Can a bank trade at over three times book for three years running? National Penn Bancshares of Boyertown, Pa., can.

When I first asked president Larry Jilk where the stock is trading and heard it was over 3 1/2 times book, I ascribed this to a built-in acquisition premium. However, the three-year-plus trading range goes well beyond such a premium and into the roots, culture, and business mix that are unique to this interesting company.

It successfully combines apparent enigmas to yield superior profits in a super community banking context. For one thing, the company has folded in all the banks it has acquired and eliminated their stand-alone charters, a no-no for most super community banks.

At the same time, bank subsidiaries have effectively retained their identity by not changing their name - a plan that looks good on the drawing board but doesn't work. At National Penn, it works, possibly because of the geographic concentration of the company.

Super Sales Culture

Another unusual aspect of Jilk's style of super community banking is his insistence on an intense sales culture. Of the company's 500-plus employees, 44 people (9%) do nothing but sell, and get compensated largely with commissions. They have no other responsibilities but trying to develop loans - commercial, residential mortgage, automobile, and so on.

Almost everyone in the company has a commission component to their compensation. "Banking is woefully lacking in its sales efforts and customer service," says Jilk. "We need to be more like our nonbank competitors. We've got a long way to go, but have started by linking our performance to the volume of business we do."

When I expressed concern about that - all of us have been burned by poor-quality assets generated by commissioned salespeople - Larry pointed out that the company has good asset quality (with loan losses of 0.4% and, that is particularly impressive figure since National Baneshares books "B" and "C" credits, loans that are just about the quality that finance companies make.

Risk Management

"Banks get paid for managing credit risk and appropriately charging for it," says Jilk. "We were generating a lot of retail loan applications from the B credits that we were not making, yet finance companies were making them. So we tried to position ourselves about half way between the commercial bank and the finance company and to increase the yield on assets to reflect the higher level of risk. We've been doing this for four years now and are pleased with the results."

The results are indeed pleasing. National Penn is in the 98th percentile of its peer banks in gross interest income. While loan losses are slightly higher, the net interest margin is in the stratosphere (6.25%). The margin, combined with an efficiency ratio in the low 50s and a 98% loan-to-deposit ratio yield ROE and ROA of 17.3% and 1.55% respectively.

Dividend Reinvestment Plan

Larry believes that consolidating new acquisitions (while reraining their name and local presence) and offering products with high net interest margin are the reasons behind the company's success. While that is true, these are not typical characteristics of super community banks. However, National Penn does have stock ownership and a community presence.

"One unusual facet of our bank is that over 50% of our shareholders participate in our dividend reinvestment plan. 1006 people come to our annual meeting, and we all share an old-fashioned family dinner. We really are trying to create a family atmosphere among our investors. We do not cater to the professional investor but to the family investor who lives in our community and works with us."

Larry believes that is why the stock was priced as high as 3.5 times book during the past year, which, incidentally, he finds to be a disadvantage in acquisitions. "When you're selling at such lofty levels, you really have to keep the earnings up to justify that price."

The company's performance has indeed kept up with its market value, indicating perhaps that the new wave of community banking must combine traditional relationship and community linkage elements.

National Penn Bancshares may be a member of the new wave, marrying close ties to the community with the new market requisites of efficiency, aggressive sales culture, and new products and appropriate pricing.

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