Fill and Sign the Changes Affecting Capital Stock Form

CHANGES AFFECTING CAPITAL STOCK §3.408 RESOLVED, that the Board of Directors of the corporation is hereby authorized to adopt a resolution adjusting the capital accounts of the corporation as, in their judgment, shall be in the best interests of the corporation in li ght of the adoption of the foregoing resolutions; and RESOLVED, that the Board of Directors of the corporation is hereby authorized and directed to adopt any or all changes to the By-laws of the corporation, and the officers of the corporation are hereby authorized and directed to do all other things and execute and file all documents, including amendments to the corporation's Amended and Restated Artic les of Incorporation, which in their sole judgment are deemed to be necessary and proper to carry out the intent of the foregoing resolutions. _____________________________ §3.408 To amend the Articles of Incorporation to reduce the par value of the corporation’s Common Stock from $5.00 to $1.00 per share. AMENDMENT OF CORPORATION’S COMMON STOCK PAR VALUE FROM $5.00 PER SHARE TO $1.00 PER SHARE (Proposal 2) Section 4 of Bank of Granite Corporation's Articles of Incorporation provides that the Corporation shall have the authority to issue a stated number of shares of Common Stock, each of which shall bear a stated par value. Specific ally, Section 4 provides the following: “The maximum number of shares which the corporation shall have the authority to issue is 10,000,000 shares of common stock, each of which shall have a par value of five dollars ($5.00)....” The Corporation's Board has already approved the change in par value of the Corporation's common stock par value from $5.00 per share to $1.00 per share and is asking that Corporation stockholders ratify this change. The following outlines the reasons for such change along with the Board's recommendation as to this Proposal. What is Par Value Stock? As a general rule, corporations are allowed to issue their common stock either with or without par value. When a corporation is initially formed, its Article of Incorporation will state whether or not its common st ock will be issued with a par value. The par value of a share of common stock is simply an amount fixed as the nominal va lue of the stockholder's interest in such share of stock. Historically, par value was intended to represent the sum of money or value of property or services which was supposed to have been contributed to the corporation in exchange for each share in the corporation's ownership. Par value was also originally intended to represent the consideration for which such shares of corporation common stock would be initially issued and sold. Today, par value means very little, other than from an accounting and state corporation law perspective. Stat e corporation law does provide that a corporation's stock may not be originally sold by the corporation upon its formation for less than its par value. However, there is generally a significant difference between the par value of a corporation's stock and the actual amount at which such stock may originally be sold or the price at which such stock may be trade d at a later date. Nevertheless, although there may be little or no relationship between a stock's par value and its c urrent value, state corporation law requires that certain procedures be followed if a corporation's stock carries with it a stated par value. In the case of Bank of Granite Corporation, these procedures can work to limit the flexibility of the Corporation in providing certain distributions of additional shares of Corporation Common Stock through either stock dividends or stock splits. (These procedures will typically not, however, restrict the Corporation in issuing cash dividends.) As described below, this lack of flexibility with respect to stock dividends or stock splits is the reason for the proposed change in the Corporation's Common Stock par value. Distinguish Capital Account and Surplus Account In order to understand the Board's proposal for a change in the par value of the Corporation's common stock, a stockholder should understand two terms. Both of these terms are defined under state corporation law and can function to limit the Corporation's flexibility in providing certain distributions of additional shares of Corporation Common Stock through either stock dividends or stock splits. The first term, “Capital Account,” represents the number of shares of Corporation Common Stock outstanding at any point in time, multiplied by such stock's par value amount. For example, _______ shares of Corporation common stock outstanding at ________________________ (at a $_________ per share par value) would generate a Capital Account equal to $______________ .The second term, “Surplus Account,” is the amount of the Corporation's "net assets" in excess of its Capital Account. For this determination, the term net assets means the amount by which the Corporation's total assets exceeds its total liabilities. For example, the Corporation's total assets of $___________________ at __________________________, less its total liabilities of $___________________, would yield net assets equal to $______________________. This amount of net assets less the Corporation's Capital Account of $____________________, would yield a Surplus Account as of ____________________ of $_________________________. Note also that the sum of the Corporation's Capital Account and its Surplus Account equals what is commonly referred to as the Corporation's Total Shareholder's Equity, The following chart demonstrates the relationship between these various Accounts and shows the effect of a change in the Corporation's Common Stock Par Value from $5.00 per share to $1.00 per share. Proforma Amount Amount on With Change Corporation _______________in Par Value to How Derived Account _______________ $1.00 per share Capital Account $______________ $__________ Number of Shares outstanding times par value per share Surplus Account* $______________ $_____________** Corporation net assets in ___________ _______________ ______________ excess of Capital Account Total Shareholder's $______________ $_____________ Sum of Capital Account Equity and Surplus Account * For purposes of Generally Accepted Accounting Principals (GAAP), the Surplus Account is further segregated into a "Capital Surplus" Account and a "Retained Earnings" Account. The Corporation's Capital Surplus Account represents the excess of amounts paid for the Corporation's Common Stock over its stated par value, and may also include amounts transferred from the Corporation's Retained Earnings Account when a stock dividend is issued. The Retained Earnings Account represents the Corporation's net income over its life as a corporation less all income distributions. On _________, _____, the Corporation’s Capital Surplus and Retained Earnings Accounts were, respectively, $_______________ and $_______________. For purposes of state corporation law, the sum of these two amounts equals the Corporation’s Surplus Account of $____________. ** With a change in the Corporation’s Common Stock Par Value from $5.00 per share to $1.00 per share, the Corporation’s Capital Surplus Account (see footnote above) would be increased by $________________ from $_______________ to $_________________. There would be no change in the Corporation’s Retained Earnings Account (see footnote above), nor would there be any change in the Corporation’s Total Shareholders’ Equity. Reason for Proposed Change. State corporation law distinguishes between the Corporation's Capital Account and Surplus Account for two purposes: (1) determining the source from which funds may be drawn for the purchase or redemption by the Corporation of outstanding shares issued by it, and (2) determining the source from which cash dividends and stock dividends may be paid and stock splits declared to the Corporation's stockholders on their outstanding shares. Note that cash dividends involve an actual monetary payment to a stockholder based on his ownership of Corporation Common Stock. In contrast, the payment of a stock dividend or the declaration of a stock split involves the issuance of additional shares of Corporation Common Stock to a stockholder based on his ownership of Corporation Common Stock. Thus, the payment of a stock dividend or the declaration of a stock split will merely increase the number of shares of Corporation Common Stock issued and outstanding but will not increase the total capitalization of the Corporati on (i.e., there will be no change in Total Shareholders' Equity). Nor will the payment of a stock dividend or the declaration of a stock split increase any stockholders' ownership percentage in the total issued and outstanding shares of Corporation Common Stock. Throughout this discussion in the Proxy Statement under Proposal 2, the stockholder should keep in mind the distinction between the payment of cash dividends and the payment of stock dividends or the declaration of stock splits. The Corporation has not repurchased or redeemed any of its issued and outstanding shares in the past, nor is there any present consideration towards a future repurchase or redemption. Since ______, though, the Corporation has declared _______ stock splits and has issued ________ stock dividends. Although the Corporation contemplates both the declaration of stock splits and the issuance of stock dividends on its Common Stock in the future, it currently has no plans for either the declaration of a stock split or the issuance of a stock dividend. However, if the Corporation should in the future declare either a stock split or issue a stock dividend, dollar amounts have to be transferred from the Corporation's Surplus Account to its Capital Account. The stockholder should understand how this need to transfer dollar amounts could limit the ability of the Corporation to declare a stock split or issue a stock dividend. If a stock split is declared, it will require that an amount equal to the number of new Corporation shares issued times suc h shares' par value be transferred from the Corporation's Surplus Account (specifically, its Capital Surplus Account) to its Capital Account. In contrast, if the Corporation declares a stock dividend, then the amount transferred from the Corporation's Surplus Account (specifically, its Retained Earnings Account) will be equal to the difference between the fair market value of all stock dividends and such new shares par value. Thus, when a stock dividend is declared, an amount equal to the aggregate par value of all new shares issued pursuant to the stock dividend will be transferred to the Corporation's Capital Account. Any excess of such new stock's fair market value over its par value will be transferred to the Corporation's Capital Surplus Account. The following chart provides an example of the declaration of a stock split and the issuance of a stock dividend by the Corporation, using the Corporation's current Common Stock par value of $5.00 per share and the proposed $1.00 per share par value. The examples utilize the Corporation's _____________________ Capital and Surplus Accounts and assume the Corporation has issued and outstanding _______________________ shares of Common Stock. Effect on Corporation Total Shareholders Equity Declaration or Issuance of Example @ $5.00 Par Value @$1.00 Par Value * Stock Split 6 for 5 stock Common Stock _______ Common Stock _______split (i.e., Capital Surplus _______ Capital Surplus _______ ________ new Retained Earnings _______ Retained Earnings _______ shares issued Total Shareholders Equity _______ Total Shareholders Equity _______ * Stock 20% stock Common Stock _______ Common Stock _______dividend (i.e, Capital Surplus _______ Capital Surplus _______ ________ new Retained Earnings _______ Retained Earnings _______ shares issue Total Shareholders Equity _______ Total Shareholders Equity _______ * Change in Retained Earnings based on $24,50 per share closing price of Corporation’s Common Stock as of _________________, ______, as quoted on NASDAQ. As the chart above shows, the need to transfer amounts from the Surplus Account can create difficulties when the Corporation declares a stock split or issues a stock dividend because the Corporation’s Common Stock carries a high par value and the Corporation has a limited dollar amount in its Surplus Account. As of _____________, ______, the Corporation’s Surplus Account equaled approximately $________________. This amount could be quickly depleted if future stock splits were declared or stock dividends were issued. In such cases, the ability of the Corporation to declare stock splits or issue stock dividends would be limited. For this reason, the Board is asking that stockholders ratify a change in the par value of the Corporation's Common Stock from $5.00 per share to $1.00 per share. This change will provide the Corporation better flexibility in its efforts to meet both its and its stockholders needs through the occasional declaration of stock splits and the issuance of stock dividends. It should also be stressed that the change in par value will have absolutely no effect on the value of each share of the Corporation's Common Stock. Nor will the change have any effect on the dollar amount of the Corporation's Total Shareholder's Equity. As discussed above, par value has relevance only with respect to certain state corporation law procedural requirements. The Board of Directors recommends a vote in favor of a change in the Corporation's Common Stock par value from $5.00 per share to $1.00 per share. _________________________________ §3.409 Reserved