National Penn Bancshares (NPBC) 10-Q 2013 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, 2013

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 o

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  o

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 o
Non-accelerated filer o	(Do not check if a smaller reporting company)	Smaller reporting company o

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

Yes o 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 1, 2013
Common Stock, no stated par value	145,738,620 shares

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION	3
Item 1.  Financial Statements	3
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3. Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.  Controls and Procedures	48
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	59
Item 3.  Defaults Upon Senior Securities	59
Item 4.  Mine Safety Disclosures	59
Item 5.  Other Information	59
Item 6.  Exhibits	59
SIGNATURES	60

2

 PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	Unaudited
(dollars in thousands)	September 30, 2013			December 31, 2012
ASSETS
Cash and due from banks	$	137,795		$	145,688
Interest-earning deposits with banks	78,895			282,440
Total cash and cash equivalents	216,690			428,128
Investment securities available-for-sale, at fair value	1,875,676			1,802,213
Investment securities held-to-maturity
(Fair value $462,031 and $499,149 for 2013 and 2012, respectively)	444,898			464,166
Other securities	44,107			68,360
Loans held-for-sale	2,752			14,330
Loans, net of allowance for loan losses of $100,763 and $110,955 for 2013 and 2012, respectively	5,179,176			5,115,597
Premises and equipment, net	93,871			96,334
Accrued interest receivable	27,831			28,526
Bank owned life insurance	146,906			143,242
Other real estate owned and other repossessed assets	1,569			3,029
Goodwill	258,279			258,279
Other intangible assets, net	7,656			10,614
Unconsolidated investments	9,177			11,347
Other assets	116,035			85,357
TOTAL ASSETS	$	8,424,623		$	8,529,522
LIABILITIES
Non-interest bearing deposits	$	1,026,546		$	891,401
Interest bearing deposits	5,408,910			5,044,164
Total deposits	6,435,456			5,935,565
Customer repurchase agreements	521,779			560,065
Repurchase agreements	50,000			75,000
Short-term borrowings	—			100,000
Federal Home Loan Bank advances	112,406			464,632
Subordinated debentures	77,321			144,627
Accrued interest payable and other liabilities	96,383			88,341
TOTAL LIABILITIES	7,293,345			7,368,230
SHAREHOLDERS' EQUITY
Common stock, no stated par value; authorized 250,000,000 shares, issued: September 30, 2013 - 152,316,674; December 31, 2012 - 152,375,522	1,387,052			1,387,644
Accumulated deficit	(182,628		)	(185,680		)
Accumulated other comprehensive (loss) income	(13,504		)	24,329
Treasury stock: September 30, 2013 - 6,593,398 shares; December 31, 2012 - 7,211,937 shares	(59,642		)	(65,001		)
TOTAL SHAREHOLDERS' EQUITY	1,131,278			1,161,292
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	8,424,623		$	8,529,522
The accompanying notes are an integral part of these financial statements.

3

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended				Nine Months Ended
(dollars in thousands, except per share data)	September 30,				September 30,
	2013		2012		2013			2012
INTEREST INCOME
Loans, including fees	$	54,577	$	60,269	$	165,558		$	183,676
Investment securities
Taxable	10,105		10,525		29,585			32,675
Tax-exempt	6,768		7,402		20,887			22,819
Deposits with banks	48		148		164			484
Total interest income	71,498		78,344		216,194			239,654
INTEREST EXPENSE
Deposits	5,468		6,472		17,213			20,645
Customer repurchase agreements	440		511		1,398			1,606
Repurchase agreements	614		843		1,956			2,673
Short-term borrowings	—		—		41			—
Federal Home Loan Bank advances	1,325		5,105		5,042			18,573
Subordinated debentures	539		1,859		2,554			5,586
Total interest expense	8,386		14,790		28,204			49,083
Net interest income	63,112		63,554		187,990			190,571
Provision for loan losses	1,250		2,000		4,250			6,000
Net interest income after provision for loan losses	61,862		61,554		183,740			184,571
NON-INTEREST INCOME
Wealth management	6,883		6,239		20,700			18,405
Service charges on deposit accounts	3,894		4,147		11,407			11,723
Insurance commissions and fees	3,071		3,238		9,664			9,745
Cash management and electronic banking fees	4,860		4,626		14,132			13,753
Mortgage banking	1,621		2,296		5,598			5,142
Bank owned life insurance	1,260		1,319		3,727			3,783
Earnings of unconsolidated investments	661		1,315		653			1,349
Other operating income	2,551		3,484		7,307			6,903
Net gains from fair value changes of subordinated debentures	—		101		2,111			936
Net gains (losses) on sales of investment securities	7		—		54			(123		)
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	—		—		—			—
Net impairment losses on investment securities	—		—		—			(154		)
Total non-interest income	24,808		26,765		75,353			71,462
NON-INTEREST EXPENSE
Salaries, wages and employee benefits	31,704		31,555		93,824			94,170
Premises and equipment	7,724		7,226		22,726			21,428
FDIC insurance	1,404		1,259		4,111			3,734
Other operating expenses	12,771		13,299		38,529			38,716
Loss on debt extinguishment	—		—		64,888			—
Total non-interest expense	53,603		53,339		224,078			158,048
Income before income taxes	33,067		34,980		35,015			97,985
Income tax expense	8,507		8,964		2,840			24,219
NET INCOME	$	24,560	$	26,016	$	32,175		$	73,766
PER SHARE
Basic earnings	$	0.17	$	0.17	$	0.22		$	0.49
Diluted earnings	$	0.17	$	0.17	$	0.22		$	0.49
Dividends paid in cash	$	0.10	$	0.09	$	0.20	(a)	$	0.21
(a) In lieu of a 1st quarter 2013 cash dividend, the Company paid an additional dividend of $0.10 per share in the 4th quarter of 2012.
The accompanying notes are an integral part of these financial statements.

