
                       
Cash
    8,772                  
Allowance for loan losses
    (4,124 )                
Other assets
    7,498                  
 
   
 
                 
Total noninterest-earning assets
    12,146                  
 
   
 
                 
Total assets
  $ 402,433                  
 
   
 
                 
                         
    Average   Income/   Yields/
    Balances
  Expense
  Rates
Liabilities and Stockholders’ Equity
                       
Interest-Bearing Liabilities
                       
Interest – bearing deposits
                       
Interest-bearing demand and savings
  $ 81,976     $ 553       1.35 %
Other time deposits
    174,788       2,037       2.33  
 
   
 
     
 
     
 
 
Total interest-bearing deposits
    256,764       2,590       2.02  
 
   
 
     
 
     
 
 
Other Interest-Bearing Liabilities
                       
Debt
    22,391       96       0.86  
Funds purchased and securities sold under agreement to repurchase
    5,110       62       2.43  
 
   
 
     
 
     
 
 
Total other interest-bearing liabilities
    27,501       158       1.15  
 
   
 
     
 
     
 
 
Total interest-bearing liabilities
    284,265       2,748       1.93  
 
   
 
     
 
     
 
 
Noninterest-Bearing Liabilities and Stockholders’ Equity
                       
Demand deposits
    46,142                  
Other liabilities
    5,157                  
Stockholders’ equity
    66,869                  
 
   
 
                 
Total noninterest-bearing liabilities and stockholders’ equity
    118,168                  
 
   
 
                 
Total liabilities and stockholders’ equity
  $ 402,433                  
 
   
 
                 
Net interest margin
                    3.84 %
 
                   
 
 
Net interest income
          $ 8,516          
 
           
 
         

-77-


Table of Contents

Average Balance Sheet:
(dollars in thousands)

                         
    June 30, 2003
    Average   Income/   Yields/
    Balances
  Expense
  Rates
Assets
                       
Interest-Earning Assets
                       
Loans, net of unearned income taxable
  $ 253,713     $ 9,141       7.21 %
 
   
 
     
 
     
 
 
Investment securities
                       
Taxable
    90,516       2,093       4.62  
Tax-exempt
    23,247       457       3.93  
 
   
 
     
 
     
 
 
Total investment securities
    113,763       2,550       4.48  
 
   
 
     
 
     
 
 
Funds sold
    5,311       30       1.13  
 
   
 
     
 
     
 
 
Total interest-earning assets
    372,787       11,721       6.29  
 
   
 
     
 
     
 
 
Noninterest-Earning Assets
                       
Cash
    7,740                  
Allowance for loan losses
    (3,955 )                
Other assets
    7,967                  
 
   
 
                 
Total noninterest-earning assets
    11,752                  
 
   
 
                 
Total assets
  $ 384,539                  
 
   
 
                 
                         
    Average   Income/   Yields/
    Balances
  Expense
  Rates
Liabilities and Stockholders’ Equity
                       
Interest-Bearing Liabilities
                       
Interest – bearing deposits
                       
Interest-bearing demand and savings
  $ 73,323     $ 648       1.77 %
Other time deposits
    169,709       2,488       2.93  
 
   
 
     
 
     
 
 
Total interest-bearing deposits
    243,032       3,136       2.58  
 
   
 
     
 
     
 
 
Other Interest-Bearing Liabilities
                       
Debt
    22,307       99       0.89  
Funds purchased and securities sold under agreement to repurchase
    6,867       98       2.85  
 
   
 
     
 
     
 
 
Total other interest-bearing liabilities
    29,174       197       1.35  
 
   
 
     
 
     
 
 
Total interest-bearing liabilities
    272,206       3,333       2.45  
 
   
 
     
 
     
 
 
Noninterest-Bearing Liabilities and Stockholders’ Equity
                       
Demand deposits
    42,788                  
Other liabilities
    6,348                  
Stockholders’ equity
    63,197                  
 
   
 
                 
Total noninterest-bearing liabilities and stockholders’ equity
    112,333                  
 
   
 
                 
Total liabilities and stockholders’ equity
  $ 384,539                  
 
   
 
                 
Net interest margin
                    3.84 %
 
                   
 
 
Net interest income
          $ 8,388          
 
           
 
         

-78-


Table of Contents

     Interest Rate Sensitivity

     The following table represents the Farmers and Merchants’ interest-sensitivity gap between interest-earning assets and interest-bearing liabilities as of December 31, 2003 and 2002 and as of June 30, 2004 and 2003.

                                         
    December 31, 2003
    Assets and Liabilities Repricing Within
    (dollars in thousands)
    <3   4-12   1-3   over 3    
    months
  months
  years
  years
  TOTAL
Loans
  $ 56,287     $ 65,956     $ 84,216     $ 55,340     $ 261,799  
Investments
    10,512       9,963       21,992       65,686       108,153  
Fed Funds sold
    8,850                         8,850  
Risk sensitive assets
    75,649       75,919       106,208       121,026       378,802  
 
   
 
     
 
     
 
     
 
     
 
 
Savings & other
    57,555                         57,555  
MMDA
    34,748                         34,748  
CD’s < $100,000
    31,488       66,424       9,313       8,430       115,655  
CD’s > $100,000
    14,335       30,191       1,576       6,650       52,752  
Other borrowings
          4,000             17,197       21,197  
Other liabilities
                      6,150       6,150  
Risk sensitive liabilities
    138,126       100,615       10,889       38,427       288,057  
Interest sensitivity gap
    (62,477 )     (24,696 )     95,319       82,599     $ 90,745  
 
   
 
     
 
     
 
     
 
     
 
 
Cumulative interest sensitivity gap
  $ (62,477 )   $ (87,173 )   $ 8,146     $ 90,745          
 
   
 
     
 
     
 
     
 
         
Ratio of sensitive assets to sensitive liabilities
    54.77 %     75.45 %     975.37 %     314.95 %        
 
   
 
     
 
     
 
     
 
         
Cumulative ratio of sensitive assets to sensitive liabilities
    54.77 %     63.49 %     103.26 %     131.50 %        
 
   
 
     
 
     
 
     
 
         

-79-


Table of Contents

                                         
    December 31, 2002
    Assets and Liabilities Repricing Within
    (dollars in thousands)
    <3   4-12   1-3   over 3    
    months
  months
  years
  years
  TOTAL
Loans
  $ 53,805     $ 56,974     $ 84,550     $ 50,642     $ 245,971  
Investments
    8,874       9,294       29,401       69,410       116,979  
Fed Funds sold
    5,350                         5,350  
Risk sensitive assets
    68,029       66,268       113,951       120,052       368,300  
 
   
 
     
 
     
 
     
 
     
 
 
Savings & other
    52,440                         52,440  
MMDA
    34,538                         34,538  
CD’s < $100,000
    32,947       75,523       11,237       4,220       123,927  
CD’s > $100,000
    13,871       27,946       2,377       1,760       45,954  
Other borrowings
          4,000             17,364       21,364  
Other liabilities
                      8,427       8,427  
Risk sensitive liabilities
    133,796       107,469       13,614       31,771       286,650  
 
   
 
     
 
     
 
     
 
     
 
 
Interest sensitivity gap
    (65,767 )     (41,201 )     100,337       88,281     $ 81,650  
 
   
 
     
 
     
 
     
 
     
 
 
Cumulative interest sensitivity gap
  $ (65,767 )   $ (106,968 )   $ (6,631 )   $ 81,650          
 
   
 
     
 
     
 
     
 
         
Ratio of sensitive assets to sensitive liabilities
    50.85 %     61.66 %     837.01 %     377.87 %        
 
   
 
     
 
     
 
     
 
         
Cumulative ratio of sensitive assets to sensitive liabilities
    50.85 %     55.66 %     97.40 %     128.48 %        
 
   
 
     
 
     
 
     
 
         

-80-


Table of Contents

                                         
    June 30, 2004
    Assets and Liabilities Repricing Within
    (dollars in thousands)
    <3   4-12   1-3   over 3    
    months
  months
  years
  years
  TOTAL
Loans
  $ 75,656     $ 67,567     $ 77,061     $ 55,314     $ 275,598  
Investments
    3,444       16,987       22,720       63,687       106,838  
Fed Funds sold
    7,000                         7,000  
Risk sensitive assets
    86,100       84,554       99,781       119,001       389,436  
 
   
 
     
 
     
 
     
 
     
 
 
Savings
    53,975                         53,975  
MMDA
    45,087                         45,087  
CD’s < $100,000
    29,094       66,946       10,099       7,612       113,751  
CD’s > $100,000
    30,527       20,832       2,264       6,391       60,014  
Other borrowings
    4,000                   17,114       21,114  
Other liabilities
                      6,572       6,572  
Risk sensitive liabilities
    162,683       87,778       12,363       37,689       300,513  
 
   
 
     
 
     
 
     
 
     
 
 
Interest sensitivity gap
    (76,583 )     (3,224 )     87,418       81,312     $ 88,923  
 
   
 
     
 
     
 
     
 
     
 
 
Cumulative interest sensitivity gap
  $ (76,583 )   $ (79,807 )   $ 7,611     $ 88,923          
 
   
 
     
 
     
 
