Farmers & Merchants Bank of Long Beach in California believes it has perfected a winning formula for keeping customers, employees and investors happy.

The $5.1 billion-asset bank has expanded significantly in the last five years by empowering employees to handle customer concerns and taking the time — sometimes years — to work with struggling borrowers, says Chairman and Chief Executive Daniel Walker.

Farmers & Merchants, founded by C.J. Walker in 1907, has a track record of retention; more than 10% of its roughly 600 employees have been at the bank for more than 20 years. And investors, some of which date back to the 1930s, like the bank's oversized dividend, which had topped $20 a share since early 2007.

To be sure, the bank has its share of challenges. Its net interest margin shrank nearly 70 basis points in the past year because of low interest rates and fierce competition. But Walker, a fourth-generation banker at Farmers & Merchants, says he sees signs of life in areas like construction.

The following is an edited transcript of an interview with Walker.

What are the bank's challenges and advantages?

DANIEL WALKER: Challenges are multifold in banking. Interest rates of course are the No. 1 subject, from the standpoint of earning on your securities portfolio and highly competitive lending rates. Personnel is always a challenge. In November we had an employee banquet. About a third, or 220 employees, had tenure with the bank of 10 years or more.

How are you tackling low rates and loan competition?

We are a $5 billion-asset bank and our securities portfolio represents about [half] of it. It's a very large percentage compared with our competitors. Discipline is the key to your securities portfolio. That's exactly where we focus our time and effort.

On the lending side, the key to Farmers & Merchants compared with our competitors is the individual [lender who] is willing to make a decision. We have lending decision-makers in each of our offices.

It sounds like you've empowered employees at each branch so customers don't have to wait for decisions.

Empowerment goes further than just the senior level at the branches. It goes into new accounts, the tellers and customer service. Training and education are keys in our industry. How to service those customers and how to make sure you are accomplishing their goals on an immediate basis is extremely important.

Where is Farmers & Merchants seeing growth?

The construction market is starting to get some legs back under it. We won't truly be able to recognize it until the end of 2013 or the beginning of 2014. I think there is a need there.

We concentrate on relationships with businesses owned by individuals. They're now starting to realize they can borrow funds again and move forward with increasing their inventories, causing their sales to increase as well.

One market I'm encouraged to look at is where you have owners who are real estate poor. Liquidity is not what they have in their market. What they have is a large set of assets, typically real estate that is paid for, but they struggle to drive the income to support that portfolio. I believe that those are very high-quality individuals who will again be in need of lending dollars. The terms will have to be specific to them so that they don't overindulge.

In your first-quarter earnings release, you referenced making strategic investments in people. Can you talk about that?

The bank was very aggressive in hiring senior lenders and executives in lending, auditing, risk, information and security. With lending, we have a new executive handling our chief lending position. We hired six new lenders in the Newport Beach/Corona del Mar area. The new auditing officer brought on three new staff as well.

If you don't have the senior staff to support the level of growth you have in assets then you are living a dangerous life. We've been able to complement the existing executive officers with additional knowledge and experience in banking.

Did market disruption create those hiring opportunities?

I think [the reason is] because we empower our employees without any political interference and direct reporting to myself or to my brother, who is president. This allows for great opportunities to anyone to enjoy their job. If you aren't passionate about what you do, then why go to work every day?

You have strong retention rates. How do you do that?

I would point the finger at my grandfather, Gus Walker, the bank's second president. He became president in 1938 and remained as president into the 1970s.

In 1948, he started a profit-sharing plan. Since then, the bank has contributed 15% of every employee's base salary to a plan that they take away when they retire. We also focus on our health insurance and our wellness. Healthy employees do a better job. If problems arise, then we have a good health plan so they are taken care of.

How have you managed to add $2 billion in assets since 2008?

We continued to lend during those tough years. Sure, we were exposed in relation to credits. We wanted to work with our customers. We weren't interested in terminating the loans or ending the relationship, though that happened on occasion. From a larger standpoint, we worked with our clients and made the adjustments that would best suit them so they could continue to be our customer. Ultimately, as they begin to grow again they will finish the payment of those loans.

In January 1994, the Northridge earthquake struck. We had a client who was in the middle of creating a shopping center there and the earthquake completely took away all of their work. This family had secured the loan with all of their real estate assets. We worked with them for 10 years and, in 2004, they were able to complete the construction.

Your stock trades at around $4,900 a share. Why is that?

We are trading at a little bit less than book value. That's what makes us popular among individuals. There were two comments made to me by a shareholder the other day. The reason he likes our stock is [because] it performs as we present ourselves to our shareholders. It also pays a consistent dividend. In 1916, we started to pay dividends to our shareholders. Since then, we've paid a dividend every quarter. The dividend was never less than the prior dividend.

What do you predict for the banking industry over the next two years?

Probably clear into 2015, banking will not change a great deal. Your interest rates will continue to be low. Following 2015, we'll start to get separation on the interest rates, but there will still be another year of lag time for the loan portfolio to catch up.

Customers are securing loans that are carried at a flat rate for a longer period of time. We'll have to live through those particular loans and, as those change in value or continue to be upgraded, that's when your banking income levels will also grow.

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