Family Feud Erupts Over Management of Local Bank

Farmers & Merchants Bank of Long Beach is a community bank founded nearly a century ago by C.J. Walker that is still “in the hands of the Walker family,” its website proudly points out.

To some members of the Walker clan, that’s just the problem.

A dissident branch of Walker heirs who are F&M; Bank shareholders -- led by Marcus Walker, one of C.J.’s great-grandsons -- is challenging the management of the closely held bank headed by his uncle, Chief Executive and President Kenneth G. Walker.

Elevating a rift in the Walker family that has been simmering for decades, the activism is an abrupt change for a bank that holds tight to its conservative roots. F&M; Bank is the kind of place where the top executives keep their offices on the main floor of headquarters to stay close to customers and answer their own phones.

But Marcus Walker contends that the bank is too conservative with its cash, too skimpy with dividends and too lacking with the information it provides investors, even though he estimates that more than half of the stock is now held by public shareholders.

He also is annoyed that F&M; Bank never splits the stock, which he says keeps the shares thinly traded, overlooked and undervalued. They closed Wednesday at $4,799, down $51 for the day, on the OTC Bulletin Board market as only 19 shares changed hands.

The dispute could come to a boil today at F&M; Bank’s annual meeting in Long Beach. Walker, 41, has nominated two directors to F&M; Bank’s seven-member board, all of whom are up for reelection.

He has also filed a class-action lawsuit in Orange County Superior Court, alleging that his uncle and the rest of management have breached their fiduciary duty and abused their control by not acting in the best interests of all the bank’s stockholders.

Marcus Walker himself owns 485 shares, worth $2.3 million.

F&M; Bank, with $2.8 billion in assets, has 18 offices in Los Angeles and Orange counties and is the ninth-largest bank based in California. Besides 77-year-old Kenneth Walker, the company’s top leadership ranks include his two sons, Executive Vice Presidents Daniel Walker and W. Henry Walker.

They reject Marcus Walker’s claims and defend their management of F&M;, saying, “It’s the strongest bank in California.” They also say Marcus Walker is waging “a personal agenda” that began years ago when his late father, Donald Walker, quit the family business after a falling-out with Kenneth Walker.

“In our opinion, this is a personal grievance from a disgruntled family member,” the bank said in proxy materials to shareholders. “The bank’s consistently outstanding performance and the superior ratings the bank has received from independent outside sources make his claims ludicrous.”

The stock also has doubled in price since 2000, a fact Daniel Walker cited in an interview as evidence of the company’s “exceptional level” of performance. Although Marcus Walker and some others object, overall, “I believe the shareholders are very delighted with how we’ve operated the bank,” he said.

Siding with Marcus Walker are two other family members: David Walker, another of Marcus Walker’s uncles, and Joan Boice Jonas, one of his aunts. “There have been questions raised for years about the true value of the bank,” said David Walker, who owns more than 1,000 shares valued in excess of $4.8 million.

F&M; Bank is yet another example of families squabbling over businesses in which the founders’ heirs still have substantial influence.

Last year, the founding family of Torrance-based coffee distributor Farmer Bros. Co. reached a truce after years of feuding. Also, the Hoiles family in 2003 settled years of battles over control of Freedom Communications Inc., the Irvine-based parent of the Orange County Register.

“There are a lot of situations like this in which dissent takes place among family members,” said Gary Lutin, an investment banker who joined dissidents in criticizing Farmer Bros. management.

But in other ways, F&M; Bank is atypical.

Kenneth Walker, despite being CEO and president, is not on the board of directors. His son Daniel Walker is chairman.

“I don’t think it’s unusual,” said Daniel Walker, 50. His father, he said, “never made the choice to be part of the board.”

F&M; Bank has $550 million in capital -- four times the level required by regulators -- which Marcus Walker argues could be better used to benefit shareholders. But F&M; Bank defends its capital level as evidence of its fiscal responsibility. “We take real estate as collateral for most of our loans,” Daniel Walker said. If real estate values fall, he said, “the capital is what protects the bank, its shareholders and its depositors.”

He also stood behind the bank’s unwillingness to split its stock. F&M; Bank has only about 158,530 shares outstanding, giving the bank a total market value of $761 million.

The narrow market for F&M; Bank’s stock makes the bank less appealing as a takeover target, which suits the bank. The shares “have never been a vehicle for speculators,” F&M; said in its proxy materials.

Kenneth Walker and his sons declined to reveal how many F&M; Bank shares they own. Because of technical reasons, the bank hasn’t had to register its stock with the Securities and Exchange Commission, a step that would require the bank to divulge insiders’ stock holdings and other information that is commonly provided by public companies. Marcus Walker contends that F&M; Bank should register the shares to provide more disclosure to investors.

Marcus Walker lives in Oregon, where he owns a string of self-storage centers. He began delving into the bank’s operations after his father died three years ago, and said he felt compelled to take action because his efforts to get more information from the bank were dismissed. The bank denies that claim.

“I’m doing this for every shareholder,” he said. “It became obvious to me that there wasn’t adequate information out there for an investor to make an informed decision.”

Walker is getting outside support. Institutional Shareholder Services, which advises major investors on proxy issues, this week backed Walker’s two director nominees. One institutional money manager in California, who asked not to be identified, said he also was backing Walker.

So why doesn’t Walker use the stock’s advance as a reason to sell and move on?

“It has gone up a great deal, that’s correct,” Walker said. “But is it where it should be? Not that I want to sell tomorrow, but I should be able to go out on any given day and get the right price for it.”

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Farmers & Merchants Bank of Long Beach

* Headquarters: Long Beach

* Founded: 1907

* Top officer: Kenneth G. Walker, president and chief executive

* Service area: Los Angeles and Orange counties

* Branches: 18

* Total assets: $2.8 billion

* 2003 net income: $47.7 million

* Employees: 500

Source: Farmers & Merchants Bank of Long Beach