     
 
         
Ratio of sensitive assets to sensitive liabilities
    52.93 %     96.33 %     807.09 %     315.74 %        
 
   
 
     
 
     
 
     
 
         
Cumulative ratio of sensitive assets to sensitive liabilities
    52.93 %     68.14 %     102.90 %     129.59 %        
 
   
 
     
 
     
 
     
 
         

-81-


Table of Contents

                                         
    June 30, 2003
    Assets and Liabilities Repricing Within
    (dollars in thousands)
    <3   4-12   1-3   over 3    
    months
  months
  years
  years
  TOTAL
Loans
  $ 59,791     $ 61,084     $ 80,552     $ 56,583     $ 258,010  
Investments
    3,623       18,171       27,488       62,679       111,961  
Fed Funds sold
    3,500                         3,500  
Risk sensitive assets
    66,914       79,255       108,040       119,262       373,471  
 
   
 
     
 
     
 
     
 
     
 
 
Savings & Other
    50,702                         50,702  
MMDA
    37,108                         37,108  
CD’s < $100,000
    35,072       67,543       10,706       6,172       119,493  
CD’s > $100,000
    18,316       24,757       2,040       4,708       49,821  
Other borrowings
                4,000       17,281       21,281  
Other liabilities
                      7,694       7,694  
Risk sensitive liabilities
    141,198       92,300       16,746       35,855       286,099  
 
   
 
     
 
     
 
     
 
     
 
 
Interest sensitivity gap
    (74,284 )     (13,045 )     91,294       83,407     $ 87,372  
 
   
 
     
 
     
 
     
 
     
 
 
Cumulative interest sensitivity gap
  $ (74,284 )   $ (87,329 )   $ 3,965     $ 87,372          
 
   
 
     
 
     
 
     
 
         
Ratio of sensitive assets to sensitive liabilities
    47.39 %     85.87 %     645.17 %     332.62 %        
 
   
 
     
 
     
 
     
 
         
Cumulative ratio of sensitive assets to sensitive liabilities
    47.39 %     62.60 %     101.58 %     130.54 %        
 
   
 
     
 
     
 
     
 
         

-82-


Table of Contents

     Investment Portfolio

     The following tables present carrying values of investment securities held by Farmers and Merchants as of December 31, 2003 and 2002 and as of June 30, 2004 and 2003.

                 
    December 31,
    2003
  2002
    (in thousands)
Securities Available-for-Sale
               
U. S. Government Agencies
  $ 34,719     $ 38,271  
State, County and Municipal
    23,165       21,462  
Mortgage Backed
    24,813       29,854  
Corporate Bonds
    22,907       23,638  
 
   
 
     
 
 
 
  $ 105,604     $ 113,225  
 
   
 
     
 
 
Securities Held-to-Maturity
               
U. S. Government Agencies
  $ 1,000     $ 1,000  
State, County and Municipal
    1,540       2,740  
Mortgage Backed
    9       14  
 
   
 
     
 
 
 
  $ 2,549     $ 3,754  
 
   
 
     
 
 
                 
    June 30,
    2004
  2003
    (in thousands)
Securities Available-for-Sale
               
U. S. Government Agencies
  $ 42,597     $ 31,976  
State, County and Municipal
    19,019       23,738  
Mortgage Backed
    24,313       29,297  
Corporate Bonds
    19,362       24,398  
 
   
 
     
 
 
 
  $ 105,291     $ 109,409  
 
   
 
     
 
 
Securities Held-to-Maturity
               
U. S. Government Agencies
  $     $ 1,000  
State, County and Municipal
    1,540       1,540  
Mortgage Backed
    7       12  
 
   
 
     
 
 
 
  $ 1,547     $ 2,552  
 
   
 
     
 
 

-83-


Table of Contents

     The following tables illustrate contractual maturities and weighted average yields of investment securities held at June 30, 2004. Expected maturities will differ from contractual maturities because certain issuers have the right to call or prepay obligations with or without call or prepayment penalties. No prepayment assumptions have been estimated in the table. The weighted average yields are calculated on the basis of the amortized cost and effective yields of each security weighted for the scheduled maturity of each security. The weighted average yields for each time horizon presented below are the combined yields for both classifications of investment securities. A calculation of actual yields by classification, which would differ nominally from those presented below, has not been prepared.

                         
    Average   Amortized   Fair
    Yield
  Cost
  Value
    Securities Available-for-Sale
Due within one year
    3.35 %   $ 29,384     $ 29,261  
Due after one year through five years
    4.54 %     62,334       62,533  
Due after five years through ten years
    5.49 %     8,777       8,776  
Due after ten years
    3.55 %     4,824       4,721  
 
   
 
     
 
     
 
 
 
    4.25 %   $ 105,319     $ 105,291  
 
   
 
     
 
     
 
 
                         
    Securities Held-to-Maturity
Due within one year
    3.35 %   $ 150     $ 157  
Due after one year through five years
    4.54 %     717       754  
Due after five years through ten years
    5.49 %     680       715  
Due after ten years
    3.55 %            
 
   
 
     
 
     
 
 
 
    4.25 %   $ 1,547     $ 1,626  
 
   
 
     
 
     
 
 

     As of December 31, 2003 and 2002 and as of June 30, 2004 and 2003, Farmers and Merchants had no holdings of securities of a single issuer in which the aggregate book value and aggregate market value of the securities exceeded ten percent of stockholders’ equity, with the exception of U.S. Government Agency securities.

     Loan Portfolio

     The following table presents the composition of Farmers and Merchants’ loan portfolio as of December 31, 2003 and 2002 and June 30, 2004 and 2003.

-84-


Table of Contents

                 
    December 31,
    2003
  2002
    (dollars in thousands)
Real estate
               
Residential 1-4 family
  $ 33,478     $ 36,683  
Residential 5 or more family
    4,373       3,688  
Construction and land development
    12,064       10,533  
Second mortgages
    1,500       2,575  
Farmland
    136       1,473  
Non-farm, nonresidential properties
    164,243       142,221  
Commercial, financial and agricultural
    23,274       24,708  
Consumer Installment loans
    20,856       22,701  
Other
    4,151       4,646  
Less: Unearned income
    (2,276 )     (3,257 )
 
   
 
     
 
 
 
    261,799       245,971  
Allowance for loan losses
    (4,137 )     (3,897 )
 
   
 
     
 
 
Loans, net
  $ 257,662     $ 242,074  
 
   
 
     
 
 
                 
    June 30,
    2004
  2003
    (dollars in thousands)
Real estate
               
Residential 1-4 family
  $ 31,514     $ 35,824  
Residential 5 or more family
    5,887       4,149  
Construction and land development
    14,380       11,940  
Second mortgages
    2,568       2,230  
Farmland
    153       785  
Non-farm, nonresidential properties
    174,518       156,793  
Commercial, financial and agricultural
    23,356       22,970  
Consumer Installment loans
    19,619       21,172  
Other
    5,479       4,871  
Less: Unearned income
    (1,876 )     (2,724 )
 
   
 
     
 
 
 
    275,598       258,010  
Allowance for loan losses
    (4,121 )     (4,092 )
 
   
 
     
 
 
Loans, net
  $ 271,477     $ 253,918  
 
   
 
     
 
 

-85-


Table of Contents

     The following table presents total loans less unearned discount as of December 31, 2003 and 2002 according to maturity distribution.

                 
    December 31,
    2003
  2002
    (dollars in thousands)
One year or less
  $ 122,243     $ 110,779  
After one year through five years
    121,883       119,991  
After five years
    17,673       15,201  
 
   
 
     
 
 
 
  $ 261,799     $ 245,971  
 
   
 
     
 
 

     The following table presents total loans less unearned discount as of June 30, 2004 and 2003 according to maturity distribution.

                 
    June 30,
    2004
  2003
    (dollars in thousands)
One year or less
  $ 143,223     $ 120,875  
After one year through five years
    115,307       114,806  
After five years
    17,068       22,329  
 
   
 
     
 
 
 
  $ 275,598     $ 258,010  
 
   
 
     
 
 

     The following table presents an interest rate sensitivity analysis of the Bank’s loan portfolio as of December 31, 2003 and 2002 and as of June 30, 2004 and 2003.