4

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended September 30, 2013									Nine Months Ended September 30, 2013
(dollars in thousands)	Before Tax Amount			Income Tax Expense (Benefit)			Net of Tax Amount			Before Tax Amount			Income Tax Expense (Benefit)			Net of Tax Amount
Net income	$	33,067		$	8,507		$	24,560		$	35,015		$	2,840		$	32,175
Unrealized holding gains (losses) arising during the period on investment securities	2,750			962			1,788			(61,190		)	(21,416		)	(39,774		)
Less net gains on sales of investment securities realized in net income	7			2			5			54			19			35
Unrealized gains (losses) on investment securities	2,743			960			1,783			(61,244		)	(21,435		)	(39,809		)
Pension adjustments	2,928			1,025			1,903			3,041			1,065			1,976
Other comprehensive income (loss)	5,671			1,985			3,686			(58,203		)	(20,370		)	(37,833		)
Total comprehensive income (loss)	$	38,738		$	10,492		$	28,246		$	(23,188	)	$	(17,530	)	$	(5,658	)
	Three Months Ended September 30, 2012									Nine Months Ended September 30, 2012
(dollars in thousands)	Before Tax Amount			Income Tax Expense (Benefit)			Net of Tax Amount			Before Tax Amount			Income Tax Expense (Benefit)			Net of Tax Amount
Net income	$	34,980		$	8,964		$	26,016		$	97,985		$	24,219		$	73,766
Unrealized holding gains arising during the period on investment securities	5,819			2,036			3,783			12,839			4,495			8,344
Less net losses on sales of investment securities realized in net income	—			—			—			(123		)	(43		)	(80		)
Unrealized gains on investment securities	5,819			2,036			3,783			12,962			4,538			8,424
Pension adjustments	(925		)	(324		)	(601		)	(925		)	(324		)	(601		)
Other comprehensive income	4,894			1,712			3,182			12,037			4,214			7,823
Total comprehensive income	$	39,874		$	10,676		$	29,198		$	110,022		$	28,433		$	81,589
The accompanying notes are an integral part of these financial statements.

5

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT 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, 2012	145,163,585	$	1,387,644		$	(185,680	)	$	24,329		$	(65,001	)	$	1,161,292
Comprehensive income (loss):
Net income					32,175									32,175
Other comprehensive income (loss), net of taxes								(37,833		)				(37,833		)
Total comprehensive income (loss)														(5,658		)
Cash dividends declared, common					(29,123		)							(29,123		)
Shares issued under share-based plans, net of excess tax benefits	559,691	(592		)							5,359			4,767
Balance at September 30, 2013	145,723,276	$	1,387,052		$	(182,628	)	$	(13,504	)	$	(59,642	)	$	1,131,278
The accompanying notes are an integral part of these financial statements.

6

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)	Nine Months Ended September 30,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	32,175		$	73,766
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	4,250			6,000
Depreciation and amortization	9,951			11,665
Amortization of premiums and discounts on investment securities, net	2,376			2,760
(Gains) losses from sales of investment securities, net	(54		)	123
Impairment of investment securities	—			154
Decrease in fair value of subordinated debentures	(2,111		)	(936		)
Bank owned life insurance policy income	(3,727		)	(3,783		)
Share-based compensation expense	2,442			2,800
Unconsolidated investment distributions, net	2,170			836
Loans originated for resale	(159,095		)	(156,245		)
Proceeds from sale of loans originated for resale	175,187			149,668
Gains on sale of loans, net	(4,513		)	(3,909		)
(Gains) losses on sale of other real estate owned, net	(200		)	860
Gains on sale of buildings	(301		)	—
Loss on debt extinguishment	64,888			—
Changes in assets and liabilities:
Decrease (increase) in accrued interest receivable	695			(457		)
Decrease in accrued interest payable	(3,041		)	(5,411		)
(Increase) decrease in other assets	(10,419		)	4,155
Increase in other liabilities	14,055			1,780
Net cash provided by operating activities	124,728			83,826
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and repayments of investment securities held-to-maturity	19,070			23,338
Proceeds from maturities and repayments of investment securities available-for-sale	348,493			292,237
Proceeds from sale of investment securities available-for-sale	3,432			850
Purchase of investment securities available-for-sale	(488,757		)	(309,371		)
Proceeds from sale of other securities	24,253			6,522
Proceeds from sale of loans previously held for investment	1,181			1,883
Increase in loans	(69,460		)	(81,603		)
Purchases of premises and equipment	(4,829		)	(7,337		)
Proceeds from the sale of other real estate owned	2,110			1,906
Proceeds from sale of buildings	868			—
Net cash used in investing activities	(163,639		)	(71,575		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in transaction and savings accounts	642,376			188,323
Net decrease in time deposits	(142,485		)	(115,398		)
Net (decrease) increase in customer repurchase agreements	(38,286		)	10,635
Decrease in short-term borrowings	(100,000		)	—
Decrease in repurchase agreements	(25,000		)	(10,000		)
Net decrease in FHLB advances and unamortized prepayment penalty	(417,382		)	(153,952		)
Repayment of subordinated debentures	(65,206		)	—
Proceeds from shares issued, share-based plans	2,542			2,170
Excess tax benefit (expense) on share-based plans	37			(143		)
Purchase of treasury stock	—			(21,242		)
Cash dividends, common	(29,123		)	(31,802		)
Net cash used in financing activities	(172,527		)	(131,409		)
Net decrease in cash and cash equivalents	(211,438		)	(119,158		)
Cash and cash equivalents at beginning of year	428,128			451,522
Cash and cash equivalents at end of period	$	216,690		$	332,364
The accompanying notes are an integral part of these financial statements.

7

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

SUPPLEMENTAL CASH FLOW DISCLOSURES

The Company considers cash and due from banks and interest earning deposits with banks to be 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,
	2013		2012
Interest	$	31,246	$	54,495
Income taxes	1,576		14,697

8

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Table of Contents

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, 2012, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (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, 2013.

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.  All material inter-company balances have been eliminated. References to the Company include all the Company’s subsidiaries unless otherwise noted.

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 share data)	September 30,				September 30,
	2013		2012		2013		2012
Income for EPS
Net income	$	24,560	$	26,016	$	32,175	$	73,766
Calculation of shares
Weighted average basic shares	145,669,300		150,157,622		145,549,146		151,325,579
Dilutive effect of share-based compensation	455,521		297,127		427,375		289,856
Weighted average fully diluted shares	146,124,821		150,454,749		145,976,521		151,615,435
Earnings per share
Basic	$	0.17	$	0.17	$	0.22	$	0.49
Diluted	$	0.17	$	0.17	$	0.22	$	0.49

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,
	2013		2012		2013		2012
Stock options	3,351,751		4,631,582		3,522,366		4,796,282
Exercise price
Low	$	8.69	$	7.07	$	8.69	$	7.07
High	$	21.49	$	21.49	$	21.49	$	21.49

