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Farmers & Merchants Bank Sees Future for Branches

Farmers & Merchants Bank of Long Beach is going against a banking trend by planning to open three more branches in Orange County.

At a time when other banks are cutting back their branches in favor of fintech, Chief Executive Daniel Walker and brother and President W. Henry Walker believe that even young tech savvy kids want to feel safe about their money.

“At the end of the day, those same individuals are still stating that they want a relationship, that they be called by a name and that they can call someone by a name that they’re entrusting their funds to,” Dan Walker said. “Bricks and mortars are still a requirement for any age of clients. Relationships are the maximum key to our success.”

The branch strategy looks to be working well as the bank, which currently has 13 branches in Orange County, reported its OC deposits rose 21% to $4.3 billion, ranking it No. 11 on the Business Journal’s annual list of banks with operations here (see list, page 32).

And this past year, F&M; (OTCQB: FMBL) surpassed a major milestone in the banking world—going over $10 billion in assets. It’s now ranked around 105th largest in the nation and 15th largest in California, Henry Walker said during an interview at the bank’s Newport Beach branch.

“We have the mantra as California’s strongest bank,” Dan Walker said.

4th Generation

Henry and Dan Walker are the fourth generation of Walkers to work at the bank, which was opened in 1907 by their great-grandfather C.J. Walker.

Dan Walker’s first job with the bank was at 14 when he ran the elevator at the institution’s headquarters in Long Beach. Henry Walker took his first job at the bank when he was 16, delivering gingerbread to the branches during the holidays, a family tradition.

Both moved up the ranks, working in just about every job at the bank.

“When Henry and I were hired by our grandfather, he told us ‘I expect you to work a half day,’” Dan Walker quipped. “We didn’t realize that was 12 hours.”

The brothers have inherited a proud legacy that includes the bank surviving two world wars, recessions, the Spanish flu and the internet bubble crash.

“We have never had an operating loss in 115 years,” Henry Walker said. “It is amazing. It’s important for Dan and me to never break that record.”

F&M; was able to avoid the 2008 financial meltdown that took down so many banks because the pair didn’t issue subprime mortgages.

“We anticipated it would be exactly what it was,” Dan Walker said. “In banking, one of the truisms is that interest will never repay that loss of principal.”

When asked where they see potential problems nowadays, they pointed to high-rise office buildings, due to uncertainty caused by the pandemic.

Pandemic

During the pandemic, F&M;’s first concern was the health of their employees so they could keep the bank branches open.

At the beginning of the Paycheck Protection Program (PPP), F&M; processed so many loans that at one time, it was the largest processor in the state. By the end, it processed 7,000 loans totaling about $1 billion.

“We wanted to fund 100% of our applications, which we did,” Dan Walker said.

Three-fourths of those loans were $150,000 or less.

“Our best day was when a gentleman walked in and said he needed $820,” Dan Walker said. “He cried tears because we saved his business that day.”

The bank saw many borrowers struggling as their revenue declined during the pandemic.

“We realigned the documents to what needed to be done at the time,” Henry Walker said.

The strength of the bank was evident last week, when F&M; announced its 516th issuance of a dividend, which has been continuous since 1916 and has never decreased. It also increased its quarterly dividend from $27 to $28 a share.

The bank finished 2021 with record high total deposits and net loans, as well as total assets.

Asset Growth

In the past 30 years, the bank has grown from $1.5 billion in assets to $11.5 billion, including adding almost $4 billion in the last two years alone.

Part of that growth can be attributed to its branch strategy, they said. In the coming year, it’ll be opening branches in Santa Ana, Tustin and in downtown Laguna Beach.

“We’d love to expand in Orange County,” Henry Walker said. “We see it as a primary market growth. We have an enormous amount of success here.”

They’re not immune to technology either, as they spend $10 million annually on their systems.

They also attribute the growth to often talking with their employees.

The brothers proudly point out that more than 100 employees have been with the bank for at least 15 years, and an additional 65 have dedicated 20 to 30 years.

“That’s a critical component,” Henry Walker said.  “We’re only as good as our employees. We have great employees.”

Crossing the $10 billion asset threshold signals more regulatory scrutiny, which the pair are taking in stride. Dan Walker pointed out the bank already has an internal audit department instead of outsourcing it.

“It’s an interesting time when you get to this size and all of a sudden your cash flow changes by $100 or $200 million in a day,” Dan Walker said.

The Strategy

F&M;’s business strategy is to develop relationships with customers.

“If you put in more collateral, we can benefit you on the interest rate. If you put in more deposits, we can benefit you on the interest rate. There is a relationship there,” Dan Walker said.  

“It isn’t just that you’re walking in and borrowing money and I’m going to be the cheapest rate in town.

“If you want to provide a relationship to us, if you want to be a depositor of ours and borrow as well, this is the relationship that we’re referring to and this is how we can benefit you the best.”

Henry Walker added, “We end up with the highest quality of borrowers.”

“Our rates are reasonable. There are no prepayment penalties, which attracts high-quality (borrowers).”

OC Economy 

The bank has budgeted for the Federal Reserve to raise interest rates by at least 1% this year.

The pair believes the OC economy will continue “to trend along.”

“As the interest rate comes about, everyone will slow just a little bit. I don’t think we’ll see something tremendously robust,” Dan Walker said.

Despite its success, the bank doesn’t receive buyout offers because “the industry is very aware that we’re not for sale,” Henry Walker said.

F&M; is still traded on over the counter and has no plans to uplift to Nasdaq or the New York Stock Exchange. The Walker family is the majority owner of the bank.

“We’re not encouraged to bring in a  group of shareholders who aren’t in line with how the bank operates,” Dan Walker said. “We’re here to do banking. We’re not here to have a business with the shareholders.”

It currently has two members of the fifth generation working at the bank.

“We’re delighted that they are even interested,” Dan Walker said.

“As long as they’re working 12-hour days, or half days, the family’s welcomed.” 

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