                                 
    December 31, 2003
            (dollars in thousands)    
    Within   1 to 5   After 5    
    1 year
  years
  years
  Total
Loans with
                               
Predetermined interest rates
  $ 113,613     $ 113,278     $ 16,424     $ 243,315  
Floating or adjustable interest rates
    8,630       8,605       1,249       18,484  
 
   
 
     
 
     
 
     
 
 
Loans, net of unearned income
  $ 122,243     $ 121,883     $ 17,673     $ 261,799  
 
   
 
     
 
     
 
     
 
 
                                 
    December 31, 2002
            (dollars in thousands)    
    Within   1 to 5   After 5    
    1 year
  years
  years
  Total
Loans with
                               
Predetermined interest rates
  $ 100,898     $ 109,288     $ 13,845     $ 224,031  
Floating or adjustable interest rates
    9,881       10,703       1,356       21,940  
 
   
 
     
 
     
 
     
 
 
Loans, net of unearned income
  $ 110,779     $ 119,991     $ 15,201     $ 245,971  
 
   
 
     
 
     
 
     
 
 

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Table of Contents

                                 
    June 30, 2004
            (dollars in thousands)    
    Within   1 to 5   After 5    
    1 year
  years
  years
  Total
Loans with
                               
Predetermined interest rates
  $ 129,528     $ 104,281     $ 15,436     $ 249,245  
Floating or adjustable interest rates
    13,695       11,026       1,632       26,353  
 
   
 
     
 
     
 
     
 
 
Loans, net of unearned income
  $ 143,223     $ 115,307     $ 17,068     $ 275,598  
 
   
 
     
 
     
 
     
 
 
                                 
    June 30, 2003
            (dollars in thousands)    
    Within   1 to 5   After 5    
    1 year
  years
  years
  Total
Loans with
                               
Predetermined interest rates
  $ 109,706     $ 104,198     $ 20,266     $ 234,170  
Floating or adjustable interest rates
    11,169       10,608       2,063       23,840  
 
   
 
     
 
     
 
     
 
 
Loans, net of unearned income
  $ 120,875     $ 114,806     $ 22,329     $ 258,010  
 
   
 
     
 
     
 
     
 
 

     Nonperforming Loans

     A loan is placed on nonaccrual status when, in management’s judgment, the collection of interest income appears doubtful. Interest receivable that has been accrued in prior years and is subsequently determined to have doubtful collectibility is charged to the allowance for loan losses. Interest on loans that are classified as nonaccrual is recognized when received. Past due loans are loans whose principal or interest is past due 90 days or more. In some cases, where borrowers are experiencing financial difficulties, loans may be restructured to provide terms significantly different from the original contractual terms.

     As of December 31, 2003 and 2002, loans contractually past due 90 days or more amounted to $30,000 and $229,000, respectively. Nonaccrual loans were $5,283,000 and $4,051,000 at December 31, 2003 and 2002, respectively.

     As of June 30, 2004 and 2003, loans contractually past due 90 days or more amounted to $410,000 and $191,000, respectively. Nonaccrual loans were $5,077,000 and $4,036,000, respectively.

     During the years ended December 31, 2003 and 2002, $259,000 and $575,000 of loans were charged-off, respectively, and $49,000 and $33,000 were recovered on charged-off loans, respectively.

     During the six months ended June 30, 2004 and 2003, $175,000 and $131,000, respectively, of loans were charged off and $9,000 and $26,000, respectively, were recovered on previously charged-off loans.

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     Off Balance Sheet Arrangements

     Farmers and Merchants does not currently engage in the use of derivative instruments to hedge interest rate risks. However, in the ordinary course of business, Farmers and Merchants has entered into off balance sheet financial instruments, which are not reflected in the financial statements. These instruments include commitments to extend credit, standby letters of credit, commercial letters of credit and credit card arrangements. Such financial instruments are recorded in the financial statements when funds are disbursed or the instruments become payable. Farmers and Merchants uses the same credit policies for these off balance sheet financial instruments as it does for instruments that are recorded in the financial statements.

     The following is an analysis of the significant off balance sheet financial instruments as of December 31, 2003 and 2002 and June 30, 2004 and 2003:

                 
    December 31,
    2003
  2002
    (dollars in thousands)
Commitments to extend credit
  $ 20,218     $ 16,889  
Unused credit card lines
    2,606       2,263  
Standby letters of credit
    731       326  
 
   
 
     
 
 
 
  $ 23,555     $ 19,478  
 
   
 
     
 
 
                 
    June 30,
    2004
  2003
    (dollars in thousands)
Commitments to extend credit
  $ 26,038     $ 21,723  
Unused credit card lines
    2,594       2,602  
Standby letters of credit
    543       505  
 
   
 
     
 
 
 
  $ 29,175     $ 24,830  
 
   
 
     
 
 

     Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitment amounts expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The credit risk involved in issuing these financial instruments is essentially the same as that involved in extending loans to customers. Farmers and Merchants does not anticipate any material losses as a result of the commitments and contingent liabilities.

     If commitments arising from these financial instruments continue to require funding at historical levels, management does not anticipate that such funding will adversely impact its ability to meet ongoing obligations. In the event these commitments require funding in excess of historical levels, management believes current liquidity, available borrowings from the Federal Home Loan Bank of Atlanta and investment security maturities provide a sufficient source of funds to meet these commitments.

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     Summary of Loan Loss Experience

     The allowance for possible loan losses is created by direct charges to operations. Losses on loans are charged against the allowance in the period in which such loans, in management’s opinion, become uncollectible. Recoveries during the period are credited to this allowance. The factors that influence management’s judgment in determining the amount charged to operating expense are past loan experience, composition of the loan portfolio, evaluation of possible future losses, current economic conditions and other relevant factors. As of December 31, 2003 and 2002, Farmers and Merchants’ allowance for loan losses was approximately $4,137,000 and $3,897,000, respectively, which represented 1.58% and 1.58% of year-end total loans outstanding, respectively.

     As of June 30, 2004 and 2003, Farmers and Merchants’ allowance for loan losses was approximately $4,121,000 and $4,092,000, respectively, which represented 1.50% and 1.59% of total loans outstanding, respectively.

     The allowance for loan losses is reviewed based on management’s evaluation of current risk characteristics of the loan portfolio as well as the impact of prevailing and expected economic business conditions. Management considers the allowance for loan losses adequate to cover possible loan losses on the loans outstanding.

     Management has allocated the reserve for loan losses to specific loan classes as follows:

                                 
    December 31, 2003
  December 31, 2002
    Amount   Percent of Loans           Percent of Loans
   
  in Category to   Amount   in Category to
    (in thousands)
  Total Loans
  (in thousands)
  Total Loans
Real estate, net
  $ 3,374       81.56 %   $ 3,073       78.86 %
Commercial, financial and agricultural
    368       8.89 %     391       10.03 %
Consumer and other
    395       9.55 %     433       11.11 %
 
   
 
     
 
     
 
     
 
 
 
  $ 4,137       100.00 %   $ 3,897       100.00 %
 
   
 
     
 
     
 
     
 
 
                                 
    June 30, 2004
  June 30, 2003
    Amount   Percent of Loans           Percent of Loans
   
  in Category to   Amount   in Category to
    (in thousands)
  Total Loans
  (in thousands)
  Total Loans
Real estate, net
  $ 3,397       82.43 %   $ 3,315       81.01 %
Commercial, financial and agricultural
    349       8.47 %     364       8.90 %
Consumer and other
    375       9.10 %     413       10.09 %
 
   
 
     
 
     
 
     
 
 
 
  $ 4,121       100.00 %   $ 4,092       100.00 %
 
   
 
     
 
     
 
     
 
 

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     The following table presents an analysis of Farmers and Merchants’ loan loss experience for the periods indicated.

                 
    December 31,
For the year ended   2003
  2002
    (dollars in thousands)
Allowance for loan losses at beginning of year
  $ 3,897     $ 3,539  
Charge-offs
               
Real estate – mortgage
    (40 )     (81 )
Commercial, financial and agricultural
    (10 )     (381 )
Consumer
    (209 )     (113 )
Recoveries
               
Real estate – mortgage
    13        
Commercial, financial and agricultural
    2        
Consumer
    34       33  
Net charge-offs
    (210 )     (542 )
Provision for loans losses
    450       900  
Allowance for loan losses at end of year
    4,137       3,897  
Ratio of net charge-offs to average loans
    .08 %     .23 %
                 
    June 30,
For the six months ended:   2004
  2003
    (dollars in thousands)
Allowance for loan losses at beginning of year
  $ 4,137     $ 3,897  
Charge-offs
               
Real estate – mortgage
    (109 )     (25 )
Commercial, financial and agricultural
          (10 )
Consumer
    (66 )     (96 )
Recoveries
               
Real estate – mortgage
          14  
Commercial, financial and agricultural
          1  
Consumer
    9       11  
Net charge-offs
    (166 )     (105 )
Provision for loans losses
    150       300  
Allowance for loan losses at June 30
    4,121       4,092  
Ratio of net charge-offs to average loans
    .06 %     .04 %

     Deposits

     The following table presents the average amount outstanding and the average rate paid on deposits by Farmers and Merchants for the years 2003 and 2002 and for the six months ended June 30, 2004 and 2003.

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    December 31, 2003
    Average    
    Amount   Average
    (in thousands)
  Rate
Noninterest-bearing demand deposits
  $ 43,116        
Interest-bearing demand and savings
    73,875       1.58 %
Time deposits
    169,481       2.75  
 
   
 
     
 
 
 
  $ 286,472       2.39 %
 
   
 
     
 
 
                 
    December 31, 2002
    Average    
    Amount   Average
    (in thousands)
  Rate
Noninterest-bearing demand deposits
  $ 39,890        
Interest-bearing demand and savings
    68,599       2.18 %
Time deposits
    170,856       3.54  
 
   
 
     
 
 
 
  $ 279,345       3.15 %
 
   
 
     
 
 
                 
    June 30, 2004
    Average    
    Amount   Average
    (in thousands)
  Rate
Noninterest-bearing demand deposits
  $ 46,142        
Interest-bearing demand and savings
    81,976       1.35 %
Time deposits
    174,788       2.33  
 
   
 
     
 
 
 
  $ 302,906       2.02 %
 
   
 
     
 
 
                 
    June 30, 2003
    Average    
    Amount   Average
    (in thousands)
  Rate
Noninterest-bearing demand deposits
  $ 42,788        
Interest-bearing demand and savings
    73,323       1.77 %
Time deposits
    169,709       2.93  
 
   
 
     
 
 
 
  $ 285,820       2.58 %
 
   
 
     
 
 

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     The following table presents the maturities of Farmers and Merchants’ time deposits as of December 31, 2003 and 2002 and as of June 30, 2004 and 2003.