9

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Table of Contents

3.  INVESTMENT SECURITIES

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

September 30, 2013
(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-Sale
U.S. Government agencies	$	1,000	$	—	$	—		$	1,000
State and municipal bonds	223,086		8,934		(3,138		)	228,882
Agency mortgage-backed securities/collateralized mortgage obligations	1,631,228		24,552		(30,241		)	1,625,539
Non-agency collateralized mortgage obligations	5,343		44		(15		)	5,372
Corporate securities and other	9,514		557		(448		)	9,623
Marketable equity securities	3,583		1,678		(1		)	5,260
Total	$	1,873,754	$	35,765	$	(33,843	)	$	1,875,676
Held-to-Maturity
State and municipal bonds	$	407,143	$	16,094	$	(686	)	$	422,551
Agency mortgage-backed securities/collateralized mortgage obligations	37,482		1,726		—			39,208
Non-agency collateralized mortgage obligations	273		—		(1		)	272
Total	$	444,898	$	17,820	$	(687	)	$	462,031
December 31, 2012
(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-Sale
U.S. Government agencies	$	999	$	24	$	—		$	1,023
State and municipal bonds	268,555		17,677		(912		)	285,320
Agency mortgage-backed securities/collateralized mortgage obligations	1,445,978		46,964		(1,577		)	1,491,365
Non-agency collateralized mortgage obligations	8,952		165		(7		)	9,110
Corporate securities and other	10,980		432		(729		)	10,683
Marketable equity securities	3,583		1,141		(12		)	4,712
Total	$	1,739,047	$	66,403	$	(3,237	)	$	1,802,213
Held-to-Maturity
State and municipal bonds	$	412,542	$	32,309	$	(68	)	$	444,783
Agency mortgage-backed securities/collateralized mortgage obligations	51,182		2,740		—			53,922
Non-agency collateralized mortgage obligations	442		2		—			444
Total	$	464,166	$	35,051	$	(68	)	$	499,149

10

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Table of Contents

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,
	2013		2012		2013		2012
Gains	$	7	$	—	$	54	$	—
Losses	—		—		—		(123		)
Net gains (losses) from sales of investment securities	$	7	$	—	$	54	$	(123	)

The table below indicates the length of time individual securities have been in a continuous unrealized loss position at September 30, 2013 and December 31, 2012, respectively.

September 30, 2013
(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	111	$	58,039	$	(1,855	)	$	16,124	$	(1,969	)	$	74,163	$	(3,824	)
Agency mortgage-backed securities/collateralized mortgage obligations	178	807,057		(30,011		)	4,557		(230		)	811,614		(30,241		)
Non-agency collateralized mortgage obligations	3	604		(16		)	—		—			604		(16		)
Corporate securities and other	4	—		—			2,720		(448		)	2,720		(448		)
Total debt securities	296	865,700		(31,882		)	23,401		(2,647		)	889,101		(34,529		)
Marketable equity securities	1	49		(1		)	—		—			49		(1		)
Total	297	$	865,749	$	(31,883	)	$	23,401	$	(2,647	)	$	889,150	$	(34,530	)
December 31, 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	45	$	18,592	$	(157	)	$	13,482	$	(823	)	$	32,074	$	(980	)
Agency mortgage-backed securities/collateralized mortgage obligations	25	141,252		(1,577		)	—		—			141,252		(1,577		)
Non-agency collateralized mortgage obligations	3	516		(3		)	268		(4		)	784		(7		)
Corporate securities and other	6	1,983		(21		)	2,816		(708		)	4,799		(729		)
Total debt securities	79	162,343		(1,758		)	16,566		(1,535		)	178,909		(3,293		)
Marketable equity securities	1	577		(12		)	—		—			577		(12		)
Total	80	$	162,920	$	(1,770	)	$	16,566	$	(1,535	)	$	179,486	$	(3,305	)

11

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Table of Contents

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

(dollars in thousands)	September 30, 2013		December 31, 2012
Deposits	$	1,272,060	$	847,155
Repurchase agreements	629,135		694,587
Other	84,214		99,585
Total	$	1,985,409	$	1,641,327

The amortized cost and fair value of investment securities, by contractual maturity, at September 30, 2013 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.

	Available-for-Sale				Held-to-Maturity
(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	3,929	$	4,023	$	—	$	—
Due after one through five years	38,859		42,097		1,004		1,036
Due after five through ten years	182,286		188,727		93,592		96,474
Due after ten years	1,645,097		1,635,569		350,302		364,521
Marketable equity securities	3,583		5,260		—		—
Total	$	1,873,754	$	1,875,676	$	444,898	$	462,031

Evaluation of Impairment of Securities

The Company did not record any other-than-temporary impairment ("OTTI") losses for the three and nine months endedSeptember 30, 2013. During the year ended December 31, 2012, the Company recorded $0.2 million of OTTI on an equity security in the second quarter.

As of September 30, 2013 and December 31, 2012, accumulated other comprehensive income does not include any impairment related charges for the non-credit-related components of OTTI.     

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 in an unrealized loss position, the Company has concluded, based on its analysis, that the unrealized losses 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.

At September 30, 2013, gross unrealized losses totaled $34.5 million, and the gross unrealized losses of securities in an unrealized loss position for twelve months or longer totaled $2.6 million, of which $2.0 million is attributable to state and municipal bonds and $0.4 million attributable to corporate securities and other.  The Company evaluates a variety of factors in concluding whether securities 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.). As a result of its review and considering the attributes of the individual securities, the Company concluded that the securities were not other-than-temporarily impaired.

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 carrying value, which may be maturity, the Company does not consider the securities in an unrealized loss position for twelve months or longer to be other-than-temporarily impaired.

Other securities on the Company’s consolidated balance sheet totaled $44.1 million and $68.4 million as of September 30, 2013 and December 31, 2012, 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 2013, the FHLB of Pittsburgh repurchased $24.3 million, net, of its capital stock from the Company at par/cost. During 2012 and 2013 the Company received and recorded dividends on its FHLB stock.

