National Penn Bancshares (NPBC) 10-Q 2012 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

000-22537-01

(Commission File Number)

NATIONAL PENN BANCSHARES, INC.

(Exact Name of Registrant as Specified in Charter)

Pennsylvania	23-2215075
(State or Other Jurisdiction of Incorporation)	IRS Employer Identification No.

Philadelphia and Reading Avenues,

Boyertown, PA  19512

(Address of Principal Executive Offices)

(800) 822-3321

Registrant’s telephone number, including area code

(Former Name or Former Address, if Changed Since Last Report):  N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.         Yes ý No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).        Yes ý No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 

Large accelerated filer ý		Accelerated filer ¨
Non-accelerated filer ¨	(Do not check if a smaller reporting company)	Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No ý

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class	Outstanding at November 5, 2012
Common Stock, no stated par value	149,550,520 shares

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION	2
Item 1.  Financial Statements	2
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3. Quantitative and Qualitative Disclosures About Market Risk	49
Item 4.  Controls and Procedures	49
PART II - OTHER INFORMATION	50
Item 1.  Legal Proceedings	50
Item 1A.  Risk Factors	50
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3.  Defaults Upon Senior Securities	58
Item 4.  Mine Safety Disclosures	58
Item 5.  Other Information	58
Item 6.  Exhibits	59
SIGNATURES	60

 PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	Unaudited
(dollars in thousands)	September 30, 2012			December 31, 2011
ASSETS
Cash and due from banks	$	120,421		$	129,637
Interest-earning deposits with banks	211,943			321,885
Total cash and cash equivalents	332,364			451,522
Investment securities available-for-sale, at fair value	1,773,579			1,747,019
Investment securities held-to-maturity
(Fair value $511,834 and $528,598 for 2012 and 2011, respectively)	472,884			496,574
Other securities	63,996			70,518
Loans held-for-sale	22,703			12,216
Loans and leases, net of allowance for loan and lease losses of $113,542 and $126,640 for 2012 and 2011, respectively	5,120,609			5,049,245
Premises and equipment, net	96,349			96,198
Accrued interest receivable	31,448			30,991
Bank owned life insurance	141,991			138,274
Other real estate owned and other repossessed assets	7,174			7,716
Goodwill	258,279			258,279
Other intangible assets, net	11,852			15,770
Unconsolidated investments	11,337			12,173
Other assets	90,961			99,786
TOTAL ASSETS	$	8,435,526		$	8,486,281
LIABILITIES
Non-interest bearing deposits	$	902,295		$	863,703
Interest bearing deposits	5,045,449			5,011,116
Total deposits	5,947,744			5,874,819
Customer repurchase agreements	534,613			523,978
Structured repurchase agreements	75,000			85,000
Federal Home Loan Bank advances, net of prepayment fees incurred	462,720			616,111
Subordinated debentures	144,374			145,310
Accrued interest payable and other liabilities	56,745			60,376
TOTAL LIABILITIES	7,221,196			7,305,594
SHAREHOLDERS' EQUITY
Common stock, no stated par value; authorized 250,000,000 shares, issued and outstanding: September 30, 2012 - 150,048,383; December 31, 2011 - 151,883,036; net of Treasury shares: September 30, 2012 - 2,334,169; December 31, 2011 - 0	1,387,073			1,383,082
Accumulated deficit	(181,225		)	(223,189		)
Accumulated other comprehensive income	28,617			20,794
Treasury stock	(20,135		)	—
TOTAL SHAREHOLDERS' EQUITY	1,214,330			1,180,687
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	8,435,526		$	8,486,281

The accompanying notes are an integral part of these financial statements.

2

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended					Nine Months Ended
(dollars in thousands, except per share data)	September 30,					September 30,
	2012		2011			2012			2011
INTEREST INCOME
Loans and leases, including fees	$	60,269	$	65,795		$	183,676		$	202,576
Investment securities
Taxable	10,525		11,591			32,675			34,500
Tax-exempt	7,402		8,337			22,819			25,231
Deposits with banks	148		332			484			846
Total interest income	78,344		86,055			239,654			263,153
INTEREST EXPENSE
Deposits	6,472		9,881			20,645			32,262
Customer repurchase agreements	511		593			1,606			1,950
Structured repurchase agreements	843		1,697			2,673			5,081
Federal Home Loan Bank advances	5,105		7,073			18,573			21,329
Subordinated debentures	1,859		2,394			5,586			7,149
Total interest expense	14,790		21,638			49,083			67,771
Net interest income	63,554		64,417			190,571			195,382
Provision for loan and lease losses	2,000		—			6,000			13,000
Net interest income after provision for loan and lease losses	61,554		64,417			184,571			182,382
NON-INTEREST INCOME
Wealth management	6,239		6,227			18,405			18,007
Service charges on deposit accounts	4,147		4,880			11,723			14,160
Insurance commissions and fees	3,238		3,406			9,745			10,147
Cash management and electronic banking fees	4,626		4,590			13,753			13,606
Mortgage banking	2,296		1,349			5,142			3,443
Bank owned life insurance	1,319		1,733			3,783			4,186
Earnings of unconsolidated investments	1,315		99			1,349			1,915
Other operating income	3,484		2,339			6,903			6,212
Loss on sale of building	—		(1,000		)	—			(1,000		)
Net gains (losses) from fair value changes on subordinated debentures	101		(506		)	936			(987		)
Loss on debt extinguishment	—		(998		)	—			(998		)
Net gains (losses) on sales of investment securities	—		1,022			(123		)	1,022
Impairment losses on investment securities:
Impairment related losses on investment securities	—		—			(154		)	—
Non credit-related losses on securities not expected to be sold recognized in other comprehensive income before tax	—		—			—			—
Net impairment losses on investment securities	—		—			(154		)	—
Total non-interest income	26,765		23,141			71,462			69,713
NON-INTEREST EXPENSE
Salaries, wages and employee benefits	31,555		30,809			94,170			92,666
Premises and equipment	7,226		7,228			21,428			21,287
FDIC insurance	1,259		2,213			3,734			8,396
Other operating expenses	13,299		14,803			38,716			43,662
Total non-interest expense	53,339		55,053			158,048			166,011
Income before income taxes	34,980		32,505			97,985			86,084
Income tax expense	8,964		7,692			24,219			19,283
NET INCOME	26,016		24,813			73,766			66,801
Preferred dividends and accretion of preferred discount	—		—			—			(1,691		)
Accelerated accretion from redemption of preferred stock	—		—			—			(1,452		)
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	26,016	$	24,813		$	73,766		$	63,658
PER SHARE OF COMMON STOCK
Basic earnings available to common shareholders	$	0.17	$	0.16		$	0.49		$	0.42
Diluted earnings available to common shareholders	$	0.17	$	0.16		$	0.49		$	0.42
Dividends paid in cash	$	0.09	$	0.03		$	0.21		$	0.05

The accompanying notes are an integral part of these financial statements.

3

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended September 30, 2012									Three Months Ended September 30, 2011
(dollars in thousands)	Before Tax Amount			Tax Expense			Net of Tax Amount			Before Tax Amount		Tax Expense		Net of Tax Amount
Net income	$	34,980		$	8,964		$	26,016		$	32,505	$	7,692	$	24,813
Unrealized gains on investment securities	5,819			2,036			3,783			13,565		4,748		8,817
Pension adjustment	(925		)	(324		)	(601		)	—		—		—
Unrealized gains on cash flow hedges	—			—			—			573		—		573
Other comprehensive income	4,894			1,712			3,182			14,138		4,748		9,390
Total comprehensive income	$	39,874		$	10,676		$	29,198		$	46,643	$	12,440	$	34,203
	Nine Months Ended September 30, 2012									Nine Months Ended September 30, 2011
(dollars in thousands)	Before Tax Amount			Tax Expense			Net of Tax Amount			Before Tax Amount		Tax Expense		Net of Tax Amount
Net income	$	97,985		$	24,219		$	73,766		$	86,084	$	19,283	$	66,801
Unrealized gains on investment securities	12,962			4,538			8,424			44,810		15,684		29,126
Pension adjustment	(925		)	(324		)	(601		)	—		—		—
Unrealized gains on cash flow hedges	—			—			—			1,618		—		1,618
Other comprehensive income	12,037			4,214			7,823			46,428		15,684		30,744
Total comprehensive income	$	110,022		$	28,433		$	81,589		$	132,512	$	34,967	$	97,545

The accompanying notes are an integral part of these financial statements.

4

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(dollars in thousands, except share data)	Common							Accumulated Other Comprehensive Income
	Shares		Value		Accumulated Deficit					Treasury Stock			Total
Balance at December 31, 2011	151,883,036		$	1,383,082	$	(223,189	)	$	20,794	$	—		$	1,180,687
Comprehensive income:
Net income					73,766								73,766
Other comprehensive income, net of taxes								7,823					7,823
Total comprehensive income													81,589
Cash dividends declared common					(31,802		)						(31,802		)
Shares issued under share-based plans, net of excess tax benefits	622,919		3,991							1,107			5,098
Treasury stock purchased	(2,457,572	)								(21,242		)	(21,242		)
Balance at September 30, 2012	150,048,383		$	1,387,073	$	(181,225	)	$	28,617	$	(20,135	)	$	1,214,330

The accompanying notes are an integral part of these financial statements.

5

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW

(dollars in thousands)	Nine Months Ended September 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	73,766		$	66,801
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses	6,000			13,000
Depreciation and amortization	11,665			12,394
Amortization of premiums and discounts on investment securities, net	2,760			1,378
Net losses (gains) from sales of investment securities	123			(1,022		)
Impairment of investment securities	154			—
(Decrease) increase in fair value of subordinated debentures	(936		)	987
Bank owned life insurance policy income	(3,783		)	(4,186		)
Share-based compensation expense	2,800			2,843
Unconsolidated investment distributions (gains), net	836			(445		)
Loans originated for resale	(156,245		)	(99,894		)
Proceeds from sale of loans	149,668			97,922
Gain on sale of loans, net	(3,909		)	(2,388		)
Write-downs/losses on sale of other real estate owned, net	860			44
Loss on sale of bank buildings	—			1,000
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable	(457		)	719
Decrease in accrued interest payable	(5,411		)	(5,617		)
Decrease in other assets	4,155			14,285
Increase (decrease) in other liabilities	1,780			(4,607		)
Net cash provided by operating activities	83,826			93,214
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and repayments of investment securities held-to-maturity	23,338			36,794
Proceeds from maturities and repayments of investment securities available-for-sale	292,237			225,650
Proceeds from sale of investment securities available-for-sale	850			65,609
Purchase of investment securities available-for-sale	(309,371		)	(404,951		)
Proceeds from sale of other securities	6,522			7,764
Proceeds from sale of loans previously held for investment	1,883			5,697
Net (increase) decrease in loans and leases	(81,603		)	130,276
Purchases of premises and equipment	(7,337		)	(3,247		)
Proceeds from the sale of other real estate owned	1,906			488
Claims from bank owned life insurance	—			1,322
Net cash (used in) provided by investing activities	(71,575		)	65,402
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in transaction and savings accounts	188,323			153,897
Net decrease in certificates of deposit	(115,398		)	(220,079		)
Net increase (decrease) in customer repurchase agreements	10,635			(69,356		)
Decrease in short-term borrowings	—			(3,600		)
Repayments of FHLB advances and structured repurchase agreements	(163,952		)	(108,117		)
Proceeds from shares issued - share-based plans	2,170			2,033
Excess tax benefit - share-based plans	(143		)	(218		)
Issuance of common stock in private placement	—			84,543
Purchase of treasury stock	(21,242		)	—
Cash dividends, common	(31,802		)	(7,581		)
Repayment of Series B Preferred stock	—			(150,000		)
Repurchase of common stock warrant	—			(1,000		)
Cash dividends, preferred	—			(2,521		)
Net cash used in financing activities	(131,409		)	(321,999		)
Net decrease in cash and cash equivalents	(119,158		)	(163,383		)
Cash and cash equivalents at beginning of year	451,522			702,382
Cash and cash equivalents at end of period	$	332,364		$	538,999

The accompanying notes are an integral part of these financial statements.

6

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

SUPPLEMENTAL CASH FLOW DISCLOSURES

The Company considers cash and due from banks and interest earning deposits with banks as cash equivalents for the purposes of reporting cash flows. Cash paid for interest and income taxes is as follows:

	Nine Months Ended
(dollars in thousands)	September 30,
	2012		2011
Interest	$	54,495	$	73,387
Income taxes	14,697		14,703

7

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.  BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions to Form 10-Q, and therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States ("GAAP"). However, all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of these financial statements have been included.  These financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for National Penn Bancshares, Inc. (the “Company” or “National Penn”) for the year ended December 31, 2011, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “Form 10-K”).  The results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

The Company has prepared its accompanying consolidated financial statements in accordance with GAAP as applicable to the financial services industry.   The consolidated financial statements include the balances of the Company and its wholly owned subsidiary, National Penn Bank (“National Penn Bank”).  All material intercompany balances and transactions have been eliminated in consolidation.  References to the Company include all the Company’s subsidiaries unless otherwise noted.

8

2.  EARNINGS PER SHARE

The components of the Company’s basic and diluted earnings per share are as follows:

	Three Months Ended				Nine Months Ended
(dollars in thousands, except per share data)	September 30,				September 30,
	2012		2011		2012		2011
Income for EPS:
Net income available to common shareholders	$	26,016	$	24,813	$	73,766	$	63,658
Calculation of shares:
Weighted average basic shares	150,157,622		151,693,223		151,325,579		151,256,293
Dilutive effect of:
Share-based compensation	297,127		234,046		289,856		257,480
Warrants			—				—
Weighted average fully diluted shares	150,454,749		151,927,269		151,615,435		151,513,773
Earnings per common share:
Basic	$	0.17	$	0.16	$	0.49	$	0.42
Diluted	$	0.17	$	0.16	$	0.49	$	0.42

The following stock options were excluded from the computation of earnings per share as they were anti-dilutive:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Stock options	4,631,582		3,545,471		4,796,282		3,434,297
Exercise price
Low	$	7.07	$	5.85	$	7.07	$	5.85
High	$	21.49	$	21.49	$	21.49	$	21.49

9

3.  INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses, and fair values of the Company’s investment securities are summarized as follows:

(dollars in thousands)	September 30, 2012
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Available-for-Sale
U.S. Government agencies	$	998	$	35	$	—		$	1,033
State and municipal bonds	278,966		19,366		(1,217		)	297,115
Agency mortgage-backed securities/collateralized mortgage obligations	1,399,682		49,200		(137		)	1,448,745
Non-agency collateralized mortgage obligations	10,066		206		(24		)	10,248
Corporate securities and other	11,998		410		(918		)	11,490
Marketable equity securities	3,594		1,357		(3		)	4,948
Total	$	1,705,304	$	70,574	$	(2,299	)	$	1,773,579
Held-to-Maturity
State and municipal bonds	$	415,043	$	35,676	$	(78	)	$	450,641
Agency mortgage-backed securities/collateralized mortgage obligations	57,327		3,349		—			60,676
Non-agency collateralized mortgage obligations	514		3		—			517
Total	$	472,884	$	39,028	$	(78	)	$	511,834
(dollars in thousands)	December 31, 2011
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Available-for-Sale
U.S. Government agencies	$	2,997	$	75	$	—		$	3,072
State and municipal bonds	313,607		15,588		(3,573		)	325,622
Agency mortgage-backed securities/collateralized mortgage obligations	1,344,442		43,230		(56		)	1,387,616
Non-agency collateralized mortgage obligations	14,887		292		(63		)	15,116
Corporate securities and other	12,023		486		(1,320		)	11,189
Marketable equity securities	3,749		758		(103		)	4,404
Total	$	1,691,705	$	60,429	$	(5,115	)	$	1,747,019
Held-to-Maturity
State and municipal bonds	$	421,046	$	29,284	$	(482	)	$	449,848
Agency mortgage-backed securities/collateralized mortgage obligations	74,714		3,197		—			77,911
Non-agency collateralized mortgage obligations	814		25		—			839
Total	$	496,574	$	32,506	$	(482	)	$	528,598

10

Gains and losses from sales of investment securities are as follows:

	For the Three Months Ended					For the Nine Months Ended
(dollars in thousands)	September 30,					September 30,
	2012		2011			2012			2011
Gains	$	—	$	1,032		$	—		$	1,032
Losses	—		(10		)	(123		)	(10		)
Net gains (losses) from sales of investment securities	$	—	$	1,022		$	(123	)	$	1,022

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at September 30, 2012 and December 31, 2011, respectively.