                         
    December 31, 2003
    (in thousands)
    Time   Time    
    Deposits   Deposits    
    $100,000   Less Than    
    or Greater
  $100,000
  Total
Months to maturity
                       
Three months or less
  $ 14,335     $ 31,488     $ 45,823  
Over three months through 12 months
    30,191       66,424       96,615  
Over 12 months
    8,226       17,743       25,969  
 
   
 
     
 
     
 
 
 
  $ 52,752     $ 115,655     $ 168,407  
 
   
 
     
 
     
 
 
                         
    December 31, 2002
    (in thousands)
    Time   Time    
    Deposits   Deposits    
    $100,000   Less Than    
    or Greater
  $100,000
  Total
Months to maturity
                       
Three months or less
  $ 13,871     $ 32,947     $ 46,818  
Over three months through 12 months
    27,946       75,523       103,469  
Over 12 months
    4,137       15,457       19,594  
 
   
 
     
 
     
 
 
 
  $ 45,954     $ 123,927     $ 169,881  
 
   
 
     
 
     
 
 
                         
    June 30, 2004
    (in thousands)
    Time   Time    
    Deposits   Deposits    
    $100,000   Less Than    
    or Greater
  $100,000
  Total
Months to maturity
                       
Three months or less
  $ 30,527     $ 29,094     $ 59,621  
Over three months through 12 months
    20,832       66,946       87,778  
Over 12 months
    8,655       17,711       26,366  
 
   
 
     
 
     
 
 
 
  $ 60,014     $ 113,751     $ 173,765  
 
   
 
     
 
     
 
 

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    June 30, 2003
    (in thousands)
    Time   Time    
    Deposits   Deposits    
    $100,000   Less Than    
    or Greater
  $100,000
  Total
Months to maturity
                       
Three months or less
  $ 18,316     $ 35,072     $ 53,388  
Over three months through 12 months
    24,757       67,543       92,300  
Over 12 months
    6,748       16,878       23,626  
 
   
 
     
 
     
 
 
 
  $ 49,821     $ 119,493     $ 169,314  
 
   
 
     
 
     
 
 

     Borrowings

     For liquidity purposes and for customer convenience, Farmers and Merchants also utilizes borrowings, principally the Federal Home Loan Bank of Atlanta (“FHLB”), and has lines to purchase overnight funds from correspondent banks. The following tables set forth certain information regarding Farmers and Merchants’ borrowings at the dates indicated.

                         
            December 31
            (in thousands)
Interest Rate
  Maturity Date
  2003
  2002
1.69%
  July 12, 2004   $ 2,000     $ 2,000  
1.54%
  August 5, 2004     2,000       2,000  
4.00%
  April 4, 2011     5,000       5,000  
3.49%
  November 10, 2011     6,000       6,000  
3.54%
  November 16, 2011     4,000       4,000  
5.41%
  October 3, 2016     385       415  
5.16%
  October 30, 2016     861       928  
5.53%
  June 27, 2017     951       1,021  
 
           
 
     
 
 
 
          $ 21,197     $ 21,364  
 
           
 
     
 
 
                         
            June 30,
            (in thousands)
Interest Rate
  Maturity Date
  2004
  2003
1.69%
  July 12, 2004   $ 2,000     $ 2,000  
1.54%
  August 5, 2004     2,000       2,000  
4.00%
  April 4, 2011     5,000       5,000  
3.49%
  November 10, 2011     4,000       4,000  
3.54%
  November 16, 2011     6,000       6,000  
5.41%
  October 3, 2016     370       400  
5.16%
  October 30, 2016     828       895  
5.53%
  June 27, 2017     916       986  
 
           
 
     
 
 
 
          $ 21,114     $ 21,281  
 
           
 
     
 
 

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     The FHLB has a blanket floating lien on Farmers and Merchants’ loan portfolio as collateral for these advances. The FHLB has established a credit availability for Farmers and Merchants at 10% of Farmers and Merchants’ total assets as of the most recent quarterly financial information submitted by Farmers and Merchants to the appropriate regulatory agencies.

Liquidity and Capital Resources

     Liquidity represents the ability to provide adequate funds for loan commitments and investment activities, as well as deposit withdrawals, payment of debt and financing of operations. The funds are obtained by converting assets to cash (representing primarily proceeds from collections on loans and maturities of investment securities) or by attracting and obtaining new deposits. Farmers and Merchants maintains relationships with the FHLB and several correspondent banks that can provide funds on short notice. Farmers and Merchants had FHLB borrowings of $21,197,000 and $21,364,000, as of December 31, 2003 and 2002, respectively. Farmers and Merchants had FHLB borrowings of $21,114,000 and $21,281,000 as of June 30, 2004 and 2003, respectively. As of December 31, 2003 and 2002, Farmers and Merchants has available FHLB advances of approximately $18,000,000 and $17,000,000 and Federal fund lines with correspondent banks of approximately $12,500,000 and $ 12,000,000, respectively. Farmers and Merchants’ liquidity is monitored on a regular basis by management. Management believes Farmers and Merchants’ liquidity position remained satisfactory in 2003 and 2002. Average loans represented 90.47%, and 85.72% of average deposits in 2003 and 2002, respectively. Average loans represented 90.22% and 88.77% of average deposits during the six months ended June 30, 2004 and 2003, respectively. Management is keenly aware of the importance of acquiring and maintaining deposits in order to continue growth.

     The Federal Banking regulatory authorities have adopted certain “prompt corrective action” rules with respect to deposit institutions. The rules establish five capital tiers: “well capitalized,” “adequately capitalized.” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” The various Federal banking regulatory agencies have adopted regulations to implement the capital rules by, among other things, defining the relevant capital measures for the five capital categories. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10 percent or greater, a Tier 1 risk-based capital ratio of 6 percent or greater and a Tier 1 leverage ratio of 5 percent or greater and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level. At June 30, 2004, Farmers and Merchants met the necessary benchmark capital ratios to be considered a “well capitalized” financial institution.

     The following table demonstrates capital ratio calculations as of December 31, 2003 and 2002 and as of June 30, 2004 and 2003.

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CAPITAL RATIOS
(dollars in thousands)

                                 
    December 31,
  June 30,
As of End of Period   2003
  2002
  2004
  2003
Tier 1 Capital
                               
Stockholders’ Equity
  $ 69,322     $ 67,074     $ 69,260     $ 70,091  
Unrealized losses (gains)
    (2,453 )     (3,878 )     2,480       (4,215 )
 
   
 
     
 
     
 
     
 
 
Total Tier 1 Capital
    66,869       63,196       71,740       65,876  
 
   
 
     
 
     
 
     
 
 
Tier 2 Capital
                               
Eligible Portion of Reserve for Loan Losses
    3,760       3,505       3,902       3,623  
Subordinated and other Qualifying Debt
                       
 
   
 
     
 
     
 
     
 
 
Total Tier 2 Capital
    3,760       3,505       3,902       3,623  
 
   
 
     
 
     
 
     
 
 
Total Risk Based Capital
  $ 70,629     $ 66,701     $ 75,642     $ 69,499  
 
   
 
     
 
     
 
     
 
 
Total Net Risk Weighted Assets
  $ 300,440     $ 280,019     $ 311,921     $ 289,394  
 
   
 
     
 
     
 
     
 
 
Total Risk Based Capital Ratio
    23.51 %     23.82 %     24.25 %     24.02 %
Tier 1 Capital Ratio
    22.26 %     22.57 %     23.00 %     22.76 %
Tier 1 Capital to Average Assets
    17.21 %     16.72 %     17.76 %     17.31 %
                 
    Regulatory Requirement
            Well
    Minimum
  Capitalized
Total Risk Based Capital Ratio
    8 %     10 %
Tier 1 Capital Ratio
    4 %     6 %
Tier 1 Capital Ratio
    4 %     5 %

     As of June 30, 2004, management was not aware of any recommendations by regulatory authorities, which if implemented, would have a material effect on the Bank’s liquidity, capital resources or results of operations. However, while management is not aware of any specific concerns, it is possible that examinations by regulatory authorities in the future could result in additional loss charge-offs, which could materially impact the Bank’s liquidity, capital resources and result of operations.

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Return on Assets and Stockholders’ Equity

     The following tables present selected financial ratios for the years ended December 31, 2003 and 2002 and for the six months ended June 30, 2004 and 2003.