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NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Table of Contents

4.  LOANS

The following table presents loan classifications:

September 30, 2013	Performing
(dollars in thousands)	Pass Rated			Special Mention			Classified			Non-Performing (b)			Total
Commercial and industrial	$	2,289,110		$	51,785		$	95,024		$	24,982		$	2,460,901
CRE - permanent	908,695			10,131			41,393			4,291			964,510
CRE - construction	148,328			6,481			20,169			6,705			181,683
Commercial real estate	1,057,023			16,612			61,562			10,996			1,146,193
Residential mortgages	639,425			—			622			12,092			652,139
Home equity	752,968			—			752			5,030			758,750
All other consumer	253,841			560			5,850			1,705			261,956
Consumer	1,646,234			560			7,224			18,827			1,672,845
Loans	$	4,992,367		$	68,957		$	163,810		$	54,805		$	5,279,939
Percent of loans	94.55		%	1.31		%	3.10		%	1.04		%	100.00		%
December 31, 2012	Performing
(dollars in thousands)	Pass Rated			Special Mention			Classified			Non-Performing (b)			Total
Commercial and industrial	$	2,282,734		$	60,809		$	126,195		$	26,117		$	2,495,855
CRE - permanent	836,212			19,469			46,208			5,871			907,760
CRE - construction	85,085			6,351			28,996			5,446			125,878
Commercial real estate	921,297			25,820			75,204			11,317			1,033,638
Residential mortgages	661,226			—			38			10,508			671,772
Home equity	749,459			—			666			4,261			754,386
All other consumer	262,174			1,740			5,282			1,705			270,901
Consumer	1,672,859			1,740			5,986			16,474			1,697,059
Loans	$	4,876,890		$	88,369		$	207,385		$	53,908		$	5,226,552
Percent of loans	93.31		%	1.69		%	3.97		%	1.03		%	100.00		%
(b) Includes restructured loans that are performing in accordance with their modified contractual terms of $10.0 million and $8.4 million at September 30, 2013 and December 31, 2012, respectively.

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NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Table of Contents

The following table presents the details for past due loans: 

September 30, 2013	Past Due and Still Accruing												Accruing Current Balances		Non-Accrual Balances (d)			Total Balances
(dollars in thousands)	30-59 Days			60-89 Days			90 Days or More (c)			Total
Commercial and industrial	$	1,484		$	2,183		$	—		$	3,667		$	2,434,133	$	23,101		$	2,460,901
CRE - permanent	2,435			472			—			2,907			957,843		3,760			964,510
CRE - construction	197			638			—			835			175,503		5,345			181,683
Commercial real estate	2,632			1,110			—			3,742			1,133,346		9,105			1,146,193
Residential mortgages	4,641			1,282			577			6,500			639,154		6,485			652,139
Home equity	2,892			797			753			4,442			749,905		4,403			758,750
All other consumer	2,321			600			1,278			4,199			256,052		1,705			261,956
Consumer	9,854			2,679			2,608			15,141			1,645,111		12,593			1,672,845
Loans	$	13,970		$	5,972		$	2,608		$	22,550		$	5,212,590	$	44,799		$	5,279,939
Percent of loans	0.26		%	0.11		%	0.05		%	0.43		%			0.85		%
December 31, 2012	Past Due and Still Accruing												Accruing Current Balances		Non-Accrual Balances (d)			Total Balances
(dollars in thousands)	30-59 Days			60-89 Days			90 Days or More (c)			Total
Commercial and industrial	$	4,026		$	1,685		$	32		$	5,743		$	2,465,459	$	24,653		$	2,495,855
CRE - permanent	1,333			330			3			1,666			903,110		2,984			907,760
CRE - construction	651			485			—			1,136			119,296		5,446			125,878
Commercial real estate	1,984			815			3			2,802			1,022,406		8,430			1,033,638
Residential mortgages	3,826			394			38			4,258			660,448		7,066			671,772
Home equity	3,705			1,818			666			6,189			744,505		3,692			754,386
All other consumer	3,054			714			1,288			5,056			264,140		1,705			270,901
Consumer	10,585			2,926			1,992			15,503			1,669,093		12,463			1,697,059
Loans	$	16,595		$	5,426		$	2,027		$	24,048		$	5,156,958	$	45,546		$	5,226,552
Percent of loans	0.32		%	0.10		%	0.04		%	0.46		%			0.87		%
(c) 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.
(d) At September 30, 2013, non-accrual balances included troubled debt restructurings of $5.8 million commercial real estate, $14.3 million of commercial and industrial, and $2.7 million of consumer loans. At December 31, 2012, non-accrual balances included troubled debt restructurings of $5.0 million of commercial real estate loans, $20.6 million of commercial and industrial loans, and $0.2 million of consumer loans.

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NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Table of Contents

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

September 30, 2013
(dollars in thousands)
Three Months Ended	Commercial and Industrial			Commercial Real Estate			Consumer			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	47,286		$	24,471		$	22,436		$	10,340		$	104,533
Charge-offs	(3,335		)	(936		)	(1,503		)	—			(5,774		)
Recoveries	276			56			422			—			754
Provision	173			(543		)	1,654			(34		)	1,250
Ending balance	$	44,400		$	23,048		$	23,009		$	10,306		$	100,763

Nine Months Ended	Commercial and Industrial			Commercial Real Estate			Consumer			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	46,151		$	29,295		$	23,101		$	12,408		$	110,955
Charge-offs	(8,084		)	(2,402		)	(6,984		)	—			(17,470		)
Recoveries	1,091			433			1,504			—			3,028
Provision	5,242			(4,278		)	5,388			(2,102		)	4,250
Ending balance	$	44,400		$	23,048		$	23,009		$	10,306		$	100,763
Allowance for loan losses:
Individually evaluated for impairment	$	5,882		$	432		$	1,657		$	—		$	7,971
Collectively evaluated for impairment	38,518			22,616			21,352			10,306			92,792
Total allowance for loan losses	$	44,400		$	23,048		$	23,009		$	10,306		$	100,763
Loans:
Individually evaluated for impairment	$	29,568		$	16,107		$	18,872		$	—		$	64,547
Collectively evaluated for impairment	2,431,333			1,130,086			1,653,973			—			5,215,392
Loans	$	2,460,901		$	1,146,193		$	1,672,845		$	—		$	5,279,939

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NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Table of Contents

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

September 30, 2012
(dollars in thousands)
Three Months Ended	Commercial and Industrial			Commercial Real Estate			Consumer			Unallocated			Total
Allowance for loan 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	Commercial and Industrial			Commercial Real Estate			Consumer			Unallocated		Total
Allowance for loan 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 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 losses	$	47,460		$	33,147		$	21,700		$	11,235	$	113,542
Loans:
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	$	2,463,949		$	1,059,400		$	1,710,802		$	—	$	5,234,151

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

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NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Table of Contents

Impaired loan details are as follows:

September 30, 2013	Recorded Investment
(dollars in thousands)	With Related Allowance		Without Related Allowance		Total		Life-to-date Charge-offs		Total Unpaid Balances		Related Allowance		Average Recorded Investment
Commercial and industrial	$	10,888	$	18,680	$	29,568	$	5,344	$	34,912	$	5,882	$	27,239
CRE - permanent	1,288		8,114		9,402		6,737		16,139		401		9,626
CRE - construction	1,409		5,296		6,705		8,027		14,732		31		7,067
Commercial real estate	2,697		13,410		16,107		14,764		30,871		432		16,693
Residential mortgages	5,575		6,562		12,137		800		12,937		1,450		10,719
Home equity	614		4,416		5,030		796		5,826		207		4,885
All other consumer	—		1,705		1,705		61		1,766		—		1,751
Consumer	6,189		12,683		18,872		1,657		20,529		1,657		17,355
Total	$	19,774	$	44,773	$	64,547	$	21,765	$	86,312	$	7,971	$	61,287
December 31, 2012	Recorded Investment
(dollars in thousands)	With Related Allowance		Without Related Allowance		Total		Life-to-date Charge-offs		Total Unpaid Balances		Related Allowance		Average Recorded Investment
Commercial and industrial	$	4,326	$	21,791	$	26,117	$	3,700	$	29,817	$	1,644	$	31,392
CRE - permanent	1,241		6,970		8,211		5,766		13,977		76		7,352
CRE - construction	809		4,637		5,446		10,230		15,676		330		9,008
Commercial real estate	2,050		11,607		13,657		15,996		29,653		406		16,360
Residential mortgages	3,413		7,095		10,508		922		11,430		880		8,111
Home equity	547		3,714		4,261		286		4,547		180		3,507
All other consumer	—		1,705		1,705		61		1,766		—		1,987
Consumer	3,960		12,514		16,474		1,269		17,743		1,060		13,605
Total	$	10,336	$	45,912	$	56,248	$	20,965	$	77,213	$	3,110	$	61,357

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NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Table of Contents

Additional impaired loan details are as follows:

	Three Months Ended						Nine Months Ended
(dollars in thousands)	September 30,						September 30,
	2013			2012			2013			2012
Gross interest due on impaired loans	$	1,113		$	1,201		$	3,052		$	3,718
Interest received on impaired loans	(228		)	(138		)	(256		)	(237		)
Net impact of impaired loans on interest income	$	885		$	1,063		$	2,796		$	3,481
Average recorded investment in impaired loans	$	63,746		$	58,677		$	61,287		$	62,825

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, 2013		December 31, 2012
Commercial and industrial	$	1,881	$	1,464
CRE - permanent	531		2,887
CRE - construction	1,360		—
Residential mortgages	5,607		3,442
Home equity	627		569
Total restructured loans	$	10,006	$	8,362
Undrawn commitments to lend on restructured loans	$	—	$	—

The Company modifies loans to consumers with residential mortgages and home equity loans utilizing a program modeled after government assisted programs in order to help customers who are experiencing financial difficulty and are in jeopardy of losing their homes to foreclosure.

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NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Table of Contents

5.  DEPOSITS

(dollars in thousands)	September 30, 2013				December 31, 2012
	Balance		Cost (e)		Balance		Cost (e)
NOW accounts	$	1,958,116	0.14	%	$	1,472,985	0.14	%
Money market accounts	1,639,859		0.27	%	1,642,803		0.30	%
Savings accounts	518,430		0.11	%	493,386		0.11	%
Time deposits less than $100	925,118		1.11	%	1,017,925		1.21	%
Time deposits $100 or greater	367,387		1.03	%	417,065		1.08	%
Total interest bearing deposits	5,408,910		0.42	%	5,044,164		0.49	%
Non-interest bearing deposits	1,026,546		—		891,401		—
Total deposits	$	6,435,456	0.35	%	$	5,935,565	0.41	%
(e) Cost represents interest incurred during the respective quarter.

At September 30, 2013, time deposits were scheduled to mature as follows:

(dollars in thousands)	2013	$	248,084
	2014	656,671
	2015	174,342
	2016	103,777
	2017	73,495
	Thereafter	36,136
	Total	$	1,292,505

6.  BORROWINGS

(dollars in thousands)	September 30, 2013				December 31, 2012
	Balance		Cost (e)		Balance		Cost (e)
Customer repurchase agreements	$	521,779	0.34	%	$	560,065	0.37	%
Repurchase agreements	50,000		4.87	%	75,000		4.25	%
Short-term borrowings	—		—		100,000		0.37	%
Federal Home Loan Bank advances	112,406		1.90	%	464,632		3.79	%
Subordinated debentures accounted for at fair value	—		—		67,306		7.85	%
Subordinated debentures accounted for at amortized cost	77,321		2.77	%	77,321		2.88	%
Total borrowings and other debt obligations	$	761,506	1.25	%	$	1,344,324	2.44	%
(e) Cost represents interest incurred during the respective quarter.

On March 7, 2013, the Company redeemed all of the 7.85% subordinated debentures accounted for at fair value - Cumulative Trust Preferred Securities issued by NPB Capital Trust II. The aggregate redemption of the debentures was $66.1 million, inclusive of $0.9 million of accrued distributions.

On February 8, 2013, the Company extinguished $400 million of borrowings with the FHLB. The FHLB borrowings were repaid with borrowings from alternative funding sources (principally repurchase agreements and wholesale deposits), and the Company recognized $64.9 million of unamortized prepayment penalty in the consolidated statement of income for the three months ended March 31, 2013. The unamortized prepayment penalty at December 31, 2012 was $65.5 million.

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NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Table of Contents

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, 2013, 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 the 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, 2013			December 31, 2012
Unrealized gains on investment securities	$	1,249		$	41,058
Pension	(14,753		)	(16,729		)
Total accumulated other comprehensive income (loss)	$	(13,504	)	$	24,329

9.   EQUITY

In lieu of a first quarter 2013 cash dividend, the Company paid an additional dividend of $0.10 per share, or $15.0 million, in the fourth quarter of 2012, due to changes in tax laws for 2013. As a result, no payments for dividends were made during the first quarter of 2013.

On April 16, 2013, the Company announced a second quarter cash dividend of $0.10 per share, which was paid on May 17, 2013 to shareholders of record as of May 3, 2013.

On July 24, 2013, the Company announced a third quarter cash dividend of $0.10 per share, which was paid on August 16, 2013 to shareholders of record as of August 3, 2013.