September 30, 2012
(dollars in thousands)		Less than 12 months					12 months or longer					Total
	No. of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
State and municipal bonds	40	$	12,561	$	(63	)	$	19,299	$	(1,232	)	$	31,860	$	(1,295	)
Agency mortgage-backed securities/collateralized mortgage obligations	8	43,055		(137		)	—		—			43,055		(137		)
Non-agency collateralized mortgage obligations	3	895		(24		)	—		—			895		(24		)
Corporate securities and other	8	7,437		(918		)	—		—			7,437		(918		)
Total debt securities	59	63,948		(1,142		)	19,299		(1,232		)	83,247		(2,374		)
Marketable equity securities	3	72		(3		)	—		—			72		(3		)
Total	62	$	64,020	$	(1,145	)	$	19,299	$	(1,232	)	$	83,319	$	(2,377	)
December 31, 2011
(dollars in thousands)		Less than 12 months					12 months or longer					Total
	No. of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
State and municipal bonds	92	$	3,263	$	(33	)	$	55,715	$	(4,022	)	$	58,978	$	(4,055	)
Agency mortgage-backed securities/collateralized mortgage obligations	4	23,226		(56		)	—		—			23,226		(56		)
Non-agency collateralized mortgage obligations	3	—		—			742		(63		)	742		(63		)
Corporate securities and other	9	4,461		(909		)	2,576		(411		)	7,037		(1,320		)
Total debt securities	108	30,950		(998		)	59,033		(4,496		)	89,983		(5,494		)
Marketable equity securities	5	588		(103		)	—		—			588		(103		)
Total	113	$	31,538	$	(1,101	)	$	59,033	$	(4,496	)	$	90,571	$	(5,597	)

11

The fair value of investment securities pledged as collateral are presented below:

(dollars in thousands)
	September 30, 2012		December 31, 2011
Deposits	$	1,007,833	$	808,873
Repurchase agreements	670,048		688,924
Other	102,987		43,145
Total	$	1,780,868	$	1,540,942

The amortized cost and fair value of investment securities, by contractual maturity, at September 30, 2012 are shown below.  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(dollars in thousands)	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	3,063	$	3,143	$	—	$	—
Due after one through five years	28,449		31,028		—		—
Due after five through ten years	146,634		158,149		63,018		66,810
Due after ten years	1,523,564		1,576,311		409,866		445,024
Marketable equity securities	3,594		4,948		—		—
Total	$	1,705,304	$	1,773,579	$	472,884	$	511,834

Evaluation of Impairment of Securities

The Company recorded $0.2 million of other-than-temporary impairment losses on an equity security for the nine months ended September 30, 2012. There were no amounts recorded during the three months ended September 30, 2012 and the year ended December 31, 2011.

The majority of the investment portfolio is comprised of U.S. Government Agency securities (mortgage-backed and collateralized mortgage obligations) and state and municipal bonds. For the investment securities with an unrealized loss, the Company has concluded, based on its analysis, that the unrealized losses in the Company’s investments are primarily caused by the movement of interest rates, and the contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment.

The majority of the unrealized losses for twelve months or longer are attributed to municipal bonds.  The Company evaluates a variety of factors in concluding whether the municipal bonds are other-than-temporarily impaired.  These factors include, but are not limited to, the type and purpose of the bond, the underlying rating of the bond issuer, and the presence of credit enhancements (i.e. state guarantees, municipal bond insurance, collateral requirements, etc.).  At September 30, 2012, approximately 70% of the Company’s municipal investment securities were general obligations of various municipalities and 30% were essential purpose revenue bonds.  As a result of its review and considering the attributes of these bonds, the Company concluded that the securities were not other-than-temporarily impaired since the decline in the fair value of these securities is due to changes in relative credit spreads for the municipal bond issuer industry.

Because the Company does not intend to sell these investments and it is not more likely than not it will be required to sell these investments before a recovery of fair value, which may be maturity, the Company does not consider the securities with unrealized losses for twelve months or longer to be other-than-temporarily impaired.

Other securities on the Company’s consolidated balance sheet totaled $64.0 million and $70.5 million as of September 30, 2012 and December 31, 2011, respectively. The balance includes Federal Loan Home Bank ("FHLB") of Pittsburgh stock and Federal Reserve Bank stock. These securities lack a market, and as such they are carried at par/cost since their fair value is not readily determinable. The Company evaluates, and will continue to evaluate, these securities for impairment each reporting period and has concluded the carrying value of these securities is not impaired. During 2012, the FHLB of Pittsburgh repurchased $6.5 million of its capital stock from the Company at par/cost.

12

4.  LOANS

The following table presents loan and lease classifications:

September 30, 2012	Performing
(dollars in thousands)	Pass Rated Loans			Special Mention Loans			Classified Loans			Non-Performing Loans			Total
Commercial and industrial loans and leases	$	2,213,689		$	78,571		$	140,444		$	31,245		$	2,463,949
CRE - permanent	839,483			19,312			53,026			6,690			918,511
CRE - construction	91,210			6,976			37,554			5,149			140,889
Commercial real estate	930,693			26,288			90,580			11,839			1,059,400
Residential mortgages	679,711			—			541			9,521			689,773
Home equity lines and loans	747,175			—			953			3,859			751,987
All other consumer	260,079			1,732			5,408			1,823			269,042
Consumer loans	1,686,965			1,732			6,902			15,203			1,710,802
Loans and leases	$	4,831,347		$	106,591		$	237,926		$	58,287		$	5,234,151
Percent of loans and leases	92.30		%	2.04		%	4.55		%	1.11		%	100.00		%
December 31, 2011	Performing
(dollars in thousands)	Pass Rated Loans			Special Mention Loans			Classified Loans			Non-Performing Loans			Total
Commercial and industrial loans and leases	$	2,113,637		$	75,988		$	199,262		$	31,140		$	2,420,027
CRE - permanent	746,741			42,259			56,663			9,861			855,524
CRE - construction	89,085			14,140			40,622			12,217			156,064
Commercial real estate	835,826			56,399			97,285			22,078			1,011,588
Residential mortgages	703,150			—			—			7,172			710,322
Home equity lines and loans	743,356			—			—			4,202			747,558
All other consumer	274,271			2,819			4,906			4,394			286,390
Consumer loans	1,720,777			2,819			4,906			15,768			1,744,270
Loans and leases	$	4,670,240		$	135,206		$	301,453		$	68,986		$	5,175,885
Percent of loans and leases	90.24		%	2.61		%	5.82		%	1.33		%	100.00		%

13

The following table presents the details for past due loans and leases: 

September 30, 2012	30-59 Days Past Due and Still Accruing			60-89 Days Past Due and Still Accruing			90 Days or More Past Due and Still  Accruing (1)			Total Past Due and Still Accruing			Accruing Current Balances		Non-Accrual Balances (2)			Total Loan Balances
(dollars in thousands)
Commercial and industrial loans and leases	$	2,868		$	2,212		$	48		$	5,128		$	2,427,712	$	31,109		$	2,463,949
CRE - permanent	501			386			—			887			913,844		3,780			918,511
CRE - construction	—			236			—			236			135,504		5,149			140,889
Commercial real estate	501			622			—			1,123			1,049,348		8,929			1,059,400
Residential mortgages	5,130			210			541			5,881			677,650		6,242			689,773
Home equity lines and loans	3,363			1,942			952			6,257			742,272		3,458			751,987
All other consumer	3,445			598			1,087			5,130			262,089		1,823			269,042
Consumer loans	11,938			2,750			2,580			17,268			1,682,011		11,523			1,710,802
Loans and leases	$	15,307		$	5,584		$	2,628		$	23,519		$	5,159,071	$	51,561		$	5,234,151
Percent of loans and leases	0.29		%	0.11		%	0.05		%	0.45		%			0.99		%
December 31, 2011	30-59 Days Past Due and Still Accruing			60-89 Days Past Due and Still Accruing			90 Days or More Past Due and Still  Accruing (1)			Total Past Due and Still Accruing			Accruing Current Balances		Non-Accrual Balances (2)			Total Loan Balances
(dollars in thousands)
Commercial and industrial loans and leases	$	8,113		$	2,253		$	59		$	10,425		$	2,378,521	$	31,081		$	2,420,027
CRE - permanent	724			209			—			933			847,188		7,403			855,524
CRE - construction	1,324			389			—			1,713			142,133		12,218			156,064
Commercial real estate	2,048			598			—			2,646			989,321		19,621			1,011,588
Residential mortgages	2,209			603			4			2,816			703,002		4,504			710,322
Home equity lines and loans	2,953			756			728			4,437			740,075		3,046			747,558
All other consumer	2,325			933			1,219			4,477			278,737		3,176			286,390
Consumer loans	7,487			2,292			1,951			11,730			1,721,814		10,726			1,744,270
Loans and leases	$	17,648		$	5,143		$	2,010		$	24,801		$	5,089,656	$	61,428		$	5,175,885
Percent of loans and leases	0.34		%	0.10		%	0.04		%	0.48		%			1.19		%

(1) Loans 90 days or more past due remain on accrual status if they are well secured and collection of all principal and interest is probable.

(2) At September 30, 2012, non-accrual balances included troubled debt restructurings of $5.3 million commercial real estate, $15.8 million of commercial and industrial, and $0.6 million of consumer loans. At December 31, 2011, non-accrual balances included troubled debt restructurings of $8.6 million commercial real estate and $11.2 million of commercial and industrial loans.

14

Changes in the allowance for loan and lease losses by loan portfolio are as follows:

September 30, 2012
Three Months Ended
(dollars in thousands)	Commercial (1)			Commercial Real Estate (2)			Consumer (3)			Unallocated			Total
Allowance for loan and lease losses:
Beginning balance	$	49,531		$	35,217		$	20,494		$	11,408		$	116,650
Charge-offs	(1,605		)	(2,273		)	(2,115		)	—			(5,993		)
Recoveries	489			37			359			—			885
Provision	(955		)	166			2,962			(173		)	2,000
Ending balance	$	47,460		$	33,147		$	21,700		$	11,235		$	113,542
Nine Months Ended
(dollars in thousands)	Commercial (1)			Commercial Real Estate (2)			Consumer (3)			Unallocated			Total
Allowance for loan and lease losses:
Beginning balance	$	55,815		$	40,722		$	19,660		$	10,443		$	126,640
Charge-offs	(9,740		)	(5,986		)	(6,896		)	—			(22,622		)
Recoveries	1,503			697			1,324			—			3,524
Provision	(118		)	(2,286		)	7,612			792			6,000
Ending balance	$	47,460		$	33,147		$	21,700		$	11,235		$	113,542
Allowance for loan and lease losses:
Individually evaluated for impairment	$	3,372		$	801		$	932		$	—		$	5,105
Collectively evaluated for impairment	44,088			32,346			20,768			11,235			108,437
Total allowance for loan and lease losses	$	47,460		$	33,147		$	21,700		$	11,235		$	113,542
Loans and leases:
Individually evaluated for impairment	$	31,245		$	14,238		$	15,203		$	—		$	60,686
Collectively evaluated for impairment	2,432,704			1,045,162			1,695,599			—			5,173,465
Loans and leases	$	2,463,949		$	1,059,400		$	1,710,802		$	—		$	5,234,151

(1) Commercial includes all C&I loans, including those secured by real estate, and capital leases.

(2) CRE is defined here as loans secured by non-owner occupied real estate which have a primary source of repayment of third-party rental income or the sale of the property securing the loan.

(3) Consumer loans include direct consumer loans (secured by residential real estate and other collateral), indirect consumer loans, consumer lines of credit (secured residential real estate and other collateral), and overdrafts.

15

Changes in the allowance for loan and lease losses by loan portfolio are as follows:

September 30, 2011
Three Months Ended
(dollars in thousands)	Commercial (1)			Commercial Real Estate (2)			Consumer (3)			Unallocated			Total
Allowance for loan and lease losses:
Beginning balance	$	63,903		$	44,542		$	18,409		$	11,055		$	137,909
Charge-offs	(2,623		)	(2,904		)	(2,847		)	—			(8,374		)
Recoveries	661			184			693			—			1,538
Provision	(1,514		)	1,851			2,333			(2,670		)	—
Ending balance	$	60,427		$	43,673		$	18,588		$	8,385		$	131,073
Nine Months Ended
(dollars in thousands)	Commercial (1)			Commercial Real Estate (2)			Consumer (3)			Unallocated			Total
Allowance for loan and lease losses:
Beginning balance	$	69,655		$	51,177		$	20,897		$	8,325		$	150,054
Charge-offs	(17,622		)	(10,575		)	(9,442		)	—			(37,639		)
Recoveries	1,275			966			3,417			—			5,658
Provision	7,119			2,105			3,716			60			13,000
Ending balance	$	60,427		$	43,673		$	18,588		$	8,385		$	131,073
Allowance for loan and lease losses:
Individually evaluated for impairment	$	4,634		$	2,766		$	465		$	—		$	7,865
Collectively evaluated for impairment	55,793			40,907			18,123			8,385			123,208
Total allowance for loan and lease losses	$	60,427		$	43,673		$	18,588		$	8,385		$	131,073
Loans and leases:
Individually evaluated for impairment	$	29,995		$	25,349		$	10,028		$	—		$	65,372
Collectively evaluated for impairment	2,392,043			941,294			1,762,566			—			5,095,903
Loans and leases	$	2,422,038		$	966,643		$	1,772,594		$	—		$	5,161,275

(1) Commercial includes all C&I loans, including those secured by real estate, and capital leases.

(2) CRE is defined here as loans secured by non-owner occupied real estate which have a primary source of repayment of third-party rental income or the sale of the property securing the loan.

(3) Consumer loans include direct consumer loans (secured by residential real estate and other collateral), indirect consumer loans, consumer lines of credit (secured residential real estate and other collateral), and overdrafts.

The Company did not have any loans acquired with deteriorated credit quality.

16

Impaired loan and lease details are as follows:

September 30, 2012
(dollars in thousands)	Recorded Investment With Related Allowance		Recorded Investment Without Related Allowance		Total Recorded Investment		Life-to-date Charge-offs		Total Unpaid Balances		Related Allowance		Average Recorded Investment
Commercial and industrial loans and leases	$	7,848	$	23,397	$	31,245	$	4,566	$	35,811	$	3,372	$	32,063
CRE - permanent	2,653		6,436		9,089		5,619		14,708		500		7,690
CRE - construction	896		4,253		5,149		9,952		15,101		301		10,282
Commercial real estate	3,549		10,689		14,238		15,571		29,809		801		17,972
Residential mortgages	3,274		6,247		9,521		494		10,015		829		7,452
Home equity lines and loans	365		3,494		3,859		2,392		6,251		103		3,266
All other consumer	—		1,823		1,823		74		1,897		—		2,072
Consumer loans	3,639		11,564		15,203		2,960		18,163		932		12,790
Total	$	15,036	$	45,650	$	60,686	$	23,097	$	83,783	$	5,105	$	62,825
December 31, 2011
(dollars in thousands)	Recorded Investment With Related Allowance		Recorded Investment Without Related Allowance		Total Recorded Investment		Life-to-date Charge-offs		Total Unpaid Balances		Related Allowance		Average Recorded Investment
Commercial and industrial loans and leases	$	13,363	$	17,718	$	31,081	$	5,992	$	37,073	$	4,003	$	31,845
CRE - permanent	2,285		7,575		9,860		6,586		16,446		1,160		14,079
CRE - construction	8,698		3,519		12,217		14,711		26,928		1,972		15,560
Commercial real estate	10,983		11,094		22,077		21,297		43,374		3,132		29,639
Residential mortgages	2,698		4,470		7,168		560		7,728		662		6,479
Home equity lines and loans	1,374		2,100		3,474		1,919		5,393		1,112		2,244
All other consumer	—		3,176		3,176		516		3,692		—		2,025
Consumer loans	4,072		9,746		13,818		2,995		16,813		1,774		10,748
Total	$	28,418	$	38,558	$	66,976	$	30,284	$	97,260	$	8,909	$	72,232

17

	Three Months Ended						Nine Months Ended
(dollars in thousands)	September 30,						September 30,
	2012			2011			2012			2011
Gross interest due on impaired loans	$	1,201		$	1,478		$	3,718		$	5,149
Interest received on impaired loans	(138		)	(105		)	(237		)	(609		)
Net impact of impaired loans on interest income	$	1,063		$	1,373		$	3,481		$	4,540
Average recorded investment in impaired loans	$	58,677		$	69,091		$	62,825		$	74,822

The following table presents details of the Company’s loans which experienced a troubled debt restructuring and are performing according to the modified terms. The Company’s restructured loans are included within non-performing loans and impaired loans in the preceding tables.