                 
    December 31,
    2003
  2002
Return on average assets (1)
    2.94 %     3.02 %
Return on equity (2)
    17.95 %     19.25 %
Dividend payout (3)
    67.64 %     58.37 %
Equity to assets (4)
    16.39 %     15.67 %
                 
    June 30,
    2004
  2003
Return on average assets (1)
    2.87 %     2.98 %
Return on equity (2)
    17.25 %     18.13 %
Dividend payout (3)
    58.08 %     53.24 %
Equity to assets (4)
    16.61 %     16.43 %


(1)   Net income divided by average total assets.
 
(2)   Net income divided by average equity.
 
(3)   Dividends declared per share divided by net income per share.
 
(4)   Average equity divided by average total assets.

Inflation

     Inflation has an important impact on the growth of total assets in the banking industry and may create a need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. The Bank deals with the effects of inflation by managing its interest rate sensitivity gap position through its asset/liability management program and by periodically adjusting its pricing of services and banking products to take into consideration current costs.

Recently Issued Accounting Standards

     In April 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“FAS”) Statement No. 149 (“FAS 149”), Amendment of Statement 133 on Derivative Instruments and Hedging Activities. FAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FAS 133, Accounting for Derivative Instruments and Hedging Activities. FAS 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003.

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     In May 2003, the FASB issued FAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. FAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. FAS 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. FAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. For nonpublic entities, mandatorily redeemable financial instruments are subject to the provisions of FAS 150 for the first fiscal period beginning after December 15, 2003. Subsequent to the issuance of FAS 150, the FASB has issued four FASB Staff Positions (FSPs) addressing FAS 150. One FSP, FSP No. 150-3, contains information for nonpublic entities with certain stock buyback agreements with their major stockholders. FSP No. 150-3 defers indefinitely the effective date of the mandatory redemption provisions of FAS 150 and all related FSPs for nonpublic entities if the redemption date either is not fixed or if the payout amount is variable and not based on an index.

     In December 2003, the FASB issued FAS 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, to improve financial statement disclosures for defined benefit plans. The change replaces existing FASB disclosure requirements for pensions. In an effort to provide the public with better and more complete information, FAS 132 requires that companies provide more details about their plan assets, benefit obligations, cash flows, benefit costs and other relevant information. FAS 132 is effective for fiscal years ending after December 15, 2003, and for quarters beginning after December 15, 2003.

     In December 2003, the FASB issued a revision to FASB Interpretation No. 46 (“FIN 46R”) to clarify some of the provisions of FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, and to exempt certain entities from its requirements. Under FIN 46R, special effective date provisions apply to enterprises that have fully or partially applied FIN 46 prior to issuance of FIN 46R. Otherwise, application of FIN 46R is required in financial statements of public entities that have interests in structures that are commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities, other than small business issuers, for all other types of variable interest entities is required in financial statements for periods ending after March 15, 2004. Application by small business issuers to variable interest entities other than special-purpose entities is required at various dates in 2004 and 2005. In some instances, entities have the option of applying or continuing to apply FIN 46 for a short period of time before applying FIN 46R.

     The provisions of FAS 149, FAS 150, FAS 132 and FIN 46R are not expected to have a material impact on Farmers and Merchants’ financial statements.

Critical Accounting Policies

     Farmers and Merchants’ accounting policies are integral to understanding the results reported. Accounting policies are described in detail in Note 1 to the financial statements. Farmers and Merchants’ most complex accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an

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expense, recovering an asset or reducing a liability. In instances where required by generally accepted accounting principles, Farmers and Merchants uses a discount factor to determine the present value of assets and liabilities. A change in the discount factor could increase or decrease the values of those assets and liabilities. That change could result in either a beneficial or adverse impact on the financial results. Farmers and Merchants has established detailed policies and control procedures that are intended to ensure valuation methods are well controlled and applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of Farmers and Merchants’ current accounting policies involving significant management valuation judgments.

     Allowance for Loan Losses

     The allowance for loan losses represents management’s estimate of losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. The allowance for loan losses is determined based on management’s assessment of several factors: reviews and evaluations of specific loans, changes in the nature and volume of the loan portfolio, current economic conditions and the related impact on segments of the loan portfolio, historical loan loss experience and the level of classified and nonperforming loans.

     Loans are considered impaired if, based on current information and events, it is probable that Farmers and Merchants will be unable to collect the scheduled payments of principal or interest according to the contractual terms of the loan agreement. When a loan is deemed impaired, impairment is measured by using the fair value of the underlying collateral, the present value of the future cash flows discounted at the effective interest rate stipulated in the loan agreement, or the estimated market value of the loan. In measuring the fair value of the collateral, management uses assumptions (e.g., discount rate) and methodologies (e.g., comparison to the recent selling price of similar assets) consistent with those that would be utilized by unrelated third parties.

     Changes in the financial condition of individual borrowers, economic conditions, historical loss experience, or the condition of the various markets in which collateral may be sold may affect the required level of the allowance for loan losses and the associated provision for loan losses. Should cash flow assumptions or market conditions change, a different amount may be recorded for the allowance for loan losses and the associated provision for loan losses.

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Selected Financial Data
(dollars in thousands)
For the year:

                 
    December 31,
    2003
  2002
Net income
  $ 11,347     $ 11,265  
Return on average assets
    2.94 %     3.02 %
Return on average stockholders’ equity
    17.95 %     19.25 %
Per share:
               
Net income
    226.94       225.30  
Book value (based on outstanding shares of 50,000)
    1,386.44       1,341.48  
At year end:
               
Assets
    394,140       384,698  
Securities
    108,153       116,979  
Loans, net
    257,662       242,074  
Deposits
    293,027       283,859  
Stockholders’ equity
    69,322       67,074  
Average balance for the year:
               
Assets
    385,674       373,527  
Securities
    110,113       116,690  
Loans
    259,166       239,466  
Deposits
    286,472       279,345  
Stockholders’ equity
    63,197       58,519  

For the six months ended:

                 
    June 30,
    2004
  2003
Net income
  $ 5,768     $ 5,729  
Return on average assets
    2.87 %     2.98 %
Return on average stockholders’ equity
    17.25 %     18.13 %
Per share:
               
Net income
    115.36       114.58  
Book value
    1,385.20       1,401.82  
At June 30:
               
Assets
    403,370       387,800  
Securities
    106,838       111,961  
Loans, net
    271,477       253,918  
Deposits
    305,224       287,293  
Stockholders’ equity
    69,260       70,091  
Average balance for the six months ended:
               
Assets
    402,433       384,539  
Securities
    110,999       113,763  
Loans
    273,287       253,713  
Deposits
    302,906       285,820  
Stockholders’ equity
    66,869       63,197  

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BUSINESS OF CAPITAL CITY

General

     Capital City is a financial holding company registered under the Gramm-Leach-Bliley Act of 1999, and is subject to the Bank Holding Company Act of 1956, as amended. At June 30, 2004, Capital City had consolidated total assets of approximately $2.0 billion and shareowners’ equity of approximately $210 million. Its principal asset is the capital stock of Capital City Bank. Capital City Bank accounted for approximately 100% of the consolidated assets at June 30, 2004 and approximately 100% of consolidated net income of Capital City for the year ended December 31, 2003. In addition to its banking subsidiary, Capital City has seven other indirect subsidiaries, all of which are wholly-owned subsidiaries of Capital City Bank:

  Capital City Trust Company
 
  Capital City Mortgage Company (inactive)
 
  Capital City Securities, Inc.
 
  Capital City Services Company
 
  First Insurance Agency of Grady County, Inc.
 
  Southern Oaks, Inc.
 
  FNB Financial Services, Inc.

     On March 19, 2004, Capital City Bank completed its merger with Quincy State Bank, an affiliate of Synovus Financial Corp. Results of Quincy’s operations have been included in Capital City’s consolidated financial statements since March 20, 2004. Quincy had $116.6 million in assets with one office in Quincy, Florida and one office in Havana, Florida. The transaction was accounted for as a purchase and resulted in approximately $14.9 million of intangible assets, including approximately $12.5 million in goodwill and a core deposit intangible of $2.4 million. The core deposit intangible is being amortized over a 7-year period.

Banking Services

     Capital City Bank is a Florida chartered full-service bank engaged in the commercial and retail banking business. Significant services offered by the Bank include:

  Business Banking – Capital City Bank provides banking services to corporations and other business clients. Loans are made for a wide variety of general business purposes, including financing for commercial business properties, equipment, inventories and accounts receivable, as well as commercial leasing, letters of credit, treasury management services, and merchant credit card transaction processing.
 
  Commercial Real Estate Lending – Capital City Bank provides a wide range of products to meet the financing needs of commercial developers and investors, residential builders and developers, and community development.
 
  Residential Real Estate Lending – Capital City Bank provides products to help meet the home financing needs of consumers, including conventional permanent and construction/ permanent (fixed or adjustable rate) financing arrangements, and FHA/VA loan products.

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    Capital City Bank offers these products through its existing network of branch offices. Geographical expansion of the delivery of this product line has occurred over the past three years through the opening of four mortgage lending offices in Gainesville (Alachua County), Lakeland (Polk County), Ocala (Marion County), and Panacea (Wakulla County).
 
  Retail Credit – Capital City Bank provides a full range of loan products to meet the needs of consumers, including personal loans, automobile loans, boat/RV loans, home equity loans, and credit card programs.
 
