Cardinal's Awkward Rule for Succession Planning

Cardinal Bankshares in Virginia is switching leaders under tense circumstances for the second time in two years.

It is unclear this time who will permanently take over as president and chief executive of the small bank in the sleepy town of Floyd in the southwestern part of the state. A gaffe in announcing the latest change made the situation even stickier.

Cardinal, the holding company for the $268 million-asset Bank of Floyd, sent a press release to the Roanoke Times Tuesday disclosing that Michael Larrowe was no longer its CEO, adding that Mark Smith, its chief lending officer, would take over on an interim basis.

Ten minutes later, Cardinal tried to rescind the release, telling the local newspaper that the appointment needed approval from the Federal Reserve Board. A second release, issued later Tuesday, noted Larrowe's departure, but made no mention of Smith.

Smith confirmed that Larrowe had left, but largely declined to discuss matters further during a brief interview with American Banker. "The board is formalizing its plans around leadership," he said. "We hope to announce something in the not-so-distant future."

Cardinal has been a roller-coaster in recent years, starting in 2012 when Doug Schaller, an investor in Winston-Salem, N.C., orchestrated a shareholder revolt that took over the board and led to the ouster of longtime Chairman and CEO Leon Moore. Schaller, who originally expressed doubts about Larrowe, eventually mended fences with the executive and did not oppose the board when it appointed him CEO.

The investor's relationship with Larrowe has since soured. "He was a complete disaster," said Schaller, who added that he had sold off most of his Cardinal stock. "It will take a lot of work to undo what he did, particularly with expenses."

Still, it is unclear why Larrowe was dismissed after less than three years at the helm, though two incidents stand out to people familiar with the company. First, they point to Cardinal's decision earlier this year to significantly forgive and write off a $2.7 million loan to Bank of the Carolinas in Mocksville, N.C., which was looking to recapitalize itself. Larrowe was an executive at Bank of the Carolinas in August 2008 when it took on the subordinated debt.

Another issue has been increased operating costs, including expenses tied to a 2013 promotional video that prominently featured Larrowe. The bank's noninterest expenses rose 7.4% during the first nine months of 2014 compared with a year earlier, to $6.2 million, according to the company's call report. Cardinal earned nearly $1.1 million over that time, though it was largely due to $1.6 million in reversals of its loan-loss provision.

While Cardinal is looking for a permanent CEO, it could also face pressure to sell itself. Two people familiar with the matter said Stilwell Group, a New York investment firm that often invests in small banks before pushing them to find buyers, has started building a stake in the company.

A representative for Joseph Stilwell, the firm's manager, said he would not comment.

Schaller, for his part, said he does not want the company to sell, reversing a position he took in 2012 when he was fighting to have Moore removed. "I will not support selling the bank, and there are a lot of other people who won't," Schaller said.

"Under the right CEO, this bank can return to profitability," Schaller added, discounting the recent profitability as a function of reserve releases and other accounting moves. "This bank needs a seasoned CEO with turnaround experience who can cut costs."