(dollars in thousands)	September 30, 2012		December 31, 2011
Commercial and industrial loans and leases	$	136	$	—
CRE - permanent	2,910		2,456
Residential mortgages	3,279		2,664
Home equity lines and loans	401		428
Total restructured loans	$	6,726	$	5,548
Undrawn commitments to lend on restructured loans	$	—	$	—

5.  DEPOSITS

(dollars in thousands)	September 30, 2012				December 31, 2011
	Balance		Cost (a)		Balance		Cost (a)
NOW accounts	$	1,498,344	0.14	%	$	1,293,148	0.17	%
Money market accounts	1,600,164		0.32	%	1,686,909		0.44	%
Savings	485,283		0.11	%	454,003		0.15	%
CDs less than $100	1,036,112		1.25	%	1,138,908		1.43	%
CDs $100 or greater	425,546		1.17	%	438,148		1.22	%
Total interest bearing deposits	5,045,449		0.52	%	5,011,116		0.65	%
Non-interest bearing deposits	902,295		—		863,703		—
Total deposits	$	5,947,744	0.44	%	$	5,874,819	0.56	%

(a) Cost represents interest incurred during the respective quarter.

At September 30, 2012, the scheduled maturities of certificates of deposit were as follows:

(dollars in thousands)	2012	$	292,231
	2013	649,073
	2014	274,023
	2015	94,168
	2016	93,281
	Thereafter	58,882
	Total	$	1,461,658

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6.  BORROWINGS

(dollars in thousands)	September 30, 2012				December 31, 2011
	Balance		Cost (a)		Balance		Cost (a)
Customer repurchase agreements	$	534,613	0.38	%	$	523,978	0.43	%
Structured repurchase agreements	75,000		4.28	%	85,000		4.05	%
Federal Home Loan Bank advances, net of prepayment fees incurred	462,720		4.09	%	616,111		4.50	%
Subordinated debentures accounted for at fair value	67,053		7.85	%	67,989		7.85	%
Subordinated debentures accounted for at amortized cost	77,321		2.98	%	77,321		3.84	%	(b)
Total borrowings and other debt obligations	$	1,216,707	2.65	%	$	1,370,399	3.07	%

(a) Cost represents interest incurred during the respective quarter.

(b) The cost includes the impact of interest rate swaps until their expiration in the fourth quarter of 2011.

During the third quarter of 2012, the Company restructured $400 million of fixed rate FHLB advances, with a weighted average rate of 4.59%, into $400 million of variable rate advances indexed to three month LIBOR with an initial rate of 0.90%.  In relation to the restructuring, the Company incurred a prepayment penalty of $68.7 million, which will be amortized over the term of the new instrument, and the effect of which is included in the cost reported in the table above. The unamortized prepayment penalty balance at September 30, 2012 was $67.6 million.

7.  CONTINGENCIES

In the normal course of business, the Company is named as a defendant in various lawsuits.  Accruals are established for legal proceedings when information related to the loss contingencies indicates that a loss settlement is both probable and can be estimated. At September 30, 2012, the Company did not have material amounts accrued for legal proceedings as it is the opinion of management that the resolution of such suits will not have a material effect on the financial position or results of operations of the Company. The outcome of legal proceedings is inherently uncertain, and as a result, the amounts recorded may not represent the Company's ultimate loss upon resolution. Thus, the Company’s exposure and ultimate losses may be higher or lower than amounts accrued or estimated as reasonably possible exposure.

8.  ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income was comprised of the following components, after tax:

(dollars in thousands)	September 30, 2012			December 31, 2011
Unrealized gains on investment securities	$	44,379		$	35,955
Pension	(15,762		)	(15,161		)
Total accumulated other comprehensive income	$	28,617		$	20,794

19

9.   EQUITY

On October 24, 2012, National Penn announced the fourth quarter cash dividend would be increased to ten cents per common share from nine cents per common share in the third quarter of 2012.

The Board of Directors authorized the repurchase of up to 7.5 million shares of National Penn’s common stock throughout 2012, which represents approximately five percent (5%) of the outstanding shares. The authorization of this repurchase plan supersedes all pre-existing share repurchase plans. As of September 30, 2012, the Company has repurchased 2.5 million shares for $21.2 million.

10.  FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

Financial instruments whose contract amounts represent credit risk:

	As of:
(dollars in thousands)	September 30, 2012		December 31, 2011
Commitments to extend credit	$	1,569,747	$	1,452,348
Commitments to fund mortgages	51,776		27,067
Commitments to sell mortgages to investors	74,479		39,283
Letters of credit	142,752		157,240

The Company enters into interest rate lock commitments with its mortgage loan customers whose loans are intended for sale in the future. These commitments are derivatives and, as such, are reported on the consolidated balance sheet at their estimated fair value. To hedge the fair value risk associated with changing interest rates on these commitments, the Company enters into forward commitments to sell the closed loans to investors. These hedges are economic hedges and are not designated in hedging relationships. The forward sale commitments are also derivatives and are recorded on the consolidated balance sheet at their estimated fair value.

Summary information regarding interest rate swap derivative positions which were not designated in hedging relationships are as follows:

(dollars in thousands)
September 30, 2012	Positions	Notional Amount		Asset		Liability		Receive Rate		Pay Rate		Life (Years)
Receive fixed - pay floating interest rate swaps	113	$	382,569	$	29,280	$	—	5.08	%	2.29	%	5.75
Pay fixed - receive floating interest rate swaps	113	382,569		—		29,280		2.29	%	5.08	%	5.75
Net interest rate swaps		$	765,138	$	29,280	$	29,280	3.68	%	3.68	%	5.75
December 31, 2011
Receive fixed - pay floating interest rate swaps	78	$	195,263	$	22,598	$	—	5.90	%	2.11	%	5.03
Pay fixed - receive floating interest rate swaps	78	195,263		—		22,598		2.11	%	5.90	%	5.03
Net interest rate swaps		$	390,526	$	22,598	$	22,598	4.01	%	4.01	%	5.03

20

The Company enters into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs.  These swaps are considered derivatives but are not designated in hedging relationships. These instruments have interest rate and credit risk associated with them.  In response, the Company enters into offsetting interest rate swaps with counterparties for interest rate risk management purposes. The counterparty swaps are also considered derivatives and are also not designated in hedging relationships. Changes to the fair value of assets and liabilities arising from these derivatives are included, net, in other operating income in the consolidated statement of operations.

The following summarizes the Company’s derivative activity:

		Income Statement Effect	Income Statement Effect
	Balance Sheet Effect at	for the Three Months Ended	for the Nine Months Ended
Derivative Activity	September 30, 2012	September 30, 2012	September 30, 2012
Interest rate swaps:	Increase to other assets/liabilities of $29.3 million.	No net effect on other operating income from offsetting $3.4 million change.	No net effect on other operating income from offsetting $6.7 million change.
Other derivatives:
Interest rate locks	Increase to other assets of $0.5 million.	Decrease to mortgage banking income of $0.3 million.	Decrease to mortgage banking income of $0.1 million.
Forward sale commitments	Increase to other liabilities of $1.0 million.	Increase to mortgage banking income of $0.2 million.	Decrease to mortgage banking income of $0.2 million.
		Income Statement Effect	Income Statement Effect
	Balance Sheet Effect at	for the Three Months Ended	for the Nine Months Ended
Derivative Activity	December 31, 2011	September 30, 2011	September 30, 2011
Cash flow hedges:
Pay fixed - receive floating interest rate swaps	There was no impact due to the expiration of all cash flow hedges.	The ineffective portion is zero. Increase to interest expense of $0.6 million for net settlements.	The ineffective portion is zero. Increase to interest expense of $1.7 million for net settlements.
Interest rate swaps:	Increase to other assets/liabilities of $22.6 million.	No net effect on other operating income from offsetting $4.6 million change.	No net effect on other operating income from offsetting $4.1 million change.
Other derivatives:
Interest rate locks	Increase to other assets of $0.6 million.	Increase to mortgage banking income of $1.1 million.	Increase to mortgage banking income of $0.4 million.
Forward sale commitments	Increase to other liabilities of $0.9 million.	Decrease to mortgage banking income of $1.4 million.	Decrease to mortgage banking income of $0.8 million.

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11.  FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company provides estimates of the fair value of its financial instruments. In general, fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, which is not adjusted for transaction costs. Accounting guidelines establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted, quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Basis of Fair Value Measurement:

Level 1 – Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The types of instruments valued based on quoted market prices in active markets include most U.S. Treasury securities, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.  The Company does not adjust the quoted price for such instruments.

The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most U.S. Government agency securities, state and municipal bonds, mortgage-backed securities, collateralized mortgage obligations, and corporate securities. Such instruments are generally classified within Level 2 of the fair value hierarchy and their fair values are determined as follows:

• The markets for U.S. Government agency securities are active, but the exact (cusip) securities owned by the Company are traded thinly or infrequently. Therefore the price for these securities is determined by reference to transactions in securities with similar yields, maturities and other features (matrix priced).

• State and municipal bonds owned by the Company are traded thinly or infrequently, and as a result the fair value is estimated in reference to securities with similar yields, credit ratings, maturities, and in consideration of any prepayment assumptions obtained from market data.

• Collateralized mortgage obligations and mortgage-backed securities are generally unique securities whose fair value is estimated using market information for new issues and adjusting for the features of a particular security by applying assumptions for prepayments, pricing spreads, yields and credit ratings.

• Certain corporate securities owned by the Company are traded thinly or infrequently. Therefore, the fair value for these securities is determined by reference to transactions in other issues of these securities with similar yields and features.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions. Valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.  Management’s best estimate consists of both internal and external support on certain Level 3 investments.  Internal cash flow models using a present value formula along with indicative exit pricing obtained from broker/dealers are used to fair value Level 3 investments.  Management changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows. Fair values for securities classified within Level 3 are determined as follows:

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• Certain corporate securities owned by the Company are not traded in active markets and prices for securities with similar features are unavailable. The fair value for each security is estimated in reference to benchmark transactions by security type based upon yields, credit spreads and option features.

• Marketable equity securities are securities not subject to ownership restrictions but are traded thinly on exchanges or over-the-counter. As a result, prices are not available on a consistent basis from published sources, and therefore additional quotations from brokers may be obtained. Additional indications of pricing, which are considered, include subsequent financing rounds or pending transactions. The reported fair value is based upon the Company’s judgment with respect to the information it is able to reliably obtain.

Interest rate swap agreements are measured by alternative pricing sources with reasonable levels of price transparency in markets that are not active.  Based on the complex nature of interest rate swap agreements, the markets these instruments trade in are not as efficient and are less liquid than that of the Level 1 markets.  These markets do however have comparable, observable inputs in which an alternative pricing source values these assets in order to arrive at a fair value.  These characteristics classify interest rate swap agreements as Level 2.

The Company has the option to measure eligible financial assets, financial liabilities and Company commitments at fair value (i.e. the fair value option), on an instrument-by-instrument basis. The election to use the fair value option is available when an entity first recognizes a financial asset or liability or upon entering into a Company commitment. Subsequent changes in fair value must be recorded in earnings.

Specifically, the fair value option was applied to the Company’s only fixed rate subordinated debenture liability with a cost basis of $65.2 million and fair value of $67.1 million at September 30, 2012.  Non-interest income included a gain of $0.9 million and a loss of $1.0 million for the change in fair value of the subordinated debenture for the nine months ended September 30, 2012 and 2011, respectively.  This subordinated debenture has a fixed rate of 7.85% and a maturity date of September 30, 2032 with an option to call after September 30, 2007.  The Company elected the fair value option for asset/liability management purposes.  The fair value of the subordinated debenture is based on an unadjusted, quoted price of the traded asset (Nasdaq: “NPBCO”) in an active market on the final day of each month.

The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2012 and December 31, 2011, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

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September 30, 2012	Total Fair Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(dollars in thousands)			(Level 1)		(Level 2)		(Level 3)
Assets
U.S. Government agencies	$	1,033	$	—	$	1,033	$	—
State and municipal bonds	297,115		—		297,115		—
Agency mortgage-backed securities/ collateralized mortgage obligations	1,448,745		—		1,448,745		—
Non-agency collateralized mortgage obligations	10,248		—		10,248		—
Corporate securities and other	11,490		61		9,779		1,650
Marketable equity securities	4,948		3,924		—		1,024
Investment securities, available-for-sale	$	1,773,579	$	3,985	$	1,766,920	$	2,674
Interest rate locks	470		—		470		—
Interest rate swap agreements	29,280		—		29,280		—
Liabilities
Subordinated debentures	$	67,053	$	67,053	$	—	$	—
Forward sale commitments	1,041		—		1,041		—
Interest rate swap agreements	29,280		—		29,280		—
December 31, 2011	Total Fair Value		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
(dollars in thousands)			(Level 1)		(Level 2)		(Level 3)
Assets
U.S. Government agencies	$	3,072	$	—	$	3,072	$	—
State and municipal bonds	325,622		—		325,622		—
Agency mortgage-backed securities/ collateralized mortgage obligations	1,387,616		—		1,387,616		—
Non-agency collateralized mortgage obligations	15,116		—		15,116		—
Corporate securities and other	11,189		1,117		8,452		1,620
Marketable equity securities	4,404		3,278		—		1,126
Investment securities, available-for-sale	$	1,747,019	$	4,395	$	1,739,878	$	2,746
Interest rate locks	587		—		587		—
Interest rate swap agreements	22,598		—		22,598		—
Liabilities
Subordinated debentures	$	67,989	$	67,989	$	—	$	—
Forward sale commitments	852		—		852		—
Interest rate swap agreements	22,598		—		22,598		—

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The following table presents activity for assets measured at fair value on a recurring basis for the nine months ended September 30, 2012:

(dollars in thousands)
Level 1	Beginning Balance January 1, 2012		Gains/(losses)/ (impairment) included in earnings			Gains/(losses) included in other comprehensive income			Purchases		Sales			Maturities/ Calls/Paydowns			Accretion/ Amortization			Transfers		Ending Balance September 30, 2012
Corporate securities and other	$	1,117	$	—		$	(25	)	$	—	$	—		$	(1,030	)	$	(1	)	$	—	$	61
Marketable equity securities	3,278		—			646			—		—			—			—			—		$	3,924
Total level 1	$	4,395	$	—		$	621		$	—	$	—		$	(1,030	)	$	(1	)	$	—	$	3,985
Level 2
U.S. Government agencies	$	3,072	$	—		$	(40	)	$	—	$	—		$	(2,000	)	$	1		$	—	$	1,033
State and municipal bonds	325,622		—			6,134			—		—			(37,277		)	2,636			—		$	297,115
Agency mortgage-backed securities/ collateralized mortgage obligations	1,387,616		—			5,889			307,371		—			(247,094		)	(5,037		)	—		$	1,448,745
Non-agency collateralized mortgage obligations	15,116		—			(46		)	—		—			(4,836		)	14			—		$	10,248
Corporate securities and other	8,452		(123		)	322			2,000		(850		)	—			(22		)	—		$	9,779
Total level 2	$	1,739,878	$	(123	)	$	12,259		$	309,371	$	(850	)	$	(291,207	)	$	(2,408	)	$	—	$	1,766,920
Level 3
Corporate securities and other	$	1,620	$	—		$	30		$	—	$	—		$	—		$	—		$	—	$	1,650
Marketable equity securities	1,126		(154		)	52			—		—			—			—			—		$	1,024
Total level 3	$	2,746	$	(154	)	$	82		$	—	$	—		$	—		$	—		$	—	$	2,674
Total available-for-sale securities	$	1,747,019	$	(277	)	$	12,962		$	309,371	$	(850	)	$	(292,237	)	$	(2,409	)	$	—	$	1,773,579

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The following table sets forth the Company’s financial assets subject to fair value adjustments (impairment) on a non-recurring basis. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

(dollars in thousands)	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
September 30, 2012	(Level 1)		(Level 2)		(Level 3)		Balance
Assets
Loans held-for-sale	$	—	$	22,703	$	—	$	22,703
Impaired loans, net	—		—		55,581		55,581
OREO and other repossessed assets	—		—		7,174		7,174
December 31, 2011
Assets
Loans held-for-sale	$	—	$	12,216	$	—	$	12,216
Impaired loans, net	—		—		58,067		58,067
OREO and other repossessed assets	—		—		7,716		7,716

Fair value for loans held-for-sale is estimated based upon available market data for mortgage-backed securities with similar interest rates and maturities.  Lower of cost or estimated fair value write-downs recorded on loans held-for-sale were zero as of September 30, 2012 and December 31, 2011.

Impaired loans totaled $60.7 million with a specific reserve of $5.1 million at September 30, 2012, compared to $67.0 million with a specific reserve of $8.9 million at December 31, 2011. Fair value for impaired loans is primarily measured based on the value of the collateral securing these loans, less estimated costs to sell, or the present value of estimated cash flows discounted at the loan’s original effective interest rate.  Appraised values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business.