Also, on October 22, 2013, the Company announced a fourth quarter cash dividend of $0.10 per share, to be paid on November 15, 2013 to shareholders of record as of November 2, 2013.

10.  FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The following table sets forth the financial instruments whose contract amounts represent credit risk:

	As of:
(dollars in thousands)	September 30, 2013		December 31, 2012
Commitments to extend credit	$	1,717,746	$	1,672,424
Commitments to fund mortgages	14,760		36,795
Commitments to sell mortgages to investors	17,512		51,125
Letters of credit	139,981		127,435

20

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Table of Contents

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

(dollars in thousands)
September 30, 2013	Positions	Notional Amount		Asset		Liability		Receive Rate		Pay Rate		Life (Years)
Receive fixed - pay floating interest rate swaps	146	$	468,546	$	17,629	$	3,171	4.59	%	2.35	%	5.78
Pay fixed - receive floating interest rate swaps	146	468,546		3,171		17,629		2.35	%	4.59	%	5.78
Net interest rate swaps		$	937,092	$	20,800	$	20,800	3.47	%	3.47	%	5.78
December 31, 2012
Receive fixed - pay floating interest rate swaps	131	$	424,863	$	28,252	$	—	4.67	%	2.34	%	6.36
Pay fixed - receive floating interest rate swaps	131	424,863		—		28,252		2.34	%	4.67	%	6.36
Net interest rate swaps		$	849,726	$	28,252	$	28,252	3.51	%	3.51	%	6.36

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 in the fair value of the customer and counterparty swaps is recorded net in the consolidated statement of income. Because these amounts offset one another, there was no impact on other operating income for the three and nine months endedSeptember 30, 2013. For additional analysis of the fair value on interest rate swaps, refer to Footnote 11 within this section. Cash collateral pledged for swaps in a liability position was $11.6 million at September 30, 2013. Cash collateral held for swaps in an asset position was $0.2 million at September 30, 2013.

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, 2013	September 30, 2013	September 30, 2013
Interest rate swaps	Increase to other assets/liabilities of $20.8 million.	No net effect on other operating income from offsetting $0.5 million change.	No net effect on other operating income from offsetting $7.5 million change.
Other derivatives:
Interest rate locks	Increase to other assets of $0.2 million.	Increase to mortgage banking income of $0.6 million.	Increase to mortgage banking income of $0.2 million.
Forward sale commitments	Increase to other liabilities of $0.3 million.	Decrease to mortgage banking income of $0.4 million.	Increase to mortgage banking income of less than $0.1 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, 2012	September 30, 2012	September 30, 2012
Interest rate swaps	Increase to other assets/liabilities of $28.3 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 less than $0.1 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 $0.4 million.	Increase to mortgage banking income of $0.2 million.	Decrease to mortgage banking income of $0.2 million.

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NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Table of Contents

11.  FAIR VALUE MEASUREMENTS AND FAIR VALUE OF 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 whose value is 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 whose value is 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 of these securities is determined by reference to transactions in other issues of these securities with similar yields and features.

Level 3 classification 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:

22

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Table of Contents

• 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.

• Certain marketable equity securities which are 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. Additionally considered indications of pricing 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.

The Company utilizes a third-party service provider to assist with investment security pricing. The Company evaluates the pricing results by periodically reviewing the service provider's practices and procedures. Additionally, each quarter the Company independently validates the pricing results of the third-party service provider by obtaining independent prices from other sources and evaluating discrepancies to established tolerances for each security type. The Company also performs benchmarking analysis to project security price movements and evaluates inconsistent trends, investigates pricing outliers by security class, and performs a review of unchanged security prices.

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 to arrive at a fair value.  These characteristics classify interest rate swap agreements as Level 2 measurements.

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, for asset/liability management purposes, the fair value option was applied to the Company’s only fixed rate subordinated debenture liability, which was redeemed by the Company during the first quarter of 2013. Upon redemption, the Company recognized a gain of $2.1 million in non-interest income for the reversal of the cumulative change in fair value previously recognized in earnings. For the nine months endedSeptember 30, 2012, non-interest income included a gain of $0.9 million for the change in fair value. The fair value of the subordinated debenture was based on an unadjusted, quoted price of the traded asset (formerly Nasdaq: “NPBCO”) in an active market on the final day of each month.

23

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Table of Contents

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, 2013 and December 31, 2012, 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.

September 30, 2013	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	$	1,000	$	—	$	1,000	$	—
State and municipal bonds	228,882		—		228,882		—
Agency mortgage-backed securities/ collateralized mortgage obligations	1,625,539		—		1,625,539		—
Non-agency collateralized mortgage obligations	5,372		—		5,372		—
Corporate securities and other	9,623		61		4,892		4,670
Marketable equity securities	5,260		4,166		—		1,094
Investment securities, available-for-sale	$	1,875,676	$	4,227	$	1,865,685	$	5,764
Interest rate swap agreements	$	20,800	$	—	$	20,800	$	—
Interest rate locks	235		—		235		—
Liabilities
Forward sale commitments	$	317	$	—	$	317	$	—
Interest rate swap agreements	20,800		—		20,800		—
December 31, 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	$	1,023	$	—	$	1,023	$	—
State and municipal bonds	285,320		—		285,320		—
Agency mortgage-backed securities/ collateralized mortgage obligations	1,491,365		—		1,491,365		—
Non-agency collateralized mortgage obligations	9,110		—		9,110		—
Corporate securities and other	10,683		59		8,799		1,825
Marketable equity securities	4,712		3,711		—		1,001
Investment securities, available-for-sale	$	1,802,213	$	3,770	$	1,795,617	$	2,826
Interest rate locks	$	12	$	—	$	12	$	—
Interest rate swap agreements	28,252		—		28,252		—
Liabilities
Subordinated debentures	$	67,306	$	67,306	$	—	$	—
Forward sale commitments	362		—		362		—
Interest rate swap agreements	28,252		—		28,252		—

24

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Table of Contents

The following table presents activity for investment securities measured at fair value on a recurring basis for the nine months endedSeptember 30, 2013:

(dollars in thousands)
Level 1	Beginning Balance January 1, 2013		Gains/(losses) included in earnings		Gains/(losses) included in other comprehensive income			Purchases		Sales			Maturities/ Calls/Paydowns			Accretion/ Amortization			Transfers		Ending Balance September 30, 2013
Corporate securities and other	$	59	$	—	$	2		$	—	$	—		$	—		$	—		$	—	$	61
Marketable equity securities	3,711		—		455			—		—			—			—			—		4,166
Total level 1	3,770		—		457			—		—			—			—			—		4,227
Level 2
U.S. Government agencies	1,023		—		(24		)	1,000		—			(1,000		)	1			—		1,000
State and municipal bonds	285,320		—		(10,969		)	—		—			(48,322		)	2,853			—		228,882
Agency mortgage-backed securities/ collateralized mortgage obligations	1,491,365		—		(51,076		)	485,027		—			(294,739		)	(5,038		)	—		1,625,539
Non-agency collateralized mortgage obligations	9,110		—		(129		)	—		—			(3,618		)	9			—		5,372
Corporate securities and other	8,799		47		(39		)	—		(3,092		)	(814		)	(9		)	—		4,892
Total level 2	1,795,617		47		(62,237		)	486,027		(3,092		)	(348,493		)	(2,184		)	—		1,865,685
Level 3
Corporate securities and other	1,825		7		443			2,730		(340		)	—			5			—		4,670
Marketable equity securities	1,001		—		93			—		—			—			—			—		1,094
Total level 3	2,826		7		536			2,730		(340		)	—			5			—		5,764
Total available-for-sale securities	$	1,802,213	$	54	$	(61,244	)	$	488,757	$	(3,432	)	$	(348,493	)	$	(2,179	)	$	—	$	1,875,676

25

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Table of Contents

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, 2013	Balance		(Level 1)		(Level 2)		(Level 3)
Loans held-for-sale	$	2,752	$	—	$	2,752	$	—
Impaired loans, net	56,576		—		—		56,576
OREO and other repossessed assets	1,569		—		—		1,569
December 31, 2012
Loans held-for-sale	$	14,330	$	—	$	14,330	$	—
Impaired loans, net	53,138		—		—		53,138
OREO and other repossessed assets	3,029		—		—		3,029

Fair value of loans held-for-sale is estimated based upon available market data for mortgage-backed securities with similar interest rates and maturities.  The Company did not record a lower of cost or estimated fair value adjustment on loans held-for-sale as of September 30, 2013 and December 31, 2012.

The recorded investment in impaired loans totaled $64.5 million with a specific reserve of $8.0 million at September 30, 2013, compared to $56.2 million with a specific reserve of $3.1 million at December 31, 2012. Fair value for impaired loans is measured primarily 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 of $0.1 million and $0.3 million were included in the period-ending OREO and other repossessed assets balance at September 30, 2013 and December 31, 2012, 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, certain 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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NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Table of Contents

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

	September 30, 2013				December 31, 2012
(dollars in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets
Cash and cash equivalents	$	216,690	$	216,690	$	428,128	$	428,128
Investment securities available-for-sale	1,875,676		1,875,676		1,802,213		1,802,213
Investment securities held-to-maturity	444,898		462,031		464,166		499,149
Loans held-for-sale	2,752		2,833		14,330		14,680
Loans, net of allowance for loan losses	5,179,176		5,147,337		5,115,597		5,131,880
OREO and other repossessed assets	1,569		1,569		3,029		3,029
Interest rate locks	235		235		12		12
Interest rate swap agreements	20,800		20,800		28,252		28,252
Liabilities
Non-interest bearing deposits	$	1,026,546	$	1,026,546	$	891,401	$	891,401
Interest bearing deposits, non-maturity	4,116,405		4,116,405		3,609,174		3,609,174
Deposits with stated maturities	1,292,505		1,292,136		1,434,990		1,445,706
Customer repurchase agreements	521,779		521,779		560,065		560,065
Repurchase agreements	50,000		51,900		75,000		78,593
Short-term borrowings	—		—		100,000		100,000
Federal Home Loan Bank advances	112,406		122,184		464,632		543,903
Subordinated debentures	77,321		77,321		144,627		144,627
Forward sale commitments	317		317		362		362
Interest rate swap agreements	20,800		20,800		28,252		28,252

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 of interest bearing deposits excludes deposits with stated maturities and is based on 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 of 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.

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NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Table of Contents

The fair value of 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.

The fair value of 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 was measured on an unadjusted, quoted price for the traded assets (formerly Nasdaq: “NPBCO”) and as such was classified within Level 1 of the fair value hierarchy. The fair value of this instrument was $67.3 million at December 31, 2012 and zero at September 30, 2013 due to its redemption on March 7, 2013. Subordinated debentures that have floating interest rates based upon LIBOR are callable at any time and, due to the call feature, the fair value is estimated to equal the par amount. These instruments are classified within Level 2 of the fair value hierarchy.

12.  PENSION PLAN

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's 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. 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.

The Company does not expect to make a contribution in 2013 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%.

Net periodic benefit cost includes the following components:

	Nine Months Ended
(dollars in thousands)	September 30,
	2013			2012
Service cost	$	123		$	93
Interest cost	1,676			1,712
Expected return on plan assets	(2,203		)	(2,068		)
Amortization of unrecognized net actuarial loss	473			421
Net periodic benefit cost	$	69		$	158

13.  SHARE-BASED COMPENSATION

Share-based compensation awards are currently granted under the Long-Term Incentive Compensation Plan ("2005 Plan"), approved by shareholders in April 2005 and expiring November 30, 2014. Under the terms of the 2005 Plan, a total of 5.3 million shares of common stock have been made available for option, restricted stock, or other share-based awards. As of September 30, 2013, 1.5 million of these shares remain available for issuance.  The Company has 1.5 million awards expiring during the twelve months ending September 30, 2014.

As of September 30, 2013, there was approximately $1.4 million of total unrecognized compensation cost related to unvested stock options and approximately $4.7 million of unrecognized compensation cost for other share-based awards that is expected to be recognized within approximately four years.

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NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Table of Contents

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

	Three Months Ended				Nine Months Ended
(dollars in thousands)	September 30,				September 30,
	2013		2012		2013		2012
Share-based compensation expense	$	809	$	756	$	2,442	$	2,800
Proceeds from stock options exercised	289		106		756		499
Intrinsic value of options exercised	151		57		325		266

14.  SEGMENT REPORTING

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

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. Examples of products and services provided include commercial business loans, commercial real estate loans, residential mortgages and other consumer loans, and deposit and cash management services. Both commercial and retail banking are dependent upon deposits and various borrowings to manage interest rate and credit risk. 

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., 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.