  Institutional Banking – Capital City Bank provides banking services to meet the needs of state and local governments, public schools and colleges, charities, membership and not-for-profit associations including customized checking and savings accounts, cash management systems, tax- exempt loans, lines of credit, and term loans.
 
  Retail Banking – Capital City Bank provides a full range of consumer banking services, including checking accounts, savings programs, automated teller machines, overdraft facilities, debit/credit cards, night deposit services, safe deposit facilities, and PC/Internet banking. Customers can use the “Star-Line” system to gain 24-hour access to their deposit and loan account information, and transfer funds between linked accounts. The Bank is a member of the “Star” ATM Network that permits banking customers to access cash at automatic teller machines (“ATMs”) or point of sale merchants at locations throughout the United States.

Data Processing Services

     Capital City Services Company provides data processing services to financial institutions (including Capital City Bank), government agencies and commercial customers located throughout North Florida and South Georgia. As of June 30, 2004, the Services Company was providing computer services to six correspondent banks, which have relationships with Capital City Bank.

Trust Services and Asset Management

     Capital City Trust Company is the investment management arm of Capital City Bank. The Trust Company provides asset management for individuals through agency, personal trust, IRA’s and personal investment management accounts. Administration of pension, profit sharing and 401(k) plans is a significant product line. Associations, endowments and other non-profit entities hire the Trust Company to manage their investment portfolios. Individuals requiring the services of a trustee, personal representative or a guardian are served by a staff of well trained professionals. The market value of trust assets under discretionary management exceeded $632 million as of June 30, 2004, with total assets under administration exceeding $703 million.

Brokerage Services

     Capital City offers access to retail investment products through Capital City Securities, Inc., a wholly-owned subsidiary of Capital City Bank. These products are offered through INVEST Financial Corporation, a member of NASD and SIPC. Non-deposit investment and

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insurance products are: (1) not FDIC insured; (2) not deposits, obligations, or guaranteed by any bank; and (3) subject to investment risk, including the possible loss of principal amount invested. Capital City Securities, Inc.’s brokers are licensed through INVEST Financial Corporation, and offer a full line of retail securities products, including U.S. Government bonds, tax-free municipal bonds, stocks, mutual funds, unit investment trusts, annuities, life insurance and long-term health care. Capital City and its subsidiary are not affiliated with INVEST Financial Corporation.

Expansion of Business

     Since 1984, Capital City has completed 13 acquisitions totaling $1.3 billion in deposits within existing and new markets. In addition, in 2003, Capital City opened four new offices - two in Tallahassee and one each in Springhill and Starke (replacement office) - to improve service and product delivery within these Florida markets.

     Capital City plans to continue its expansion, emphasizing a combination of growth in existing markets and acquisitions. Acquisitions will be focused on a three state area including Florida, Georgia, and Alabama with a particular focus on acquiring banks and branches.

Directors and Executive Officers

     The directors of Capital City after the merger will be:

         
CLASS I DIRECTORS
  CLASS II DIRECTORS
  CLASS III DIRECTORS
Cader B. Cox, III
  Thomas A. Barron   Dubose Ausley
McGrath Keen, Jr.
  J. Everitt Drew   Frederick Carroll, III
Ruth A. Knox
  Lina S. Knox   John K. Humphress
William G. Smith, Jr.
  John R. Lewis   Henry Lewis III

     The executive officers of Capital City after the merger will be:

     
William G. Smith, Jr.
  Chairman, President and Chief Executive Officer
J. Kimbrough Davis
  Executive Vice President and Chief Financial Officer
Thomas A. Barron
  President of Capital City Bank

     The following section sets forth certain information regarding each of the persons who, after the consummation of the merger, will be a director or executive officer of Capital City. Except as otherwise indicated, each of the named persons has been engaged in his or her present principal occupation for more than five years.

CLASS I DIRECTORS:
(Term Expiring in 2007)

CADER B. COX, III
Mr. Cox, 50, has been a director since October 1994. Since 1976, he has served as President of Riverview Plantation, Inc., a resort and agricultural company.

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MCGRATH KEEN, JR.
Mr. Keen, 50, has served as President (since 2000) and director (1980-2004) of Farmers and Merchants, prior to its merger with Capital City. He was a principal shareowner of Farmers and Merchants at the time of the merger.

RUTH A. KNOX
Ms. Knox, 50, has been a director since July 1, 2003. Since 2003, she has served as President of Wesleyan College, Macon, Georgia. Prior to this appointment, she practiced law in Atlanta and Macon, Georgia for 25 years.

WILLIAM G. SMITH, JR.
Mr. Smith, 50, is the Chairman of the Board of Capital City and has been a director since 1982. In 1995, he was appointed President and Chief Executive Officer of Capital City and Chairman of Capital City Bank. In 2003, Mr. Smith was elected Chairman of the Board of Directors. Mr. Smith is the first cousin of Lina S. Knox.

CLASS II DIRECTORS:
(Term Expiring in 2005)

THOMAS A. BARRON
Mr. Barron, 51, has been a director since 1982. He is Treasurer of Capital City and was appointed President of Capital City Bank in 1995.

J. EVERITT DREW
Mr. Drew, 48, has been a director since July 1, 2003. Since 2000, he has been the President of St. Joe Land Company where his duties include overseeing the sale and development efforts of several hundred thousand acres of St. Joe property in northwest Florida and southwest Georgia.

LINA S. KNOX
Ms. Knox, 56, has been a director since January 1998. She is a dedicated community volunteer. Ms. Knox is the first cousin of William G. Smith, Jr.

JOHN R. LEWIS
Mr. Lewis, 61, has been a director since 1999. He is President and Chief Executive Officer of Super-Lube, Inc., Tallahassee, Florida which he founded in 1979.

CLASS III DIRECTORS:
(Term Expiring in 2006)

DUBOSE AUSLEY
Mr. Ausley, 66, has been a director since 1982. He is employed by the law firm of Ausley & McMullen and was Chairman of this firm and its predecessor for more than 20 years. Since 1992, he has served as a director of TECO Energy, Inc. Since 1993, Mr. Ausley has served as a director of Sprint Corporation. In addition, Mr. Ausley has been nominated, and has consented to serve, as a director of Huron Consulting Group, Inc.

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FREDERICK CARROLL, III
Mr. Carroll, 53, has been a director since July 1, 2003. Since 1990, he has been the Managing Partner of Carroll and Company, an accounting firm specializing in tax and audit based in Tallahassee, Florida.

JOHN K. HUMPHRESS
Mr. Humphress, 55, has been a director since 1994. Since 1973, he has been a shareowner of Krause Humphress Pace & Wadsworth, Chartered CPA’s.

HENRY LEWIS III
Dr. Lewis, 54, has been a director since July 1, 2003. Since 1994, he has served as Dean of the College of Pharmacy and Pharmaceutical Studies at Florida A&M University.

NON-DIRECTOR EXECUTIVE OFFICER:

J. KIMBROUGH DAVIS
Mr. Davis, 50, was appointed Executive Vice President and Chief Financial Officer of Capital City in 1997. He served as Senior Vice President and Chief Financial Officer from 1991 to 1997. In 1998, he was appointed Executive Vice President and Chief Financial Officer of Capital City Bank.

FINANCIAL INFORMATION

Pro Forma Consolidated Statements of Income

     The following unaudited pro forma consolidated statements of income have been prepared for (i) the six months ended June 30, 2004, and give effect to the merger, assuming the merger is accounted for as a purchase and occurred at the beginning of the period and (ii) for the year ended December 31, 2003 and give effect to the merger, assuming the merger is accounted for as a purchase and occurred at the beginning of the period. The unaudited pro forma consolidated statements of income should be read in conjunction with the notes thereto and the historical consolidated financial statements of Capital City, including the notes thereto, which are incorporated by reference in this Proxy Statement/Prospectus. See “WHERE YOU CAN FIND MORE INFORMATION ABOUT CAPITAL CITY,” on page 1, “SUMMARY – Historical and Pro Forma Comparative Per Share Data,” on page 15, and “– Selected Financial Data,” on page 13. The pro forma combined condensed statements of income are not necessarily indicative of the results that actually would have occurred if the merger had been consummated at the dates indicated or which may be obtained in the future.