Fair value for OREO and other repossessed assets is estimated based upon its appraised value less costs to sell. Additional write-downs recorded on OREO and other repossessed assets held at September 30, 2012 and December 31, 2011 totaled $1.0 million and $0.2 million, respectively.

In addition to financial instruments recorded at fair value in the Company’s financial statements, disclosure of the estimated fair value of all of an entity’s assets and liabilities considered to be financial instruments is also required.  For the Company, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments.  However, many of such instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.  Also, it is the Company’s general practice and intent to hold its financial instruments to maturity and to not engage in trading or sales activities.  Fair values have been estimated using data that management considered the best available and estimation methodologies deemed suitable for the pertinent category of financial instrument.  

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The estimation methodologies, resulting fair values and recorded carrying amounts are as follows:

(dollars in thousands)	September 30, 2012					December 31, 2011
	Carrying Amount			Fair Value		Carrying Amount			Fair Value
ASSETS
Cash and cash equivalents	$	332,364		$	332,364	$	451,522		$	451,522
Investment securities available-for-sale	1,773,579			1,773,579		1,747,019			1,747,019
Investment securities held-to-maturity	472,884			511,834		496,574			528,598
Loans held-for-sale	22,703			23,274		12,216			12,482
Loans and leases	5,234,151			5,146,893		5,175,885			5,021,895
Allowance for loan and lease losses	(113,542		)	—		(126,640		)	—
Loans and leases, net	$	5,120,609		$	5,146,893	$	5,049,245		$	5,021,895
OREO and other repossessed assets	$	7,174		$	7,174	$	7,716		$	7,716
Interest rate locks	470			470		587			587
Interest rate swap agreements	29,280			29,280		22,598			22,598
LIABILITIES
Non-interest bearing deposits	$	902,295		$	902,295	$	863,703		$	863,703
Interest bearing deposits, non-maturity	3,583,791			3,583,791		3,434,060			3,434,060
Deposits with stated maturities	1,461,658			1,465,404		1,577,056			1,575,222
Customer repurchase agreements	534,613			534,613		523,978			523,978
Structured repurchase agreements	75,000			79,319		85,000			90,820
Federal Home Loan Bank advances	462,720			557,967		616,111			705,493
Subordinated debentures	144,374			144,374		145,310			145,310
Forward sale commitments	1,041			1,041		852			852
Interest rate swap agreements	29,280			29,280		22,598			22,598

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The fair value of cash and cash equivalents has been estimated to equal the carrying amounts due to the short-term nature of these instruments.  Therefore, cash and cash equivalents are classified within Level 1 of the fair value hierarchy.

The fair value of investment securities held-to-maturity has been estimated in a similar fashion to similar securities categorized as available-for-sale.  Held-to-maturity securities include state and municipal bonds, collateralized mortgage obligations and mortgage-backed securities.  These instruments are classified within Level 2 of the fair value hierarchy.

The fair value of the loan portfolio has been estimated using a discounted cash flow methodology based upon prevailing market interest rates relative to the portfolios’ effective interest rate which includes assumptions concerning prepayment rates and net credit losses.  The loan portfolio is classified within Level 3 of the fair value hierarchy.

The fair value of non-interest bearing demand deposits has been estimated to equal the carrying amount, which is assumed to be the amount payable on demand at the balance sheet date and therefore are classified within Level 1 of the fair value hierarchy.

The fair value for interest bearing deposits, excludes deposits with stated maturities, and is based on the average remaining term of the instruments with the assumption that the exit value of the instruments would be funded with like instruments by principal market participants.  These instruments are classified within Level 2 of the fair value hierarchy.

The fair value of deposits with stated maturities is estimated at the present value of associated cash flows using contractual maturities and market interest rates.  These instruments are classified within Level 2 of the fair value hierarchy.

The fair value for customer repurchase agreements has been estimated at the present value of associated cash flows using contractual maturities and market interest rates for each instrument.  These instruments are classified within Level 2 of the fair value hierarchy.

The fair value for structured repurchase agreements is determined based on current market rates for similar borrowings, as well as a further calculation for valuing the optionality of the conversion features in certain of the instruments.  These instruments are classified within Level 2 of the fair value hierarchy.

Fair value for FHLB advances is determined based on current market rates for similar borrowings with similar credit ratings, as well as a further calculation for valuing the optionality of the conversion features in certain of the instruments.  These instruments are classified within Level 2 of the fair value hierarchy.

The fair value option was elected for the Company’s fixed rate subordinated debenture, and the fair value is measured on an unadjusted, quoted price for the traded assets (Nasdaq: “NPBCO”) and as such is classified within Level 1 of the fair value hierarchy. Subordinated debentures that float with LIBOR are callable at any time and the fair value is estimated to equal the par amount. These instruments are classified within Level 2 of the fair value hierarchy.

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12.  RETIREMENT PLANS

The Company has a curtailed, non-contributory defined benefit pension plan (National Penn Bancshares, Inc. Employee Pension Plan) covering substantially all employees of the Company and its subsidiaries employed as of January 1, 2009.  The Company-sponsored pension plan provides retirement benefits under pension trust agreements based on years of service. Prior to April 1, 2006, benefits are based on the average of the employee compensation during the highest five consecutive years during the last ten consecutive years of employment. Beginning on April 1, 2006, eligible compensation was limited to $50,000 per year.  The Company does not expect to make a contribution in 2012 because the plan’s funding credit balance will be applied toward reducing the contribution requirement. The Company’s expected long-term rate of return on plan assets is 7.25%.

On February 12, 2010, the Company curtailed its pension plan effective March 31, 2010, whereby no additional service will accumulate for vested participants after March 31, 2010. Unvested participants still have the opportunity to meet the five year vesting requirement to earn a benefit.

Net periodic benefit costs included the following components:

(dollars in thousands)	Nine Months Ended September 30,
	2012			2011
Service cost	$	93		$	90
Interest cost	1,712			1,748
Expected return on plan assets	(2,068		)	(2,055		)
Amortization of unrecognized net actuarial loss	421			217
Net periodic benefit cost	$	158		$	—

13.  SHARE-BASED COMPENSATION

The Company has certain compensation plans (collectively the “Plans”) authorizing the Company to grant various share-based employee and non-employee director awards, including common stock, options, restricted stock, restricted stock units and other stock-based awards.

A total of 5.3 million shares of common stock have been made available for awards to be granted under these Plans through November 30, 2014.  As of September 30, 2012, 1.3 million of these shares remain available for issuance.  The Company has 1.0 million awards expiring during the next twelve months ending September 30, 2013.

As of September 30, 2012, there was approximately $1.5 million of total unrecognized compensation cost related to unvested stock options and approximately $3.3 million of unrecognized compensation cost for other share-based awards that is expected to be recognized within approximately three years.

The table below summarizes activity related to share-based plans:

(dollars in thousands)	Three Months Ended				Nine Months Ended
	September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
Share-based compensation expense	$	756	$	662	$	2,800	$	2,843
Cash received	106		3		499		1,135
Intrinsic value of options exercised	57		4		266		863

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14.  SEGMENT REPORTING

The Company’s operating segments are components, which are evaluated regularly by the Chief Executive Officer in deciding how to allocate and assess resources and assess performance.  The Company determines its segments based primarily upon product and service offerings and through types of income generated. The Company’s segments are “Community Banking” and “Other.”

The Company’s community banking segment consists of commercial and retail banking.  The community banking business segment is managed as a single strategic unit, which generates revenue from a variety of products and services it provides.  For example, commercial lending is dependent upon the availability of funding from retail deposits and other borrowings and the management of interest rate and credit risk.  This situation is also similar for consumer and residential mortgage lending.

The Company has also identified several other operating segments.  These non-reportable segments include National Penn Wealth Management, N.A., National Penn Capital Advisors, Inc., National Penn Insurance Services Group, Inc., Caruso Benefits Group, Inc., and the parent bank holding company and are included in the “Other” category.  These operating segments do not have similar characteristics to the community banking operations and do not individually or in the aggregate meet the quantitative thresholds requiring separate disclosure.  The operating segments in the “Other” category earn revenues primarily through the generation of fee income and are also aggregated based on their similar economic characteristics, products and services, type or class of customer, methods used to distribute products and services and/or nature of their regulatory environment.  The identified segments reflect the manner in which financial information is currently evaluated by management.  The accounting policies, used in this disclosure of operating segments, are the same as those described in the summary of significant accounting policies in the Company’s most recent Annual Report on Form 10-K.

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Reportable segment-specific information and reconciliation to consolidated financial information is as follows:

(dollars in thousands)	As of and for the Three Months Ended September 30, 2012
	Community Banking		Other			Consolidated
Total assets	$	8,383,854	$	51,672		$	8,435,526
Total deposits	5,947,744		—			5,947,744
Net interest income (expense)	67,254		(3,700		)	63,554
Total non-interest income	16,240		10,525			26,765
Total non-interest expense	43,932		9,407			53,339
Net income (loss) available to common shareholders	26,626		(610		)	26,016
(dollars in thousands)	For the Nine Months Ended September 30, 2012
	Community Banking		Other			Consolidated
Net interest income (expense)	$	195,899	$	(5,328	)	$	190,571
Total non-interest income	39,419		32,043			71,462
Total non-interest expense	130,184		27,864			158,048
Net income (loss) available to common shareholders	74,890		(1,124		)	73,766
(dollars in thousands)	As of and for the Three Months Ended September 30, 2011
	Community Banking		Other			Consolidated
Total assets	$	8,555,510	$	56,131		$	8,611,641
Total deposits	5,992,991		—			5,992,991
Net interest income (expense)	66,584		(2,167		)	64,417
Total non-interest income	12,582		10,559			23,141
Total non-interest expense	46,458		8,595			55,053
Net income (loss) available to common shareholders	26,544		(1,731		)	24,813
(dollars in thousands)	For the Nine Months Ended September 30, 2011
	Community Banking		Other			Consolidated
Net interest income (expense)	$	201,767	$	(6,385	)	$	195,382
Total non-interest income	38,801		30,912			69,713
Total non-interest expense	141,121		24,890			166,011
Net income (loss) available to common shareholders	71,613		(7,955		)	63,658

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is intended to assist in understanding and evaluating the major changes in the earnings performance and financial condition of the Company as of and for the three and nine months ended September 30, 2012, with a primary focus on an analysis of operating results.  Current performance does not guarantee, and may not be indicative of similar performance in the future.  The Company’s consolidated financial statements included in this Report are unaudited, and as such, are subject to year-end examination.

Statement Regarding Non-GAAP Financial Measures:

This Report contains supplemental financial information determined by methods other than in accordance with Accounting Principles Generally Accepted in the United States of America (“GAAP”). National Penn’s management uses these non-GAAP measures in its analysis of National Penn’s performance. These measures should not be considered a substitute for GAAP basis measures nor should they be viewed as a substitute for operating results determined in accordance with GAAP. Management believes the presentation of the following non-GAAP financial measures, which exclude the impact of the specified items, provides useful supplemental information that is essential to a proper understanding of the financial results of National Penn.

• Tangible common equity excludes goodwill and intangible assets and preferred equity. Banking and financial institution regulators also exclude goodwill and intangible assets from shareholders’ equity when assessing the capital adequacy of a financial institution. Tangible common equity provides a method to assess the Company’s tangible capital trends.

• Tangible book value expresses tangible common equity on a per-share basis. Tangible book value provides a method to assess the level of tangible net assets on a per-share basis.

• Adjusted net income and return on assets exclude the effects of certain gains and losses, adjusted for taxes when applicable. Adjusted net income and returns provide methods to assess earnings performance by excluding items management believes are not comparable among the periods presented.

• Efficiency ratio expresses operating expenses as a percentage of fully-taxable equivalent net interest income plus non-interest income. Operating expenses exclude items from non-interest expense that management believes are not comparable among the periods presented. Non-interest income is adjusted to also exclude items that management believes are not comparable among the periods presented. Efficiency ratio is used as a method for management to assess its operating expense level and to compare to financial institutions of varying sizes.

Management believes the use of non-GAAP measures will help readers compare National Penn’s current results to those of prior periods as presented in the accompanying Financial Highlights and financial data tables.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

The accounting and reporting policies of the Company conform to GAAP and predominant practice within the financial services industry.  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.  The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results:

• allowance for loan and lease losses;

• goodwill and other intangible assets;

• income taxes; and

• other-than-temporary impairment.

There have been no material changes in the Company’s critical accounting policies, judgments and estimates, including assumptions or estimation techniques utilized, as compared to the Company's most recent Annual Report on Form 10-K.

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FINANCIAL HIGHLIGHTS

Business and Industry

National Penn Bancshares, Inc. is a Pennsylvania business corporation and a registered bank holding company headquartered in Boyertown, Pennsylvania. National Penn operates as an independent community banking company that offers a diversified range of financial products principally through its bank subsidiary, National Penn Bank, as well as an array of investment, insurance and employee benefit services through its non-bank subsidiaries.  National Penn’s financial services affiliates consist of National Penn Wealth Management, N.A., including its National Penn Investors Trust Company division; National Penn Capital Advisors, Inc.; Institutional Advisors, LLC; National Penn Insurance Services Group, Inc., including its Higgins Insurance division; and Caruso Benefits Group, Inc.

The Company’s primary business is accepting deposits from customers through its retail branch offices, and investing those deposits, together with funds generated from operations and borrowings, in loans, including commercial business loans, commercial real estate loans, residential mortgages, home equity loans, other consumer loans, and investment securities.  The Company’s strategic plan provides for it to operate within growth markets focusing on diversification of revenue sources and increased market penetration in growing geographic areas.

At September 30, 2012, National Penn operated 120 retail branch offices. It has 119 retail branch offices in Pennsylvania and one retail branch office in Maryland through National Penn Bank and its KNBT and Nittany Bank divisions.

The Company’s results of operations are affected by five major elements: (1) net interest income, or the difference between interest income earned on loans and investments and interest expense paid on deposits and borrowed funds; (2) the provision for loan and lease losses, or the amount added to the allowance for loan and lease losses to provide reserves for inherent losses on loans and leases; (3) non-interest income, which is made up primarily of banking fees, wealth management income, insurance income, fair value measurements and gains and losses from sales of securities or other transactions; (4) non-interest expense, which consists primarily of salaries, employee benefits and other operating expenses; and (5) income taxes. Results of operations are also significantly affected by general economic and competitive conditions, as well as changes in market interest rates, government policies and actions of regulatory authorities.

33

Overview

(dollars in thousands, except per share data)	Three Months Ended									Nine Months Ended
	September 30, 2012			June 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
EARNINGS
Total interest income	$	78,344		$	79,896		$	86,055		$	239,654		$	263,153
Total interest expense	14,790			16,697			21,638			49,083			67,771
Net interest income	63,554			63,199			64,417			190,571			195,382
Provision for loan and lease losses	2,000			2,000			—			6,000			13,000
Net interest income after provision for loan and lease losses	61,554			61,199			64,417			184,571			182,382
Loss on sale of building	—			—			(1,000		)	—			(1,000		)
Loss on debt extinguishment	—			—			(998		)	—			(998		)
Net gains (losses) from fair value changes of subordinated debentures	101			(810		)	(506		)	936			(987		)
(Losses) gains on investment securities	—			(277		)	1,022			(277		)	1,022
Other non-interest income	26,664			21,543			24,623			70,803			71,676
Other non-interest expense	53,339			52,269			55,053			158,048			166,011
Income before income taxes	34,980			29,386			32,505			97,985			86,084
Income tax expense	8,964			6,938			7,692			24,219			19,283
Net income	26,016			22,448			24,813			73,766			66,801
Preferred dividends and accretion of preferred discount	—			—			—			—			(1,691		)
Accelerated accretion from redemption of preferred stock	—			—			—			—			(1,452		)
Net income available to common shareholders	$	26,016		$	22,448		$	24,813		$	73,766		$	63,658
Basic earnings available to common shareholders	$	0.17		$	0.15		$	0.16		$	0.49		$	0.42
Diluted earnings available to common shareholders	0.17			0.15			0.16			0.49			0.42
Dividends per common share	0.09			0.07			0.03			0.21			0.05
Net interest margin	3.50		%	3.48		%	3.46		%	3.51		%	3.52		%
Efficiency ratio (1)	56.26		%	58.42		%	58.54		%	57.36		%	58.81		%
Return on average assets	1.23		%	1.07		%	1.15		%	1.17		%	1.03		%
Asset Quality Metrics
Allowance / total loans and leases	2.16		%	2.24		%	2.54		%
Non-performing loans / total loans and leases	1.11		%	1.13		%	1.27		%
Delinquent loans / total loans and leases	0.45		%	0.46		%	0.56		%
Allowance / non-performing loans and leases	194.8		%	197.6		%	200.5		%
Annualized net charge-offs / average loans and leases	0.39		%	0.53		%	0.53		%	0.49		%	0.82		%

(1)    Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Part I, Item 2.

