The ouster of Cardinal Bankshares' chief executive helped set into motion events that led to the Floyd, Va., company’s merger with another banking company.

Discussions between the $263 million-asset Cardinal and the $332 million-asset Grayson began shortly after Michael Larrowe was removed as Cardinal's CEO in November 2014, according to a recent regulatory filing. Larrowe had become CEO just two years earlier, when a shareholder revolt removed his predecessor and reshaped the company's board.

Shortly after Larrowe's departure, J. Allan Funk, Grayson's president and chief executive, contacted John Paul Houston, who was on Cardinal's board. Funk introduced Houston to Thomas Jackson Jr., Grayson's chairman. (Houston resigned from Cardinal's board last month.)

Cardinal, in late 2014, considered raising capital, but it quickly abandoned the notion because the board wanted to avoid diluting the value of shares held by existing investors.

Cardinal's board finally decided to pursue a merger of equals in mid-2015 after conducting a strategic planning process with CCG Catalyst Consulting Group. The board “believed that preserving the community banking model … was a high priority because of, among other things, the possible strategic advantages to offering customers the option to use a locally owned bank in the face of the influx of 'super-regional' banks,” the filing said.

By mid-July, Grayson and Cardinal had entered into a confidentiality agreement and begun conducting formal due diligence that included credit reviews. More meetings took place over subsequent months, and the exchange ratios were worked out in October.

The companies last November announced plans to merge by forming a new company called Parkway Acquisition. Grayson is set to own 60.2% of the new company.

As previously announced, Grayson will hold eight of Parkway's 12 initial board seats; its chairman will also keep that post at the new company. Cardinal has the right to eventually appoint two more directors.

Four of Parkway's seven corporate-level posts, including chief executive and chief financial officer, will go to Grayson executives.

The filing also disclosed that Grayson National Bank will be the surviving entity, though the companies have said they will select a new bank name after completing the combination.

Parkway expects to incur $2.9 million in merger-related expenses, though it also plans to cut $2.5 million in annual expenses. The bank, which will be regulated by the Office of the Comptroller of the Currency, will have 17 branches, more than $600 million in assets and more than $500 million in deposits.

Raymond James and Williams Mullen advised Grayson. Gentry Locke advised Cardinal, while Banks Street Partners provided a fairness opinion.

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