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Capital City Bank Group, Inc.
Pro Forma Consolidated Statements of Income for the Six Months Ended June 30, 2004
(unaudited)

                                 
            Farmers and        
(Dollars in thousands, except per share data)
  Capital City
  Merchants
  Adjustments
  Consolidated
Short-Term Investments
  $ 339     $ 27     $ -33 (A)   $ 333  
Investment Securities
    2,402       2,225       -791 (A)     3,836  
Loan Income & Fees
    44,194       8,922       0       53,116  
 
   
 
     
 
     
 
     
 
 
TOTAL INTEREST INCOME
  $ 46,935     $ 11,174     $ -824     $ 57,285  
 
                               
INTEREST EXPENSE
                               
Interest on Deposits
  $ 4,779     $ 2,590     $ 0     $ 7,369  
Short-Term Borrowings
    536       62       0       598  
Long-Term Debt
    1,084       374       591 (B)     2,049  
 
   
 
     
 
     
 
     
 
 
TOTAL INTEREST EXPENSE
  $ 6,399     $ 3,026     $ 591     $ 10,016  
 
                               
NET INTEREST INCOME
  $ 40,536     $ 8,148     $ -1,415     $ 47,269  
 
                               
PROVISION FOR LOAN LOSSES
  $ 1,541     $ 150     $ 0     $ 1,691  
 
                               
NONINTEREST INCOME
                               
Service Charges
  $ 8,371     $ 657     $ 0     $ 9,028  
Data Processing
    1,336       0       0       1,336  
Trust
    1,691       0       0       1,691  
Gain (Loss) on Sale of Investments
    19       38       0       57  
Gain on the Sale of RE Loans
    1,680       0       0       1,680  
Other
    7,815       318       0       8,133  
 
   
 
     
 
     
 
     
 
 
TOTAL NONINTEREST INCOME
  $ 20,912     $ 1,013     $ 0     $ 21,925  
 
                               
OPERATING REVENUES
  $ 61,448     $ 9,161     $ -1,415     $ 69,194  
 
                               
NONINTEREST EXPENSE Compensation
  $ 21,549     $ 1,668     $ 0     $ 23,217  
Occupancy
    3,366       204       12 (C)     3,582  
FF&E
    4,040       231       0       4,271  
 
   
 
     
 
     
 
     
 
 
Total Occupancy and FF&E
  $ 7,406     $ 435     $ 12     $ 7,853  
Merger
    46       0       0       46  
Intangible Amortization
    1,752       0       902 (D)     2,654  
Other
    11,923       1,140       0       13,063  
 
   
 
     
 
     
 
     
 
 
 
                               
TOTAL NONINTEREST EXPENSE
  $ 42,676     $ 3,243     $ 914     $ 46,833  
 
                               
OPERATING PROFIT
  $ 17,231     $ 5,768     $ -2,329     $ 20,670  
 
                               
Provision For Income Taxes
  $ 5,941     $ 0     $ 1,327 (E)   $ 7,268  
 
   
 
     
 
     
 
     
 
 
 
                               
NET INCOME BEFORE MERGER EXPENSES
  $ 11,290     $ 5,768     $ -3,656     $ 13,402  
 
   
 
     
 
     
 
     
 
 
 
                               
Earnings Per Share:
                               
Basic
  $ 0.85                     $ 0.95  
Diluted
  $ 0.85                     $ 0.95  
Basic Shares Outstanding
    13,275               877       14,152 (*)
Diluted Shares Outstanding
    13,277               877       14,154 (*)


(*)   Assumes a merger conversion ratio of 17.54 Capital City shares per Farmers and Merchants share.

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(A)   Reduction in Farmers and Merchants Bank interest income primarily resulting from reduced federal funds sold (“FFS”) and investment securities used to fund distribution to Farmers and Merchants shareowners prior to merger as determined below:
                                         
                    Assumed   Total   Total
            Amount
  Yield
  (Per Year)
  Six Month
       
Reduction in FFS
  $ (7,000 )     0.96 %   $ (67 )   $ (33 )
       
Reduction in Securities
  $ (32,260 )     4.93 %   $ (1,591 )   $ (791 )
       
 
   
 
             
 
     
 
 
       
Net Change in Cash
  $ (39,260 )           $ (1,658 )   $ (824 )

(B)   Capital City will fund the cash portion of the purchase price through FHLB advances and its line of credit with a bank resulting in increased long-term debt interest expense as follows:
                                                 
                                            Total
                    Amount
  Rates
  Total
  Six Month
       
FHLB
          $ 25,000       4.03 %   $ 1,008     $ 501  
       
SunTrust LOC
          $ 10,325       1.75 %   $ 181     $ 90  
       
 
           
 
             
 
     
 
 
             Total Debt
 
    $ 35,325             $ 1,189     $ 591  

(C)   Represents additional depreciation resulting from purchase accounting adjustments to record buildings acquired at fair value:

                                         
                    Life   Total   Total
            Amount
  (In Years)
  Per Year
  Six Month
       
Buildings
  $ 625       25     $ 25     $ 12  

(D)   Represents amortization of identifiable intangible assets recorded in the acquisition
                                         
                    Life   Total   Total
            Amount
  (in Years)
  Per Year
  Six Month
       
Non-competes
  $ 1,000       2     $ 500     $ 249  
       
Core Deposit Intangibles (3% of Total Deposits)
  $ 9,200       7     $ 1,314     $ 653  
       
Goodwill
  $ 27,825       0     $     $  
       
 
   
 
             
 
     
 
 
       
Total Intangibles
  $ 38,025             $ 1,814     $ 902  

(E)   Represents income tax effect of pro forma adjustments:
                                         
            12/31/2003
      6/30/2004
   
       
Farmers & Merchants pretax income
  $ 11,347         $ 5,768      
       
Merger Adjustments
  $ (4,686 )           $ (2,329 )        
       
Total
  $ 6,661             $ 3,439          
       
Assumed marginal tax rate
    38.60 %             38.60 %        
       
 
   
 
             
 
         
       
Total Tax Provision
  $ 2,571             $ 1,327          
       
 
   
 
             
 
         

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Capital City Bank Group, Inc.
Pro Forma Consolidated Statements of Income for the Twelve Months Ended December 31, 2003
(unaudited)

                                 
            Farmers and        
(Dollars in Thousands, except per share data)
  Capital City
  Merchants
  Adjustments
  Consolidated
Short-Term Investments
  $ 1,261     $ 51     $ -67 (A)   $ 1,245  
Investment Securities
    6,135       4,761       -1,591 (A)     9,305  
Loan Income & Fees
    87,434       18,410       0       105,844  
 
   
 
     
 
     
 
     
 
 
TOTAL INTEREST INCOME
  $ 94,830     $ 23,222     $ -1,658     $ 116,394  
 
                               
INTEREST EXPENSE
                               
Interest on Deposits
  $ 11,567     $ 5,819     $ 0     $ 17,386  
Short-Term Borrowings
    1,270       170       0       1,440  
Long-Term Debt
    2,002       747       1,189 (B)     3,938  
 
   
 
     
 
     
 
     
 
 
TOTAL INTEREST EXPENSE
  $ 14,839     $ 6,736     $ 1,189     $ 22,764  
 
                               
NET INTEREST INCOME
  $ 79,991     $ 16,486     $ -2,847     $ 93,630  
 
                               
PROVISION FOR LOAN LOSSES
  $ 3,436     $ 450     $ 0     $ 3,886  
 
                               
NONINTEREST INCOME
                               
Service Charges
  $ 16,319     $ 1,476     $ 0     $ 17,795  
Data Processing
    2,403       0       0       2,403  
Trust
    2,650       0       0       2,650  
Gain (Loss) on Sale of Investments
    1       0       0       1  
Gain on the Sale of RE Loans
    6,090       0       0       6,090  
Other
    14,476       615       0       15,091  
 
   
 
     
 
     
 
     
 
 
TOTAL NONINTEREST INCOME
  $ 41,939     $ 2,091     $ 0     $ 44,030  
 
                               
OPERATING REVENUES
  $ 121,930     $ 18,577     $ -2,847     $ 137,660  
 
                               
NONINTEREST EXPENSE
                               
Compensation
  $ 40,462     $ 3,666     $ 0     $ 44,128  
Occupancy
    5,972       417       25 (C)     6,414  
FF&E
    7,840       467       0       8,307  
 
   
 
     
 
     
 
     
 
 
Total Occupancy and FF&E
  $ 13,812     $ 884     $ 25     $ 14,721  
Merger
    0       0       0       0  
Intangible Amortization
    3,241       0       1,814 (D)     5,055  
Other
    22,206       2,230       0       24,436  
 
   
 
     
 
     
 
     
 
 
 
                               
TOTAL NONINTEREST EXPENSE
  $ 79,721     $ 6,780     $ 1,839     $ 88,340  
 
                               
OPERATING PROFIT
  $ 38,773     $ 11,347     $ -4,686     $ 45,434  
 
                               
Provision For Income Taxes
  $ 13,580     $ 0     $ 2,571 (E)   $ 16,151  
 
   
 
     
 
     
 
     
 
 
 
                               
NET INCOME BEFORE MERGER EXPENSES
  $ 25,193     $ 11,347     $ -7,257     $ 29,283  
 
   
 
     
 
     
 
     
 
 
 
                               
Earnings Per Share:
                               
Basic
  $ 1.91                     $ 2.08  
Diluted
  $ 1.90                     $ 2.07  
 
Basic Shares Outstanding
    13,222               877       14,099 (*)
Diluted Shares Outstanding
    13,251               877       14,128 (*)


(*)   Assumes a merger conversion ratio of 17.54 Capital City shares per Farmers and Merchants share.