34

Net income available to common shareholders increased 15.9% to $73.8 million for the nine months endedSeptember 30, 2012, as compared to $63.7 million in the same period of the prior year.  Improvements in net income available to common shareholders resulted from the following items:

• Net interest income totaled $191 million for the nine months endedSeptember 30, 2012 compared to $195 million for the nine months endedSeptember 30, 2011. The decrease in net interest income is the result of the continued low interest rate environment. However, management of deposit and funding costs have helped to mitigate the effect of declining asset yields due to loan and investment repayment and replacement. Additionally, during the third quarter of 2012, the Company improved the cost of borrowings through the restructuring of $400 million of fixed rate FHLB advances that had a weighted average interest rate of 4.59%. This transaction reduced the average cost of FHLB borrowings by 45 basis points, to 4.09% for the third quarter of 2012. The Company's interest rate management initiatives maintained net interest margin at 3.51% for the nine months endedSeptember 30, 2012 on $7.8 billion of average earning assets. Net interest margin for the comparable prior year period was 3.52% on $8.0 billion of average earning assets.

• The Company continues to benefit from improving asset quality. Classified loans declined by 21% since September 30, 2011, and non-performing loans declined to 1.11% of total loans and leases at September 30, 2012. The improvement in asset quality resulted in a $7.0 milliondecrease to the provision for loan and lease losses (“provision”) which totaled $6.0 million for the nine months endedSeptember 30, 2012, compared to $13.0 million for the nine months endedSeptember 30, 2011. The provision was unchanged from the second quarter of 2012, and the allowance to non-performing loans and leases was 195% at September 30, 2012.

• Other non-interest income was stable year over year and totaled $70.8 million for the nine months endedSeptember 30, 2012. Low interest rates increased customer interest rate swap and mortgage banking income for the nine months endedSeptember 30, 2012, when compared to the prior year to date period. Service charges on deposit accounts offset the improvements to other non-interest income for the nine months endedSeptember 30, 2012, by $2.4 million, due to declines in overdraft volume.

• Other non-interest expense continued to be well controlled during the nine months endedSeptember 30, 2012, at $158 million, as compared to $166 million in the prior year period. FDIC insurance and other operating expense reductions led to an $8.0 million net decline in non-interest expense for the nine months endedSeptember 30, 2012, compared to the prior year to date period. The efficiency ratio was stable at 57.36% for the nine months endedSeptember 30, 2012, as the Company continued to effectively manage expense levels.

Adjusted net income and returns are non-GAAP measures and exclude certain items which management believes affect the comparability of results between periods. The following table reconciles the non-GAAP measure of adjusted net income to the GAAP measure of net income available to common shareholders and diluted earnings per share and calculates the adjusted return on average assets.

(dollars in thousands, except per share data)	Three Months Ended
	September 30, 2012			June 30, 2012			September 30, 2011
Adjusted net income reconciliation
Net income available to common shareholders	$	26,016		$	22,448		$	24,813
After tax unrealized fair value (gain) loss on subordinated debentures	(66		)	527			329
Adjusted net income available to common shareholders	$	25,950		$	22,975		$	25,142
Earnings per share
Net income available to common shareholders	$	0.17		$	0.15		$	0.16
After tax unrealized fair value (gain) loss on subordinated debentures	—			—			—
Adjusted net income available to common shareholders	$	0.17		$	0.15		$	0.16
Average assets	$	8,386,342		$	8,473,164		$	8,588,269
Adjusted return on average assets	1.23		%	1.09		%	1.15		%

35

Adjusted net income was $26.0 million, or $0.17 per diluted share, for the third quarter of 2012 compared to $23.0 million, or $0.15 per diluted share, for the second quarter of 2012 and $25.1 million, or $0.16 per diluted share, for the third quarter of 2011. Adjusted net income remains stable despite modest reductions to net interest income, as asset quality trends and expense levels continue to be favorable. During the third quarter of 2012, other non-interest income improved as a result of increased customer interest rate swap and mortgage banking activity due to low interest rates. The income trends resulted in an adjusted ROA of 1.23% and 1.16% for the quarter and nine months endedSeptember 30, 2012. Adjusted net income excluded the effects of the changes in the fair value of the Company’s subordinated debentures accounted for at fair value.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Comparison of Financial Condition

SUMMARY BALANCE SHEET

(dollars in thousands, except per share data)	September 30, 2012			June 30, 2012			December 31, 2011
Total cash and cash equivalents	$	332,364		$	336,983		$	451,522
Investment securities and other securities	2,310,459			2,316,894			2,314,111
Total loans and leases	5,256,854			5,210,767			5,188,101
Total assets	8,435,526			8,395,864			8,486,281
Deposits	5,947,744			5,845,543			5,874,819
Borrowings	1,216,707			1,298,477			1,370,399
Shareholders' equity	1,214,330			1,199,760			1,180,687
Tangible book value per common share (1)	$	6.29		$	6.18		$	5.97
Tangible common equity / tangible assets (1)	11.56		%	11.43		%	11.04		%

(1)    Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Part I, Item 2.

Assets

Loans and Leases

Regional economic conditions impact the Company’s customers. Although the economy and credit environment continue to be uncertain, the Company’s loan portfolio has demonstrated continued asset quality improvement. Proactive management of lower quality credits has helped to mitigate the continuing impact of housing market conditions and decreased real estate and commercial property values. The Company remains focused on attracting and retaining high-quality commercial and retail customers to support quality loan growth.

Federal Reserve economic data suggests the following trends:

• Contacts in the Third District have reported improved overall business activity, although results were mixed. Sectors such as retailers and auto dealers reported growth with auto increasing at a strong pace; however, manufacturing activity continues to decline slightly.

• New home construction and sales have slowed while the growth of sales on existing homes was reported to be strong.

• The outlook among Third District business contacts remains optimistic, but cautious as a trend of slow, but steady improvement is expected to continue throughout 2012.

36

The Company’s loans are diversified by borrower, industry group, and geographical area throughout the markets it serves. The following table summarizes the composition of the Company’s loan portfolio:

(dollars in thousands)	September 30, 2012		December 31, 2011		Increase/(decrease)
Commercial and industrial loans and leases	$	2,463,949	$	2,420,027	$	43,922		1.8	%
CRE - permanent	918,511		855,524		62,987			7.4	%
CRE - construction	140,889		156,064		(15,175		)	(9.7	)%
Commercial real estate	1,059,400		1,011,588		47,812			4.7	%
Residential mortgages	689,773		710,322		(20,549		)	(2.9	)%
Home equity lines and loans	751,987		747,558		4,429			0.6	%
All other consumer	269,042		286,390		(17,348		)	(6.1	)%
Consumer loans	1,710,802		1,744,270		(33,468		)	(1.9	)%
Loans and leases	$	5,234,151	$	5,175,885	$	58,266		1.1	%
Allowance for loan and lease losses	113,542		126,640		(13,098		)	(10.3	)%
Loans and leases, net	$	5,120,609	$	5,049,245	$	71,364		1.4	%
Loans held-for-sale	$	22,703	$	12,216	$	10,487		85.8	%

Net loans and leases increased by $71.4 million, or 1.4%, to $5.1 billion at September 30, 2012. Emphasis on loans to commercial and industrial customers resulted in a $43.9 million increase to this portfolio during the nine months endedSeptember 30, 2012, and commercial real estate loans increased $47.8 million from December 31, 2011. Commercial loan growth of $91.7 million was offset by prepayments of consumer loans and sales of residential mortgage loans in the secondary market by $33.5 million during the same period. Additionally, classified loans decreased $74.2 million, or 20%, since December 31, 2011 and resulted in a decrease to the allowance for loan and lease losses which totaled $113.5 million at September 30, 2012. Net charge-offs totaled $19.1 million, and the provision was $6.0 million during the nine months endedSeptember 30, 2012.

The following table demonstrates select asset quality metrics:

(dollars in thousands)	September 30, 2012			June 30, 2012			December 31, 2011
Non-performing loans	$	58,287		$	59,019		$	66,976
Non-performing loans to total loans and leases	1.11		%	1.13		%	1.29		%
Delinquent loans	$	23,519		$	24,144		$	24,801
Delinquent loans to total loans and leases	0.45		%	0.46		%	0.48		%
Classified loans	$	296,213		$	301,542		$	370,439
Classified loans to total loans and leases	5.63		%	5.79		%	7.14		%
Tier 1 capital and allowance	$	1,138,430		$	1,124,702		$	1,104,942
Classified loans to Tier 1 capital and allowance	26.02		%	26.81		%	33.53		%
Total loans and leases	$	5,256,854		$	5,210,767		$	5,188,101

37

The following table summarizes the Company’s non-performing assets:

(dollars in thousands)	September 30, 2012			June 30, 2012			December 31, 2011
Non-accrual commercial and industrial loans and leases	$	31,109		$	33,984		$	31,081
Non-accrual CRE-permanent	3,780			2,999			7,403
Non-accrual CRE-construction	5,149			6,959			12,218
Total non-accrual commercial real estate loans	8,929			9,958			19,621
Non-accrual residential mortgages	6,242			4,301			4,504
Non-accrual home equity lines and loans	3,458			2,555			3,046
All other non-accrual consumer loans	1,823			1,753			3,176
Total non-accrual consumer loans	11,523			8,609			10,726
Total non-accrual loans	51,561			52,551			61,428
Restructured loans (a)	6,726			6,468			5,548
Total non-performing loans	58,287			59,019			66,976
Other real estate owned and repossessed assets	7,174			7,201			7,716
Total non-performing assets	65,461			66,220			74,692
Loans 90+ days past due & still accruing	2,628			3,426			2,010
Total non-performing assets and loans 90+ days past due	$	68,089		$	69,646		$	76,702
Total loans and leases	$	5,256,854		$	5,210,767		$	5,188,101
Average total loans and leases	$	5,191,136		$	5,196,803		$	5,149,546
Allowance for loan and lease losses	$	113,542		$	116,650		$	126,640
Allowance for loan and lease losses to:
Non-performing assets and loans 90+ days past due	167		%	168		%	165		%
Non-performing loans	195		%	198		%	189		%
Total loans and leases	2.16		%	2.24		%	2.44		%

(a) Restructured loans at September 30, 2012, include $3.0 million of commercial loans and $3.7 million of consumer loans which were modified for customers who were experiencing financial difficulty and were in jeopardy of losing their homes or businesses to foreclosure.

The following table provides additional information for the Company’s non-accrual loans:

(dollars in thousands)	September 30, 2012			June 30, 2012			December 31, 2011
Total non-accrual loans	$	51,561		$	52,551		$	61,428
Non-accrual loans and leases with partial charge-offs	20,160			20,947			28,919
Life-to-date partial charge-offs on non-accrual loans and leases	23,097			22,393			30,284
Charge-off rate of non-accrual loans and leases	53.4		%	51.7		%	51.2		%
Specific reserves on non-accrual loans	4,042			5,523			8,162

38

At September 30, 2012, the Company’s non-accrual loans totaled $51.6 million and included $20.2 million of non-accrual loans which have been partially charged-off by 53.4% or $23.1 million. Non-accrual and non-performing loan and asset levels continue to improve and remain relatively low as a percentage of total loans and leases and total assets. Non-performing loans totaled 1.11% of total loans and leases at September 30, 2012. Additionally, non-performing loans are included in impaired loans and leases and are evaluated individually when determining the allowance. Impaired loans had a specific reserve in the allowance of $5.1 million related to $15.0 million of underlying principal balances. There is a portion of the Company’s impaired loans that have not been reserved or partially charged-off, since principal collection is probable. The Company does not believe these amounts are material for purposes of further disclosure and analysis.

An analysis of net loan and lease charge-offs:

(dollars in thousands)	Three Months Ended									Nine Months Ended
	September 30, 2012			June 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
Commercial and industrial loans and leases	$	1,116		$	5,196		$	1,962		$	8,237		$	16,347
CRE - permanent	481			595			83			3,009			5,271
CRE - construction	1,755			(148		)	2,637			2,280			4,338
Commercial real estate	2,236			447			2,720			5,289			9,609
Residential mortgages	742			328			998			1,630			3,124
Home equity lines and loans	517			404			596			2,776			2,587
All other consumer loans	497			427			560			1,166			314
Consumer loans	1,756			1,159			2,154			5,572			6,025
Net loans and leases charged-off	$	5,108		$	6,802		$	6,836		$	19,098		$	31,981
Net charge-offs (annualized) to:
Total loans and leases	0.39		%	0.53		%	0.53		%	0.49		%	0.83		%
Average total loans and leases	0.39		%	0.53		%	0.53		%	0.49		%	0.82		%
Allowance for loan and lease losses	17.90		%	23.45		%	20.69		%	22.47		%	32.62		%

Net loan charge-offs totaled $19.1 million for the nine months endedSeptember 30, 2012, a $12.9 million, or 40.3%, decrease compared to the prior year to date period. The overall improvement in net charge-offs is the result of continued credit quality improvement. Annualized net charge-offs as a percentage of average total loans and leases totaled 0.39% for the third quarter of 2012 compared to 0.53% for the both the second quarter of 2012 and the third quarter of 2011.

39

Changes in the allowance for loan and lease losses by loan portfolio:

	Three Months Ended				Nine Months Ended
(dollars in thousands)	September 30,				September 30,
	2012		2011		2012		2011
Balance at beginning of period	$	116,650	$	137,909	$	126,640	$	150,054
Charge-offs:
Commercial and industrial loans and leases	1,605		2,623		9,740		17,622
Commercial real estate	2,273		2,904		5,986		10,575
Consumer loans	2,115		2,847		6,896		9,442
Total charge-offs	5,993		8,374		22,622		37,639
Recoveries:
Commercial and industrial loans and leases	489		661		1,503		1,275
Commercial real estate	37		184		697		966
Consumer loans	359		693		1,324		3,417
Total recoveries	885		1,538		3,524		5,658
Net charge-offs	5,108		6,836		19,098		31,981
Provision charged to expense	2,000		—		6,000		13,000
Balance at end of period	$	113,542	$	131,073	$	113,542	$	131,073

The following table presents the components of the allowance:

(dollars in thousands)	September 30, 2012		December 31, 2011
Specific reserves	$	5,105	$	8,909
Allocated reserves	97,202		107,288
Unallocated reserves	11,235		10,443
Total allowance for loan and lease losses	$	113,542	$	126,640

The allowance decreased to $114 million at September 30, 2012 and represented 2.16% of total loans and leases and 195% of non-performing loans, compared to $127 million at December 31, 2011, or 2.44% of total loans and leases and 189% of non-performing loans. The decrease of the allowance was due primarily to the reduction in classified loans and continued improvement in asset quality. These improvements resulted in a provision of $6.0 million for the nine months endedSeptember 30, 2012, a decrease of $7.0 million compared to the nine months endedSeptember 30, 2011.

40

Liabilities

Liabilities totaled $7.2 billion at September 30, 2012, a decrease of $84.4 million, or 1.2%, from $7.3 billion at December 31, 2011. Total deposits, the Company’s primary source of funding, increased$72.9 million during the first nine months of 2012 primarily due to an increase in NOW account balances of $205 million during the period, offset by a $115 million decrease in time deposits. The Company’s continued efforts to improve deposit mix, and manage high-cost, non-relationship based wholesale and time deposit customers reduced the cost of deposits by twelve basis points to 0.44% for the three months ended September 30, 2012 compared to the three months ended December 31, 2011.

(dollars in thousands)	September 30, 2012			December 31, 2011			Increase/(decrease)
Non-interest bearing deposits	$	902,295		$	863,703		$	38,592		4.47	%
NOW accounts	1,498,344			1,293,148			205,196			15.87	%
Money market accounts	1,600,164			1,686,909			(86,745		)	(5.14	)%
Savings	485,283			454,003			31,280			6.89	%
CDs less than $100	1,036,112			1,138,908			(102,796		)	(9.03	)%
CDs $100 or greater	425,546			438,148			(12,602		)	(2.88	)%
Total deposits	$	5,947,744		$	5,874,819		$	72,925		1.24	%
Non-time deposits / total deposits	75		%	73		%

Deposit funding is supplemented by additional sources of borrowings which include customer and structured repurchase agreements, FHLB advances, and subordinated debentures. In the aggregate, these funding sources totaled $1.2 billion at September 30, 2012, which was a decrease of $154 million, or 11.2%, from December 31, 2011.

Significant borrowing activity during the nine months endedSeptember 30, 2012, included the following:

• FHLB advances declined by $153 million due to maturities of $85.0 million and the restructuring of $400 million of advances during the third quarter of 2012, and

• Maturity of $10.0 million of structured repurchase agreements.

Shareholders’ Equity

Shareholders’ equity totaled $1.2 billion at September 30, 2012, an increase of $33.6 million from December 31, 2011. Significant activity during the nine months ended September 30, 2012 included: 

• Net income of $73.8 million,

• Cash dividends paid to common shareholders of $31.8 million,

• Treasury stock purchased of $21.2 million.

41

Results of operations for the nine months ended September 30, 2012 and September 30, 2011

Net Interest Income

The following table presents average balances, average yields, and net interest margin information for the nine months ended September 30, 2012 as compared to the same period in 2011.  Interest income and yields are presented on a fully taxable equivalent (“FTE”) basis using an effective tax rate of 35%.  Net interest margin is expressed as net interest income (FTE) as a percentage of average total interest earning assets.

Average Balances, Average Rates, and Net Interest Margin*

	For the Nine Months Ended September 30,
(dollars in thousands)	2012								2011
	Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate
INTEREST EARNING ASSETS:
Interest earning deposits at banks	$	289,272		$	484	0.22	%		$	506,544		$	846	0.22	%
U.S. Treasury	—			—		—	%		19,982			41		0.27	%
U.S. Government agencies	2,711			47		2.32	%		4,245			69		2.17	%
Mortgage-backed securities/collateralized mortgage obligations	1,496,323			29,925		2.67	%		1,385,676			32,312		3.12	%
State and municipal*	733,543			35,858		6.53	%		760,050			38,396		6.75	%
Other bonds and securities	83,117			1,951		3.14	%		94,002			2,079		2.96	%
Total investments	2,315,694			67,781		3.91	%		2,263,955			72,897		4.30	%
Commercial loans and leases*	3,458,327			125,282		4.84	%		3,377,757			132,114		5.23	%
Installment loans	1,019,780			33,229		4.35	%		921,410			34,438		5.00	%
Mortgage loans	710,954			27,020		5.08	%		920,851			38,101		5.53	%
Total loans and leases	5,189,061			185,531		4.78	%		5,220,018			204,653		5.24	%
Total earning assets	7,794,027			253,796		4.35	%		7,990,517			278,396		4.66	%
Allowance for loan and lease losses	(122,803		)						(147,311		)
Non-interest earning assets	747,619								786,326
Total assets	$	8,418,843							$	8,629,532
INTEREST BEARING LIABILITIES:
Interest bearing deposits	$	4,972,835		$	20,645	0.55	%		$	5,133,080		$	32,262	0.84	%
Customer repurchase agreements	527,278			1,606		0.41	%		526,909			1,950		0.49	%
Structured repurchase agreements	82,774			2,673		4.31	%		164,359			5,081		4.13	%
Short-term borrowings	91			—		—	%		6,765			—		—	%
Federal Home Loan Bank advances	562,474			18,573		4.41	%		634,048			21,329		4.50	%
Subordinated debentures	144,476			5,586		5.16	%		142,963			7,149		6.69	%
Total interest bearing liabilities	6,289,928			49,083		1.04	%		6,608,124			67,771		1.37	%
Non-interest bearing deposits	880,556								829,853
Other non-interest bearing liabilities	49,937								42,097
Total liabilities	7,220,421								7,480,074
Equity	1,198,422								1,149,458
Total liabilities and equity	$	8,418,843							$	8,629,532
NET INTEREST INCOME/MARGIN (FTE)				204,713		3.51	%					210,625		3.52	%
Tax equivalent interest				14,142								15,243
Net interest income				$	190,571							$	195,382
								��

*Fully taxable equivalent basis, using a 35% effective tax rate.

Average loan balances include non-accruing loans and average net fees and costs.

42

The following table allocates changes in FTE interest income and interest expense based upon volume and rate changes.  For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated proportionately.

(dollars in thousands)	Nine Months Ended September 30, 2012 compared to 2011
Increase (decrease) in:	Volume			Rate			Total
Interest Income:
Interest earning deposits at banks	$	(364	)	$	2		$	(362	)
U.S. Treasury	(41		)	—			(41		)
U.S. Government agencies	(26		)	4			(22		)
Mortgage-backed securities/collateralized mortgage obligations	2,448			(4,835		)	(2,387		)
State and municipal	(1,317		)	(1,221		)	(2,538		)
Other bonds and securities	(250		)	122			(128		)
Total investments	814			(5,930		)	(5,116		)
Commercial loans and leases	3,095			(9,927		)	(6,832		)
Installment loans	3,462			(4,671		)	(1,209		)
Mortgage loans	(8,163		)	(2,918		)	(11,081		)
Total loans and leases	(1,606		)	(17,516		)	(19,122		)
Total interest income	$	(1,156	)	$	(23,444	)	$	(24,600	)
Interest Expense:
Interest bearing deposits	$	(978	)	$	(10,639	)	$	(11,617	)
Customer repurchase agreements	1			(345		)	(344		)
Structured repurchase agreements	(2,625		)	217			(2,408		)
Short-term borrowings	—			—			—
Federal Home Loan Bank advances	(2,370		)	(386		)	(2,756		)
Subordinated debentures	75			(1,638		)	(1,563		)
Total borrowed funds	(4,919		)	(2,152		)	(7,071		)
Total interest expense	(5,897		)	(12,791		)	(18,688		)
Increase (decrease) in net interest income	$	4,741		$	(10,653	)	$	(5,912	)

Interest rates remain at historically low levels and continue to pressure asset yields, as investments and loans mature and are replaced. Additionally, economic conditions continue to limit opportunities for significant loan growth. The Company has undertaken various initiatives to manage the impact of prolonged low interest rates on net interest income. As a result, the Company's net interest margin remained stable at 3.51% for the nine months endedSeptember 30, 2012, as compared to 3.52% for the prior year period. However, net interest income for the comparative period declined by $4.8 million, or 2.5%, to $191 million for the nine months endedSeptember 30, 2012. The following initiatives were employed to mitigate the 8.9%, or $23.5 million ($24.6 million on a FTE basis), decrease to interest income during the nine months endedSeptember 30, 2012:

• Deposit pricing initiatives resulted in a 25 basis point reduction to the cost of deposits for the nine months endedSeptember 30, 2012, as the Company's average deposit rate declined to 0.47%. The decline in deposit cost reduced interest expense by $11.6 million for the nine months endedSeptember 30, 2012 when compared to the nine months endedSeptember 30, 2011. Additionally, the cost of deposits further declined to 0.44% for the quarter ended September 30, 2012.

• The cost of deposits was also impacted by improvement in the mix of transaction, savings and money market deposits which increased to 75% of total deposits at September 30, 2012. The improvement in mix was driven by a $283 million decrease in time deposits since September 30, 2011.

• Repayment of $155 million of FHLB advances and structured repurchase agreements reduced interest expense by approximately $5 million.

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• On August 13, 2012, the Company modified $400 million of FHLB advances with a weighted-average fixed interest rate of 4.59%. The advances were converted to a variable interest rate of three-month LIBOR plus a 47 basis point spread. The restructuring reduced interest expense in the third quarter by $0.8 million.

Provision for Loan and Lease Losses

Provision for the nine months endedSeptember 30, 2012 was $6.0 million, compared to $13.0 million for the same period in 2011. A $19.3 million reduction to net charge-offs for the nine months endedSeptember 30, 2012, combined with a continued decline of classified loans resulted in a reduction to the allowance, which totaled $113.5 million at September 30, 2012. The allowance as a percentage of non-performing loans decreased to 195% at September 30, 2012 from 198% in the second quarter and increased from 189% at December 31, 2011, and the allowance to total loans and leases totaled 2.16% at September 30, 2012.  For additional analysis of the allowance refer to “Loans and Leases.”

Non-Interest Income

(dollars in thousands)	Nine Months Ended
	September 30,
NON-INTEREST INCOME	2012			2011			Increase (Decrease)
Wealth management income	$	18,405		$	18,007		$	398		2.21	%
Service charges on deposit accounts	11,723			14,160			(2,437		)	(17.21	)%
Insurance commissions and fees	9,745			10,147			(402		)	(3.96	)%
Cash management and electronic banking fees	13,753			13,606			147			1.08	%
Mortgage banking income	5,142			3,443			1,699			49.35	%
Bank owned life insurance income	3,783			4,186			(403		)	(9.63	)%
Earnings of unconsolidated investments	1,349			1,915			(566		)	(29.56	)%
Other operating income	6,903			6,212			691			11.12	%
Loss on sale of building	—			(1,000		)	1,000			NM
Net gains (losses) from fair value changes on subordinated debentures	936			(987		)	1,923			NM
Loss on debt extinguishment	—			(998		)	998			NM
Net (losses) gains on sales of investment securities	(123		)	1,022			(1,145		)	NM
Credit related losses on investment securities	(154		)	—			(154		)	NM
Total non-interest income	$	71,462		$	69,713		$	1,749		2.51	%
"NM" - Denotes a value displayed as a percentage change is not meaningful

Non-interest income for the nine months endedSeptember 30, 2012 and 2011 totaled $71.5 million and $69.7 million, respectively, and its components changed primarily due to the following items:

Increases:

• The income derived from the Company’s mortgage banking operations increased $1.7 million for the nine months endedSeptember 30, 2012 compared to the prior year period as mortgage activity increased due to declining interest rates.

• The change in fair value of the Company’s subordinated debentures accounted for at fair value (Nasdaq: “NPBCO”) increased non-interest income by $0.9 million in 2012 compared to a $1.0 million reduction in 2011.

Decreases:

• Service charges on deposit accounts decreased $2.4 million due to declines in overdraft volume.

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Non-Interest Expense

(dollars in thousands)	Nine Months Ended
	September 30,
NON-INTEREST EXPENSE	2012			2011			Increase (Decrease)
Salaries, wages and employee benefits	$	94,170		$	92,666		$	1,504		1.62	%
Premises and equipment	21,428			21,287			141			0.66	%
FDIC insurance	3,734			8,396			(4,662		)	(55.53	)%
Other operating expenses	38,716			43,662			(4,946		)	(11.33	)%
Total non-interest expense	$	158,048		$	166,011		$	(7,963	)	(4.80	)%
RECONCILIATION TABLE FOR NON-GAAP FINANCIAL MEASURES - EFFICIENCY RATIO (1)
	Nine Months Ended
	September 30,
Efficiency Ratio Calculation	2012			2011
Non-interest expense	$	158,048		$	166,011
Net interest income (taxable equivalent)	$	204,713		$	210,625
Non-interest income	71,462			69,713
Less:
Loss on sale of building	—			(1,000		)
Loss on debt extinguishment	—			(998		)
Net gains (losses) from fair value changes on subordinated debentures	936			(987		)
Net (losses) gains on investment securities	(277		)	1,022
Adjusted revenue	$	275,516		$	282,301
Efficiency Ratio	57.36		%	58.81		%

(1) Refer to the Statement regarding Non-GAAP Financial Measures in the beginning of Part I, Item 2.

Continued focus on expense controls reduced expenses overall, as demonstrated by an efficiency ratio of 57.36% for the first nine months of 2012. Non-interest expense for the nine months endedSeptember 30, 2012 totaled $158 million, an $8.0 milliondecrease when compared to the same period in the prior year. FDIC insurance decreased $4.7 million compared to the nine months endedSeptember 30, 2011, due to a change to the assessment framework and the improving risk profile of the Company, and other operating expenses continue to be controlled.

Income Tax Expense

Income tax expense for the nine months ended September 30, 2012 was $24.2 million compared to $19.3 million for the nine months ended September 30, 2011. During the first nine months of 2012, pre-tax income increased while tax-free income and other permanent items remained stable, resulting in an effective tax rate of 24.7% compared to 22.4% for the prior year period. The Company’s net deferred tax asset (“DTA”) decreased to $53.5 million at September 30, 2012, primarily from the reduction of the allowance for loan and lease losses and an increase to the fair value of investment securities available-for-sale.

Each quarter, the Company evaluates the realizability of the DTA. As of September 30, 2012, the Company concluded that the DTA was realizable, and a valuation allowance was not required. In reaching this conclusion, the Company carefully weighed both positive and negative evidence. Through the first nine months of 2012, the Company has performed in line with management projections. Therefore, management believes the DTA continues to be realizable and will be fully utilized as planned.

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LIQUIDITY, COMMITMENTS, CAPITAL AND INTEREST RATE SENSITIVITY

Analysis of Liquidity and Capital Resources

Liquidity

The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of September 30, 2012:

(dollars in thousands)			Payments Due by Period:
	Total		One Year or less		After one year to three years		After three years to five years		More than 5 Years
Maturities of time deposits	$	1,461,658	$	893,960	$	397,098	$	170,087	$	513
Structured repurchase agreements	75,000		25,000		50,000		—		—
Federal Home Loan Bank advances	462,720		17,000		52,500		54,740		338,480
Subordinated debentures	144,374		—		—		—		144,374
Minimum annual rentals on non-cancelable operating leases	43,458		6,808		11,453		8,701		16,496
Total	$	2,187,210	$	942,768	$	511,051	$	233,528	$	499,863

As part of the restructuring of FHLB advances in August of 2012, the Company obtained the option to redeem $400 million of advances, in part or in whole, during the first and/or second quarter of 2013 with no additional prepayment penalty.

The Company does not presently have any commitments for significant capital expenditures.

The Company’s primary source of liquidity is deposits obtained from retail, business and institutional banking customers. The Company supplements liquidity with a mix of wholesale funding.   The Company’s wholesale sources of funds and levels of liquidity include:

• Relationships with several correspondent banks to provide short-term borrowings in the form of federal funds purchased.

• The Company is also a member of the FHLB and has the ability to borrow within applicable limits in the form of advances secured by pledges of certain qualifying assets.

• Overnight funds are available from the Federal Reserve Bank via the discount window, and serve as an additional source of liquidity.

As measured using the consolidated statement of cash flows, the Company used $119 million and $163 million of net cash and equivalents for the nine months ended September 30,2012 and 2011, respectively. Operating activities generated $83.8 million of net cash for the nine months ended September 30, 2012 compared to $93.2 million for the nine months ended September 30, 2011.  During the nine months ended September 30, 2012, cash was deployed in the following ways:

Investing activities

• $309 million of investment security purchases

• $81.6 million net increase in loans and leases

Financing activities

• $115 million reduction in certificates of deposit

• $164 million of repayments of FHLB advances and structured repurchase agreements

• $21.2 million of treasury stock repurchased

• $31.8 million of cash dividends paid to common shareholders

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During the nine months ended September 30, 2012, cash was generated from the following additional sources:

Investing activities

• $316 million of proceeds from maturities and repayments of investment securities

Financing activities

• $188 million increase in core deposits

Capital

At September 30, 2012, National Penn and National Penn Bank’s capital ratios met the criteria to be considered a “well-capitalized” institution.  Management believes that, under current regulations, the Company and National Penn Bank will each continue to exceed the minimum capital requirements in the foreseeable future.

	Tier 1 Capital to Average Assets Ratio				Tier 1 Capital to Risk- Weighted Assets Ratio				Total Capital to Risk- Weighted Assets Ratio
	September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011
National Penn	12.78	%	12.00	%	17.45	%	17.12	%	18.70	%	18.38	%
National Penn Bank	10.69	%	11.03	%	14.75	%	15.91	%	16.01	%	17.17	%
"Well Capitalized" institution under banking regulations	5.00	%	5.00	%	6.00	%	6.00	%	10.00	%	10.00	%

National Penn and National Penn Bank exclude from regulatory capital a portion of deferred tax assets, since these regulations are more restrictive than GAAP as it relates to the usage and recognition of deferred tax assets.

Subsequent to September 30, 2012, the Board of Directors of National Penn Bank authorized and paid a $75 million dividend to National Penn.

Other Commitments

The following table sets forth the notional amounts of other commitments as of September 30, 2012:

(dollars in thousands)	Total		One Year or less		After one year to three years		After three years to five years		More than 5 Years
Loan commitments	$	1,569,777	$	697,985	$	212,206	$	123,088	$	536,498
Letters of credit	142,752		130,156		12,445		151		—
Total	$	1,712,529	$	828,141	$	224,651	$	123,239	$	536,498

The Company evaluates and establishes an estimated reserve for credit and other risks associated with off-balance sheet positions based upon historical losses, expected performance under these arrangements and current trends in the economy. The reserve totaled $1.6 million at September 30, 2012.