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Table of Contents

(A)   Reduction in Farmers and Merchants Bank interest income primarily resulting from reduced federal funds sold (“FFS”) and investment securities used to fund distribution to Farmers and Merchants shareowners prior to merger as determined below:
                                     
                Assumed   Total   Total
        Amount
  Yield
  (Per Year)
  Six Month
   
Reduction in FFS
  $ (7,000 )     0.96 %   $ (67 )   $ (33 )
   
Reduction in Securities
  $ (32,260 )     4.93 %   $ (1,591 )   $ (791 )
   
 
   
 
             
 
     
 
 
   
Net Change in Cash
  $ (39,260 )           $ (1,658 )   $ (824 )

(B)   Capital City will fund the cash portion of the purchase price through FHLB advances and its line of credit with a bank resulting in increased long-term debt interest expense as follows:
                                     
                                Total
        Amount
  Rates
  Total
  Six Month
   
FHLB
  $ 25,000       4.03 %   $ 1,008     $ 501  
   
SunTrust LOC
  $ 10,325       1.75 %   $ 181     $ 90  
   
 
   
 
             
 
     
 
 
   
Total Debt
  $ 35,325             $ 1,189     $ 591  

(C)   Represents additional depreciation resulting from purchase accounting adjustments to record buildings acquired at fair value:
                                     
                Life   Total   Total
        Amount
  (In Years)
  Per Year
  Six Month
   
Buildings
  $ 625       25     $ 25     $ 12  

(D)   Represents amortization of identifiable intangible assets recorded in the acquisition
                                     
                Life   Total   Total
        Amount
  (in Years)
  Per Year
  Six Month
   
Non-competes
  $ 1,000       2     $ 500     $ 249  
   
Core Deposit Intangibles (3% of Total Deposits)
  $ 9,200       7     $ 1,314     $ 653  
   
Goodwill
  $ 27,825       0     $     $  
   
 
   
 
             
 
     
 
 
   
Total Intangibles
  $ 38,025             $ 1,814     $ 902  

(E)   Represents income tax effect of pro forma adjustments:
                                     
        12/31/2003
      6/30/2004
   
   
Farmers & Merchants pretax income
  $ 11,347         $ 5,768      
   
Merger Adjustments
  $ (4,686 )           $ (2,329 )        
   
Total
  $ 6,661             $ 3,439          
   
Assumed marginal tax rate
    38.60 %             38.60 %        
   
 
   
 
             
 
         
   
Total Tax Provision
  $ 2,571             $ 1,327          
   
 
   
 
             
 
         

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Table of Contents

Pro Forma Consolidated Balance Sheet

     The following unaudited pro forma consolidated balance sheet presents the historical unaudited consolidated balance sheets of Capital City and Farmers and Merchants at June 30, 2004, giving effect to the merger, assuming the merger is accounted for as a purchase and had occurred on June 30, 2004. The unaudited pro forma consolidated balance sheet should be read in conjunction with the notes thereto and the historical consolidated financial statements of Capital City, including the notes thereto, which are incorporated by reference in this Proxy Statement/Prospectus. See “WHERE YOU CAN FIND MORE INFORMATION ABOUT CAPITAL CITY,” on page 1, “SUMMARY — Historical and Pro Forma Comparative Per Share Data,” on page 15, and ” — Selected Financial Data,” on page 13. The pro forma consolidated balance sheet is not necessarily indicative of the consolidated financial position that actually would have occurred if the merger had been consummated at the date indicated or which may be obtained in the future.

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Table of Contents

Capital City Bank Group, Inc.
Pro Forma Consolidated Statement Of Condition at June 30, 2004
(unaudited)

                                 
            Farmers and        
(Dollars in thousands, except per share data)
  Capital City
  Merchants
  Adjustments
  Consolidated
ASSETS:
                               
 
                               
Short-Term Investments
  $ 107,399     $ 7,000     $ -7,000 (A)   $ 107,399  
 
                               
Investment Securities — AFS
    183,732       105,291       -30,713 (A)     258,310  
Investment Securities — HTM
    0       1,547       -1,547 (A)     0  
 
   
 
     
 
     
 
     
 
 
Total Investment Securities
    183,732       106,838       -32,260       258,310  
 
                               
Loans, Net of Unearned Interest
    1,521,497       275,598       0       1,797,095  
 
                               
Earning Assets
    1,812,628       389,436       -39,260       2,162,804  
 
                               
Cash and Due From Banks
    97,154       9,508       0       106,662  
Bank Premises and FF&E
    56,263       3,859       625 (C)     60,747  
Other Real Estate Owned
    1,064       60       0       1,124  
Intangible Assets
    40,608       0       38,025 (D)     78,633  
Other
    32,770       4,628       0       37,398  
Reserve For Loan Loss
    -13,657       -4,121       0       -17,778  
 
   
 
     
 
     
 
     
 
 
Total Other Assets
    214,202       13,934       38,650       266,786  
 
                               
TOTAL ASSETS
  $ 2,026,830     $ 403,370     $ -610     $ 2,429,590  
 
   
 
     
 
     
 
     
 
 
 
                               
LIABILITIES
                               
 
                               
Noninterest Bearing DDA
    520,118       32,397       0       552,515  
Interest Bearing
    1,092,618       272,827       0       1,365,445  
 
   
 
     
 
     
 
     
 
 
Total Deposits
    1,612,736       305,224       0       1,917,960  
 
                               
Short-Term Borrowings
    127,012       5,124       0       132,136  
 
                               
Long-Term Debt
    58,427       22,562       35,325 (B)     116,314  
 
                               
Other Liabilities
    18,934       1,200       0       20,134  
 
                               
TOTAL LIABILITIES
    1,817,109       334,110       35,325       2,186,544  
 
                               
SHAREOWNERS’ EQUITY
                               
 
                               
Common Stock
    133       1,000       -991 (E)     142  
Surplus
    17,922       9,000       24,316 (E)     51,238  
Other Comprehensive Gain/Loss
    21       -28       28 (E)     21  
Retained Earnings
    191,645       59,288       -59,288 (E)     191,645  
 
   
 
     
 
     
 
     
 
 
 
                               
TOTAL SHAREOWNERS’ EQUITY
    209,721       69,260       -35,935       243,046  
 
                               
TOTAL LIABILITIES & SHAREOWNERS’ EQUITY
  $ 2,026,830     $ 403,370     $ -610     $ 2,429,590  
 
   
 
     
 
     
 
     
 
 

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Table of Contents

(A)   Represents liquidation of Farmers and Merchants Federal Funds Sold and Investment Securities to be used to fund distribution to Farmers and Merchants shareowners prior to merger, including a reclassification of held-to-maturity securities to available-for-securities as follows:
             
        Amount
   
Federal Funds Sold
  $ (7,000 )
   
Investment Securities
  $ (32,260 )
   
 
   
 
 
   
Total
  $ (39,260 )

(B)   Debt to be incurred to fund the cash portion of the purchase price through FHLB advances and line of credit with a bank as follows:
             
        Amount
   
FHLB
  $ 25,000  
   
Bank line of credit
  $ 10,325  
   
 
   
 
 
   
Total
  $ 35,325  

(C)   Represents purchase accounting adjustments to record buildings acquired at fair market value as follows:
             
        Amount
   
Buildings
  $ 625  

(D)   Represents purchase accounting adjustments to record identifiable intangible assets in connection with the acquisition as follows:
                     
            Life
        Amount
  (in Years)
   
Non-competes
  $ 1,000       2  
   
Core Deposit Intangibles (3% of Total Deposits)
  $ 9,200       7  
   
Goodwill
  $ 27,825       0  
   
 
   
 
         
   
Total Intangibles
  $ 38,025          

(E)   Represents equity transactions involved in the merger as well as elimination entries for consolidation as follows:
                                     
                            Total
                        Issue   Pro Forma
        Beginning Balance
  Elimination
  Capital City Stock
  Adjustments
   
Common Stock
  $ 1,000     $ (1,000 )   $ 9     $ (991 )
   
Surplus
  $ 9,000     $ (9,000 )   $ 33,316     $ 24,316  
   
Other Comprehensive Loss
  $ (28 )   $ 28           $ 28  
   
Retained Earnings
  $ 59,288     $ (59,288 )         $ (59,288 )

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Table of Contents

Farmers and Merchants Bank Supplemental Financial Information
(unaudited)

Quarterly Financial Data
(dollars in thousands, except
per share data)

                                                 
    2004
  2003
    Second
  First
  Fourth
  Third
  Second
  First
Summary of Operations:
                                               
Interest Income
  $ 5,614     $ 5,560     $ 5,768     $ 5,752     $ 5,817     $ 5,885  
Interest Expense
    1,515       1,511       1,525       1,603       1,766       1,842  
Net Interest Income
    4,099       4,049       4,243       4,149       4,051       4,043  
Provision for Loan Loss
    150       0       0       150       150       150  
Net Interest Income
                                               
After Provisions for Loan Loss
    3,949       4,049       4,243       3,999       3,901       3,893  
Noninterest Income
    548       465       439       519       687       446  
Merger Expense
                                               
Noninterest Expense
    1,627       1,616       2,029       1,553       1,602       1,596  
Income Before
                                               
Provision for Income Taxes
    2,870       2,898       2,653       2,965       2,986       2,743  
Net Income
    2,870       2,898       2,653       2,965       2,986       2,743  
Per Common Share:
                                               
Net Income Basic
  $ 57.40     $ 57.96     $ 53.06     $ 59.30     $ 59.72     $ 54.86  
Net Income Diluted
    57.40       57.96       53.06