The Company may be required to utilize cash or other financial instruments on its balance sheet, if called upon, to perform according to the contractual terms of the commitments.  The contract or notional amounts of the instruments reflect the extent of involvement the Company has for each class.

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The Company uses derivative instruments for management of interest rate sensitivity.  The asset/liability management committee approves the use of derivatives in balance sheet hedging.  The derivatives employed by the Company may include forward sales of mortgage commitments, as well as fair value and cash flow hedges.  The Company does not use any of these instruments for trading purposes.  For details of derivatives, refer to Footnote 10 to the consolidated financial statements.

Interest Rate Risk Management

The Company’s largest business segment is its community banking segment, whose business activities principally include accepting deposits and making loans.  As a result, the Company’s largest source of revenue is net interest income, which subjects it to movements in market interest rates.  Management’s objective for interest rate risk management is to understand the Company’s susceptibility to changes in interest rates and develop and implement strategies to minimize volatility while maximizing net interest income.  The Board of Directors establishes policies that govern interest rate risk management.  This is accomplished via a centralized asset/liability management committee (“ALCO”).  ALCO is comprised of various members of the Company’s business lines who are responsible for managing the components of interest rate risk:

• Timing differences between contractual maturities and or repricing of assets and liabilities (“gap risk”),

• Risk that assets will repay or customers withdraw prior to contractual maturity (“option risk”),

• Non-parallel changes in the slope of the yield curve (“yield curve risk”), and

• Variation in rate movements of different indices (“basis risk”).

ALCO employs various techniques and instruments to implement its developed strategies.  These generally include one or more of the following:

• Changes to interest rates offered on products,

• Changes to maturity terms offered on products,

• Changes to types of products offered, and/or

• Use of wholesale products such as advances from the FHLB or interest rate swaps.

Interest rate sensitivity is a function of the repricing characteristics of the Company’s assets and liabilities. Minimizing the balance sheet’s maturity and repricing risk is a continual focus in a changing rate environment.

The Company uses a simulation model to identify and manage its interest rate risk profile.  The model measures projected net interest income “at-risk” and anticipated changes in net income for a rolling twelve month period.  The model is based on expected cash flows and repricing characteristics for all financial instruments at a point in time and incorporates Company-developed, market-based assumptions regarding the impact of changing interest rates on these financial instruments.

The Company also incorporates assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates.  These assumptions are inherently uncertain and, as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income.  While actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and management strategies, this model is an important guidance tool for ALCO.

The following table demonstrates the anticipated impact of a parallel interest rate shift on the Company’s net interest income for the subsequent twelve months:

	Change in Net Interest Income
Change in Interest Rates	September 30,
(in basis points)	2012	2011
300	2%	8%
200	2%	6%
100	1%	3%
-100	N/A*	N/A*

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* Certain short-term interest rates are currently below 1.00%. Therefore, in a scenario where interest rates decline by 100 basis points, short-term interest rates decline to zero, resulting in a non-parallel downward shift. In this interest rate scenario, net interest income is estimated to decline for the subsequent twelve months by 3% and 5% based upon net interest income for the twelve months ended September 30, 2012 and 2011, respectively.

Recent guidance from the Federal Reserve indicates interest rates are expected to remain at current levels through 2015. In response to this guidance, National Penn restructured $400 million of FHLB advances to move its interest rate risk profile to be less asset sensitive. As measured by the net interest income analysis, the Company continues to have an asset sensitive risk profile. As a result, in the event that interest rates increase, the Company would benefit over the next twelve months. For additional details on the FHLB restructuring refer to Footnote 6 within Item 1 of this Report.

The results of the net interest income analysis fall within the compliance guidelines established by ALCO and the Board of Directors.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The information presented in the Liquidity and Interest Rate Risk Management section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Report is incorporated herein by reference.

Item 4.  Controls and Procedures

National Penn’s management is responsible for establishing and maintaining effective disclosure controls and procedures.  Disclosure controls and procedures are controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be so disclosed by an issuer is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  For National Penn, these reports are its annual reports on Form 10-K, its quarterly reports on Form 10-Q, and its current reports on Form 8-K.

National Penn’s management is also responsible for establishing and maintaining adequate internal control over financial reporting.  A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

National Penn considers its internal control over financial reporting to be a subpart of its disclosure controls and procedures.  In accordance with SEC regulations, National Penn’s management evaluates National Penn’s disclosure controls and procedures at the end of each quarter, while it assesses the effectiveness of its internal control over financial reporting at the end of each year.

As of September 30, 2012, National Penn’s management, under the supervision of and with the participation of National Penn’s Chief Executive Officer and Chief Financial Officer, evaluated National Penn’s disclosure controls and procedures.  Based on that evaluation, National Penn’s management concluded that National Penn’s disclosure controls and procedures were effective as of September 30, 2012.

There were no changes in National Penn’s internal control over financial reporting during the quarter ended September 30, 2012 that materially affected, or are reasonably likely to materially affect, National Penn’s internal control over financial reporting.  

There are inherent limitations to the effectiveness of any control system.  A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that its objectives are met. Further, the design of a control system is limited by available resources, and the benefits of controls must be considered relative to their costs and their impact on National Penn’s business model.  National Penn intends to continue improving and refining its internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

     Various actions and proceedings are currently pending to which National Penn or one or more of its subsidiaries is a party. These actions and proceedings arise out of routine operations and, in management’s opinion, are not expected to have a material impact on the Company’s financial position or results of operations.

Item 1A.  Risk Factors

National Penn’s failure to comply with the pervasive and comprehensive federal and state regulatory requirements to which its operations are subject may harm its business and financial results, its reputation, and its share price.

National Penn is supervised by the Federal Reserve, and National Penn Bank is supervised by the Office of the Comptroller of the Currency (the “OCC”). Accordingly, National Penn and its subsidiaries are subject to extensive federal and state legislation, regulation, and supervision that govern almost all aspects of business operations, which puts each of them at risk of being the subject of a formal or informal supervisory enforcement action. The expansive regulatory framework is primarily designed to protect consumers, depositors and the government’s deposit insurance funds, and to accomplish other governmental policy objectives such as combating terrorism.  Areas such as Bank Secrecy Act (“BSA”) compliance (including BSA and related anti-money laundering regulations) and real estate-secured consumer lending (such as Truth-in-Lending regulations, changes in Real Estate Settlement Procedures Act regulations, implementation of licensing and registration requirements for mortgage originators and more recently, heightened regulatory attention to mortgage and foreclosure-related activities and exposures) are being confronted with escalating regulatory expectations and scrutiny.  Failure by National Penn to comply with these requirements could result in adverse action by regulators, which would negatively affect National Penn’s reputation and could adversely affect National Penn’s ability to manage its business, and as a result, could be materially adverse to National Penn’s shareholders.

The impact of recent legislation, proposed legislation, and government programs intended to stabilize the financial markets cannot be predicted at this time, and such legislation is subject to change.  In addition, the failure of the financial markets to stabilize and a continuation or worsening of current financial market conditions could materially and adversely affect National Penn’s business, results of operations, financial condition, access to funding and the trading price of National Penn’s common stock.

New or changed governmental legislation or regulation and accounting industry pronouncements could adversely affect National Penn.

Changes in federal and state legislation and regulation may affect National Penn’s operations.  On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law.  The Dodd-Frank Act has, and will continue to, implement significant changes to the U.S. financial system, including among others:

• New requirements on banking, derivative and investment activities, including the repeal of the prohibition on the payment of interest on business demand accounts, debit card interchange fee requirements, and the “Volcker Rule,” which restricts the sponsorship, or the acquisition or retention of ownership interests, in private equity funds.

• The creation of a new Bureau of Consumer Financial Protection with supervisory authority, including the power to conduct examinations and take enforcement actions with respect to financial institutions with assets of $10 billion or more.

• The creation of a Financial Stability Oversight Council with authority to identify institutions and practices that might pose a systemic risk.

• Provisions affecting corporate governance and executive compensation of all companies subject to the reporting requirements of the Securities and Exchange Act of 1934, as amended.

• A provision that broadens the base for FDIC insurance assessments

• A provision that requires bank regulators to set minimum capital levels for bank holding companies that are as strong as those required for their insured depository subsidiaries, subject to a grandfather clause for holding companies with less than $15 billion in assets as of December 31, 2009.

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• The requirement that National Penn submit its executive compensation program to an advisory (non-binding) shareholder vote.

While a few of the Dodd-Frank Act’s provisions became effective immediately, many have yet to be implemented because the issuance of some rules has been delayed and the deadlines for adoption of other rules have not yet been reached.  In addition to the Dodd-Frank Act, the Federal Reserve Board issued in September 2012 proposed new capital rules consistent with Basel III, which includes the phase-out of Tier 1 capital treatment for trust preferred securities of banking companies of National Penn’s asset size. National Penn is also subject to changes in accounting rules and interpretations.  National Penn cannot predict what effect any presently contemplated or future changes in financial market regulation or accounting rules and interpretations will have on National Penn.  National Penn will have to devote a substantial amount of management and financial resources to ensure compliance with such regulatory changes, including all applicable provisions of the Dodd-Frank Act and its implementing rules as they are finalized and released.  Doing so may increase National Penn’s costs of operations.  In addition, in some cases, National Penn’s ability to comply with regulatory changes may be dependent on third party vendors taking timely action to achieve compliance.  Any such changes may also negatively affect National Penn’s financial performance, the calculation of its capital ratios, its ability to expand its products and services and/or to increase the value of its business and, as a result, could be materially adverse to National Penn’s shareholders.

Deterioration in credit quality, particularly in commercial, construction and real estate loans, has adversely impacted National Penn and may continue to adversely impact National Penn.

In late 2008, National Penn began to experience a downturn in the overall credit performance of its loan portfolio, as well as acceleration in the deterioration of general economic conditions.  National Penn believes that this deterioration, as well as a significant increase in national and regional unemployment levels and decreased sources of liquidity, have been the primary drivers of increased stress being placed on many borrowers and is negatively impacting borrowers’ ability to repay.

Deterioration in the quality of National Penn's credit portfolio could significantly increase non-performing loans, require additional increases in loan loss reserves, elevate charge-off levels and have a material adverse effect on National Penn's capital, financial condition and results of operations.

National Penn's allowance for loan and lease losses may prove inadequate or be negatively affected by credit risk exposure.

National Penn depends on the creditworthiness of its customers. National Penn periodically reviews the adequacy of its allowance for loan losses, considering economic conditions and trends, collateral values and credit quality indicators, including past charge-off experience and levels of past due loans and non-performing assets, classified assets and other regulatory requirements. As a result of these considerations, National Penn may increase or decrease its allowance for loan losses.  The allowance for loan losses may not be adequate over time to cover credit losses because of unanticipated adverse changes to the economy caused by recession, inflation, unemployment or other factors beyond National Penn's control.  If the credit quality of National Penn's customer base materially decreases, if the risk profile of a market, industry or group of customers changes materially, or if the allowance for loan losses is not adequate, National Penn's business, financial condition, liquidity, capital and results of operations could be materially and adversely affected.

Because its operations are concentrated in eastern Pennsylvania, National Penn's performance and financial condition may be adversely affected by regional economic conditions and real estate values.

National Penn's loan activities are largely based in 13 counties in eastern Pennsylvania. To a lesser extent, National Penn's deposit base is also generated from this area. As a result, National Penn's consolidated financial performance depends largely upon economic conditions in this region and demand for its products and services. Weak local economic conditions from 2008 through 2012 have caused National Penn to experience an increase in loan delinquencies, an increase in the number of borrowers who defaulted on their loans and a reduction in the value of the collateral securing their loans. A continued downturn in the regional real estate market could further harm National Penn's financial condition and results of operations because of the geographic concentration of loans within this regional area and because a large percentage of its loans are secured by real property. If there is a further decline in real estate values, the collateral for National Penn's loans will provide less security. As a result, National Penn's ability to recover on defaulted loans by selling the underlying real estate will be diminished, and National Penn will be more likely to suffer losses on defaulted loans.

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Declines in asset values may result in impairment charges and adversely impact the value of National Penn's investments, financial performance and capital.

National Penn maintains an investment portfolio that includes, but is not limited to, municipal bonds, bank equity securities, and individual trust preferred securities. The market value of investments may be affected by factors other than the underlying performance of the issuer or composition of the bonds themselves, such as ratings downgrades, adverse changes in business climate and lack of liquidity for resales of certain investment securities. National Penn periodically, but not less than quarterly, evaluates investments and other assets for impairment indicators. National Penn may be required to record additional impairment charges if investments suffer a decline in value that is considered other-than-temporary. If National Penn determines that a significant impairment has occurred, National Penn would be required to charge against earnings the credit-related portion of the other-than-temporary impairment, which could have a material adverse effect on results of operations in the period in which the write-off occurs.

National Penn's investment portfolio includes approximately $38 million in capital stock of the Federal Home Loan Bank of Pittsburgh as of September 30, 2012. This stock ownership is required of all Home Loan Bank members as part of the overall Home Loan Bank capitalization. The Home Loan Bank is experiencing a potential capital shortfall, has suspended its quarterly cash dividend, and could possibly require its members, including National Penn, to make additional capital investments in the Home Loan Bank. If the Home Loan Bank were to cease operations, or if National Penn were required to write-off its investment in the Home Loan Bank, National Penn's business, financial condition, liquidity, capital and results of operations may be materially and adversely affected.

National Penn may incur impairments to goodwill.

At September 30, 2012, National Penn had approximately $258 million recorded as goodwill.  National Penn evaluates its goodwill for impairment at least annually during the second quarter of its fiscal year.  Significant negative industry or economic trends, including the lack of recovery in the market price of National Penn's common stock, or reduced estimates of future cash flows or disruptions to National Penn's business could result in impairments to goodwill. National Penn's valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely on projections of future operating performance. National Penn operates in competitive environments and projections of future operating results and cash flows may vary significantly from actual results. If National Penn's analysis results in additional impairment to its goodwill, National Penn would be required to record an impairment charge to earnings in its financial statements during the period in which such impairment is determined to exist. Any such change could have a material adverse effect on National Penn's results of operations and stock price.

National Penn’s ability to realize its deferred tax asset may be reduced, which may adversely impact results of operations.

Realization of a deferred tax asset requires National Penn to exercise significant judgment and is inherently uncertain because it requires the prediction of future occurrences. National Penn’s deferred tax asset may be reduced in the future if estimates of future income or our tax planning strategies do not support the amount of the deferred tax asset. If it is determined that a valuation allowance of its deferred tax asset is necessary, National Penn may incur a charge to earnings and a reduction to regulatory capital for the amount included therein.

Negative conditions in the general economy and financial services industry may limit National Penn's access to additional funding and adversely impact liquidity.

An inability to raise funds through deposits, borrowings and other sources could have a substantial negative effect on National Penn's liquidity. National Penn's access to funding sources in amounts adequate to finance its activities could be impaired by factors that affect it specifically or the financial services industry in general. Factors that could detrimentally impact National Penn's access to liquidity sources include a decrease in the level of its business activity due to a market downturn or adverse regulatory action against it. National Penn's ability to borrow could also be impaired by factors that are nonspecific to National Penn, such as severe disruption of the financial markets or negative news and expectations about the prospects for the financial services industry as a whole as evidenced by recent turmoil in the domestic and worldwide credit markets.

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National Penn may need to, or may be compelled to, raise additional capital in the future.  However, capital may not be available when needed and on terms favorable to current shareholders.

Federal banking regulators require National Penn and National Penn Bank to maintain adequate levels of capital to support their operations. These capital levels are determined and dictated by law, regulation and banking regulatory agencies.  In addition, capital levels are also determined by National Penn's management and board of directors based on capital levels that they believe are necessary to support National Penn's business operations.  To be "well capitalized" under current bank regulatory guidelines, banking companies generally must maintain a Tier 1 leverage ratio of at least 5%, a Tier 1 risk-based capital ratio of at least 6%, and a total risk-based capital ratio of at least 10%.

If National Penn raises capital through the issuance of additional shares of its common stock or other securities, it would likely dilute the ownership interests of current investors and could dilute the per share book value and earnings per share of its common stock. Please refer to the risk factor below titled "There may be other dilution of National Penn's equity, which may adversely affect the market price of National Penn's common stock." Furthermore, a capital raise through issuance of additional shares may have an adverse impact on National Penn's stock price. New investors may also have rights, preferences and privileges senior to National Penn's current shareholders, which may adversely impact its current shareholders. National Penn's ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside of its control, and on its financial performance. Accordingly, National Penn cannot be certain of its ability to raise additional capital on terms and time frames acceptable to it or to raise additional capital at all. If National Penn cannot raise additional capital in sufficient amounts when needed, its ability to comply with regulatory capital requirements could be materially impaired. Additionally, the inability to raise capital in sufficient amounts may adversely affect National Penn's operations, financial condition and results of operations.

National Penn may be required to pay significantly higher FDIC premiums or special assessments that could adversely affect our earnings.

Bank failures over recent years severely depleted the FDIC’s insurance fund.  In response, the FDIC took various measures in 2009 and early 2010. The Dodd-Frank Act, adopted in July 21, 2010, requires the FDIC to increase reserves against future losses, which will require increased assessments that are to be borne primarily by institutions with assets of greater than $10 billion. Any future increases in assessments or higher periodic fees could adversely affect National Penn’s earnings.

Competition from other financial institutions may adversely affect National Penn's profitability.

National Penn Bank faces substantial competition in originating loans, both commercial and consumer. This competition comes principally from other banks, savings institutions, mortgage banking companies and other lenders. Many of National Penn's competitors enjoy advantages, including greater financial resources and higher lending limits, a wider geographic presence, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. Additionally, several of National Penn's banking competitors are financial institutions that received multi-million or multi-billion dollar infusions of capital from the U.S. Treasury or other support from federal programs, which strengthened their balance sheets and enhanced their ability to withstand the uncertainty of the current economic environment. Intensified competition from these institutions and/or economic conditions could reduce National Penn's net income by decreasing the number and size of loans that National Penn Bank originates and the interest rates it may charge on these loans.

In attracting business and consumer deposits, National Penn Bank faces substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many of National Penn's competitors enjoy advantages, including greater financial resources (from participation in the U.S. Treasury’s Capital Purchase Program or otherwise), more aggressive marketing campaigns, better brand recognition and more branch locations. These competitors may offer higher interest rates than National Penn, which could decrease the deposits that National Penn attracts or require National Penn to increase its rates to retain existing deposits or attract new deposits. Increased deposit competition could adversely affect National Penn's ability to generate the funds necessary for lending operations. As a result, National Penn may need to seek other sources of funds that may be more expensive to obtain and could increase National Penn's cost of funds.

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National Penn Bank and National Penn's non-banking subsidiaries also compete with non-bank providers of financial services, such as brokerage firms, consumer finance companies, credit unions, insurance agencies and governmental organizations which may offer more favorable terms. Some of National Penn's non-bank competitors are subject to less extensive regulations than those governing National Penn's banking operations. As a result, such non-bank competitors may have advantages over National Penn Bank and non-banking subsidiaries in providing financial products and services. This competition may reduce or limit National Penn's margins on banking and non-banking services reduce its market share and adversely affect its earnings and financial condition.

Inability to hire or retain key personnel could adversely affect National Penn’s business.

National Penn's subsidiaries face intense competition with various other financial institutions, as well as from non-bank providers of financial services, such as brokerage firms, consumer finance companies, credit unions, insurance agencies and government organizations, for the attraction and retention of key personnel, specifically those who generate and maintain National Penn's customer relationships and serve in other key operation positions in the areas of finance, credit administration, loan functions and information technology. These competitors may offer greater compensation and other benefits, which could result in the loss of potential and/or existing key personnel. The inability to hire or retain key personnel may result in the loss of potential and/or existing substantial customer relationships and may adversely affect National Penn's ability to compete effectively.

National Penn's financial performance is directly impacted by interest rates.

Changes in interest rates may reduce profits. The primary source of income for National Penn currently is the differential, or the net interest spread, between the interest earned on loans, securities and other interest-earning assets, and the interest paid on deposits, borrowings and other interest-bearing liabilities. Based upon prevailing interest rates, net interest spreads are affected by the difference between the maturities and re-pricing characteristics of interest-earning assets and interest-bearing liabilities. Interest rates could materially adversely affect National Penn's net interest spread, loan origination volume, asset quality and overall profitability.

If National Penn's information systems are interrupted or sustain a breach in security, those events may negatively affect National Penn's financial performance and reputation.

In conducting its business, National Penn relies heavily on its information systems. Maintaining and protecting those systems is difficult and expensive, as is dealing with any failure, interruption or breach in security of these systems, whether due to acts or omissions by National Penn or by a third party and whether intentional or not. Any such failure, interruption or breach could result in failures or disruptions in National Penn's customer relationship management, general ledger, deposit, loan and other systems.  A breach of National Penn’s information security may result from fraudulent activity committed against National Penn or its clients, resulting in financial loss to National Penn or its clients, or privacy breaches against National Penn’s clients.  Such fraudulent activity may consist of check fraud, electronic fraud, wire fraud, “phishing”, social engineering or other deceptive acts.  The policies, procedures and technical safeguards put in place by National Penn to prevent or limit the effect of any failure, interruption or security breach of its information systems may be insufficient to prevent or remedy the effects of any such occurrences.  The occurrence of any failures, interruptions or security breaches of National Penn's information systems could damage National Penn's reputation, cause National Penn to incur additional expenses, result in losses to National Penn or its clients, result in a loss of customer business and data, affect National Penn’s ability to grow its online services or other businesses, subject National Penn to regulatory sanctions or additional regulatory scrutiny, or expose National Penn to civil litigation and possible financial liability, any of which could have a material adverse effect on National Penn's financial condition and results of operations.

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If National Penn's information technology is unable to keep pace with its growth or industry developments, National Penn's financial performance may suffer.

Effective and competitive delivery of National Penn's products and services is increasingly dependent upon information technology resources and processes, both those provided internally as well as those provided through third party vendors, such as firms which license their software solutions to National Penn. In addition to better serving customers, the effective use of technology increases efficiency and enables National Penn to reduce costs. National Penn's future success will depend, in part, upon its ability to address the needs of its customers by using technology to provide products and services to enhance customer convenience, as well as to create additional efficiencies in its operations. Many of National Penn's competitors have greater resources to invest in technological improvements. Additionally, as technology in the financial services industry changes and evolves, keeping pace becomes increasingly complex and expensive for National Penn.  There can be no assurance that National Penn will be able to effectively implement new technology-driven products and services, which could reduce its ability to compete effectively.

National Penn's internal control systems are inherently limited.

National Penn's systems of internal controls, disclosure controls and corporate governance policies and procedures are inherently limited.  The inherent limitations of National Penn's system of internal controls include the use of judgment in decision-making that can be faulty; breakdowns can occur because of human error or mistakes; and controls can be circumvented by individual acts or by collusion of two or more people. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and may not be detected, which may have an adverse effect on National Penn's business, results of operations or financial condition. Additionally, any plans of remediation for any identified limitations may be ineffective in improving National Penn's internal controls.

National Penn may grow its business by acquiring other financial services companies, and these acquisitions present a number of risks and uncertainties related both to the acquisition transactions themselves and to the integration of the acquired businesses.

Acquisitions of other financial services companies or assets present risks to National Penn in addition to those presented by the nature of the business acquired. In general, acquisitions may be substantially more expensive to complete than expected (including unanticipated costs incurred in connection with the integration of the acquired company) and the anticipated benefits (including anticipated cost savings and strategic gains) may be significantly more difficult or take longer to achieve than expected. In some cases, acquisitions involve our entry into new businesses or new geographic or other markets, and these situations also present risks in instances where we may be inexperienced in these new areas. As a regulated financial institution, our ability to pursue or complete attractive acquisition opportunities could be negatively impacted by regulatory delays or other regulatory issues. The processes of integrating acquired businesses also pose many additional possible risks which could result in increased costs, liability or other adverse consequences.

There may be other dilution of National Penn's shareholders, which may adversely affect the market price of National Penn's common stock.

National Penn is not restricted from issuing additional common shares, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common shares. National Penn is currently authorized to issue up to 250 million common shares, of which 150 million shares were outstanding as of September 30, 2012, and up to one million shares of preferred stock, none of which are outstanding.  In addition, National Penn’s Board of Directors has made shares available for compensation purposes, including under its Employee Stock Purchase Plan, as well as for compensation including shares available for purchase under National Penn's Dividend Reinvestment and Stock Purchase Plan. The Employee Stock Purchase Plan allows employee shareholders to purchase shares of National Penn common shares at a 10% discount from market value.  In addition, shares are issuable upon the vesting of restricted stock units and/or exercise of stock options that have been, or stock options, stock appreciation rights, stock awards and restricted stock that may be, issued under National Penn's equity compensation plans.  Should National Penn experience strong participation in the Employee Stock Purchase Plan or the Dividend Reinvestment and Stock Purchase Plan, the issuance of the required shares of common stock may significantly dilute the ownership of National Penn's shareholders. National Penn's board of directors has authority, without action or vote of the shareholders, to issue all or part of its authorized but unissued shares. Authorized but unissued shares could be issued on terms or in circumstances that could dilute the interests of other shareholders.

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National Penn relies on dividends it receives from its subsidiaries, may further reduce or eliminate cash dividends on its common stock, and is subject to restrictions on its ability to declare or pay cash dividends and repurchase shares of common stock.

As a bank holding company, National Penn's ability to pay dividends depends primarily on its receipt of dividends from its direct and indirect subsidiaries. Its bank subsidiary, National Penn Bank, is National Penn's primary source of dividends. Dividend payments from National Penn Bank are subject to legal and regulatory limitations, generally based on net profits and retained earnings, imposed by bank regulatory agencies. The ability of National Penn Bank to pay dividends is also subject to profitability, financial condition, regulatory capital requirements, capital expenditures and other cash flow requirements. As of September 30, 2012, National Penn Bank had the ability to pay dividends to National Penn without prior regulatory approval.  However, there is no assurance that National Penn Bank, and/or National Penn's other subsidiaries, will be able to pay dividends in the future.

In October 2012, National Penn’s Board of Directors approved a fourth quarter 2012 cash dividend of $0.10 per share.  There can be no assurance that National Penn will pay dividends to its shareholders in the future, or if dividends are paid, that National Penn will increase its dividend to historical levels or otherwise.  National Penn's ability to pay dividends to its shareholders is subject to limitations and guidance issued by the Board of Governors of the Federal Reserve System, or the Federal Reserve.  For example, under Federal Reserve guidance, bank holding companies generally are advised to consult in advance with the Federal Reserve before declaring dividends, and to strongly consider reducing, deferring or eliminating dividends, in certain situations, such as when declaring or paying a dividend that would exceed earnings for the fiscal quarter for which the dividend is being paid, or when declaring or paying a dividend that could result in a material adverse change to the organization's capital structure.  National Penn's failure to pay dividends on its common stock could have a material adverse effect on its business, operations, financial condition, access to funding and the market price of its common stock.

National Penn may be a defendant from time to time in a variety of litigation and other actions, which could have a material adverse effect on its financial condition, results of operations and cash flows.

National Penn and its subsidiaries have been and may continue to be involved from time to time in a variety of litigation arising out of its business. An increased number of lawsuits, including class action lawsuits and other consumer driven litigation, have been filed and will likely continue to be filed against financial institutions, which may involve substantial compensatory and/or punitive damages. National Penn believes the risk of litigation generally increases during downturns in the national and local economies.  National Penn's insurance may not cover all claims that may be asserted against it, and any claims asserted against it, regardless of merit or eventual outcome, may harm National Penn's reputation and may cause it to incur significant expense.  Should the ultimate judgments or settlements in any litigation exceed National Penn's insurance coverage, they could have a material adverse effect on National Penn’s financial condition, results of operations and cash flows.  In addition, National Penn may not be able to obtain appropriate types or levels of insurance in the future, nor may National Penn be able to obtain adequate replacement policies with acceptable terms, if at all.

A Warning About Forward-Looking Information

This Report, including information incorporated by reference in this Report, contains forward-looking statements about National Penn and its subsidiaries.  In addition, from time to time, National Penn or its representatives may make written or oral forward-looking statements about National Penn and its subsidiaries.  These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are not statements of historical fact, and can be identified by the use of forward-looking terminology such as “believe,” “expect,” “may,” “will,” “should,” “project,” “plan,” “goal,” “potential,” “pro forma,” “seek,” “target,” “intend” or “anticipate” or the negative thereof or comparable terminology.  Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, rationales, objectives, expectations or consequences of various proposed or announced transactions, and statements about the future performance, operations, products and services of National Penn and its subsidiaries.  National Penn cautions its shareholders and other readers not to place undue reliance on such statements.

National Penn’s businesses and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experience may materially differ from those contained in any forward-looking statements. Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the risk factors set forth above, as well as the following:

• National Penn’s branding and marketing initiatives may not be effective in building name recognition and customer awareness of National Penn’s products and services.

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• National Penn may be unable to differentiate itself from its competitors by a higher level of customer service, as intended by its business strategy and other marketing initiatives.

• Expansion of National Penn’s product and service offerings may take longer, and may meet with more effective competitive resistance from others already offering such products and services, than expected.  Additionally, new product development by new and existing competitors may be more effective, and take place more quickly, than expected.

• National Penn may be unable to attract, motivate, and/or retain key executives and other key personnel due to intense competition for such persons, National Penn’s cost saving strategies, increased governmental oversight or otherwise.

• Growth and profitability of National Penn’s non-interest income or fee income may be less than expected, particularly as a result of current financial market conditions.

• General economic or business conditions, either nationally or in the regions in which National Penn does business, may continue to deteriorate or be more prolonged than expected, resulting in, among other things, a deterioration in credit quality, a reduced demand for credit, or a decision by National Penn to reevaluate staffing levels or to divest one or more lines of business.

• In the current environment of increased investor activism, including hedge fund investment policies and practices, shareholder concerns or actions may require increased management/board attention, efforts and commitments, which could require a shift in focus from business development and operations.

• Current stresses in the financial markets may inhibit National Penn's ability to access the capital markets or obtain financing on favorable terms.

• Repurchase obligations with respect to real estate mortgages sold in the secondary market could adversely affect National Penn’s earnings.

• Changes in consumer spending and savings habits could adversely affect National Penn’s business.

• Negative publicity with respect to any National Penn product or service, employee, director or other associated individual or entity whether legally justified or not, could adversely affect National Penn’s reputation and business.

• National Penn may be unable to successfully manage the foregoing and other risks and to achieve its current short-term and long-term business plans and objectives.

All written or oral forward-looking statements attributable to National Penn or any person acting on its behalf made after the date of this Report are expressly qualified in their entirety by the risk factors and cautionary statements contained in this Report. National Penn does not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.

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Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information on repurchases by National Penn of its common stock in each month of the quarter ended September 30, 2012:

Period	Total No. of Shares Purchased	Weighted-average Price Paid per Share		Total No. of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum No. of Shares that may yet be Purchased Under the Plans or Programs
July 1, 2012 through July 31, 2012	—	$	—	—	5,342,498
August 1, 2012 through August 31, 2012	300,070	$	8.80	300,070	5,042,428
September 1, 2012 through September 30, 2012	—	$	—	—	5,042,428
Total	300,070	8.80		300,070

1. National Penn's current repurchase program was announced by the Board of Directors on April 2, 2012 and the program is authorized for the remainder of 2012.

2. The number of shares approved for repurchase under National Penn's current stock repurchase program is 7,500,000.

3. The authorization of this repurchase plan supersedes all pre-existing share repurchase plans.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

None.

Item 5.  Other Information

None.

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Item 6.  Exhibits

3.1	Articles of Incorporation, as amended, of National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 3.1 to National Penn’s Report on Form 8-K dated April 24, 2009 as filed on April 24, 2009.)
3.2	Bylaws, as amended and restated, of National Penn Bancshares, Inc. (Incorporated by reference to  Exhibit 3.1 to National Penn’s Report on Form 8-K dated September 28, 2011, as filed on  October 3, 2011.)
31.1	Certification of President and Chief Executive Officer of National Penn Bancshares, Inc., pursuant to Commission Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer of National Penn Bancshares, Inc., pursuant to Commission Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of President and Chief Executive Officer of National Penn Bancshares, Inc., pursuant to Commission Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  (Furnished, not filed.)
32.2	Certification of  Chief Financial Officer of National Penn Bancshares, Inc., pursuant to Commission Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  (Furnished, not filed.)

101.INS XBRL	Instance Document **
101.SCH XBRL	Taxonomy Extension Schema Document **
101.CAL XBRL	Taxonomy Extension Calculation Linkbase Document **
101.DEF XBRL	Taxonomy Extension Definition Linkbase Document **
101.LAB XBRL	Taxonomy Extension Label Linkbase Document **
101.PRE XBRL	Taxonomy Extension Presentation Linkbase Document **

** Furnished herewith.

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SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		NATIONAL PENN BANCSHARES, INC.
		(Registrant)
Date:	November 8, 2012	By:	/s/ Scott V. Fainor
			Name:	Scott V. Fainor
			Title:	President and Chief Executive Officer
Date:	November 8, 2012	By:	/s/ Michael J. Hughes
			Name:	Michael J. Hughes
			Title:	Chief Financial Officer

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