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

	As of and for the Three Months Ended September 30, 2013
(dollars in thousands)	Community Banking		Other			Consolidated
Total assets	$	8,383,872	$	40,751		$	8,424,623
Total deposits	6,435,456		—			6,435,456
Net interest income (expense)	63,946		(834		)	63,112
Total non-interest income	14,234		10,574			24,808
Total non-interest expense	44,372		9,231			53,603
Net income	24,243		317			24,560
	For the Nine Months Ended September 30, 2013
(dollars in thousands)	Community Banking		Other			Consolidated
Net interest income (expense)	$	190,436	$	(2,446	)	$	187,990
Total non-interest income	40,709		34,644			75,353
Total non-interest expense	195,917		28,161			224,078
Net income	30,121		2,054			32,175

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NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Table of Contents

	As of and for the Three Months Ended September 30, 2012
(dollars in thousands)	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)	26,626		(610		)	26,016
	For the Nine Months Ended September 30, 2012
(dollars in thousands)	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)	74,890		(1,124		)	73,766

30

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 endedSeptember 30, 2013, 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 average assets exclude the effects of certain gains and losses, adjusted for taxes when applicable. Adjusted net income and return on assets 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 discussion.

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 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.

31

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; and National Penn Insurance Services Group, Inc., including its Higgins Insurance and Caruso Benefits divisions.

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, 2013, National Penn Bank operated 120 retail branch offices, of which 119 are located in Pennsylvania and one is located in Maryland.

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 losses, or the amount added to the allowance for loan 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, change in fair value measurements, gains and losses from the sale of securities, and 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.

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Overview

	Three Months Ended									Nine Months Ended
(dollars in thousands, except per share data)	September 30, 2013			June 30, 2013			September 30, 2012			September 30, 2013				September 30, 2012
EARNINGS
Total interest income	$	71,498		$	72,101		$	78,344		$	216,194			$	239,654
Total interest expense	8,386			8,847			14,790			28,204				49,083
Net interest income	63,112			63,254			63,554			187,990				190,571
Provision for loan losses	1,250			1,500			2,000			4,250				6,000
Net interest income after provision for loan losses	61,862			61,754			61,554			183,740				184,571
Net gains from fair value changes of subordinated debentures	—			—			101			2,111				936
Net gains (losses) on investment securities	7			22			—			54				(277		)
Other non-interest income	24,801			24,946			26,664			73,188				70,803
Loss on debt extinguishment	—			—			—			64,888				—
Other non-interest expense	53,603			53,153			53,339			159,190				158,048
Income before income taxes	33,067			33,569			34,980			35,015				97,985
Income tax expense	8,507			8,550			8,964			2,840				24,219
Net income	$	24,560		$	25,019		$	26,016		$	32,175			$	73,766
Basic earnings per share	$	0.17		$	0.17		$	0.17		$	0.22			$	0.49
Diluted earnings per share	0.17			0.17			0.17			0.22				0.49
Dividends per share	0.10			0.10			0.09			0.20			(a)	0.21
Net interest margin	3.49		%	3.53		%	3.50		%	3.51		%		3.51		%
Efficiency ratio (f)	58.16		%	57.43		%	56.26		%	58.06		%		57.36		%
Return on average assets	1.17		%	1.21		%	1.23		%	0.52		%		1.17		%
Adjusted return on average assets (f)	1.17		%	1.21		%	1.23		%	1.17		%		1.16		%
Asset Quality Metrics
Allowance / total loans	1.91		%	1.99		%	2.16		%
Non-performing loans / total loans	1.04		%	1.05		%	1.11		%
Delinquent loans / total loans	0.43		%	0.43		%	0.45		%
Allowance / non-performing loans	184		%	189		%	195		%
Annualized net charge-offs / average loans	0.38		%	0.32		%	0.39		%	0.37		%		0.49		%
(a) In lieu of a first quarter 2013 cash dividend, the Company paid an additional dividend of $0.10 per share in the 4th quarter of 2012.
(f) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Part I, Item 2.

• For the nine months endedSeptember 30, 2013, the Company recorded net income of $32.2 million, or $0.22 per diluted share, compared to net income of $73.8 million, or $0.49 per diluted share, in the comparable prior year period. The decrease in net income resulted from a first quarter $64.9 million ($42.2 million after-tax) charge from the extinguishment of $400 million of previously restructured FHLB advances. Additionally, during the first quarter of 2013, the Company redeemed $65.2 million of 7.85%, fixed-rate subordinated debentures. This transaction produced a $2.1 million ($1.4 million after-tax) gain because these instruments were previously accounted for at fair value and the Company had a call at par. These strategic initiatives were undertaken for asset/liability, interest rate risk, and capital management purposes.

• Net interest income totaled $188 million for the nine months endedSeptember 30, 2013 compared to $191 million for the nine months endedSeptember 30, 2012. The previously discussed interest rate management initiatives have allowed the Company to maintain a consistent net interest margin of 3.51% for the nine months endedSeptember 30, 2013, as average earning assets have declined$131 million to $7.7 billion compared to $7.8 billion for the nine months endedSeptember 30, 2012.

• The Company continues to experience improvements in asset quality. Classified loans declined by 26.2% since September 30, 2012, and non-performing loans declined to 1.04% of total loans at September 30, 2013, compared to 1.11% at September 30, 2012. The sustained improvement in asset quality resulted in a $1.8 milliondecrease to the provision for loan losses (“provision”) which totaled $4.3 million for the nine months endedSeptember 30, 2013, compared to $6.0 million for the nine months endedSeptember 30, 2012.

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• Other non-interest income increased by $2.4 million over the prior year period and totaled $73.2 million for the nine months endedSeptember 30, 2013. Wealth management, cash management and electronic banking fees, and mortgage banking operations combined to contribute $3.1 million to the increase, offset by a $0.7 million decrease in earnings on unconsolidated investments.

• Non-interest expense, excluding the first quarter loss on debt extinguishment of $64.9 million, continued to be well controlled at $159 million for the nine months endedSeptember 30, 2013, which is less than a 1%, or $1.1 million, increase compared to the nine months endedSeptember 30, 2012. The efficiency ratio^(f) remained stable at 58.06% for the nine months endedSeptember 30, 2013, as the Company continues to effectively manage expense levels.

Adjusted net income and return on average assets^(f) 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^(f).

	Three Months Ended									Nine Months Ended
(dollars in thousands, except per share data)	September 30, 2013			June 30, 2013			September 30, 2012			September 30, 2013			September 30, 2012
Adjusted net income reconciliation
Net income	$	24,560		$	25,019		$	26,016		$	32,175		$	73,766
After tax unrealized fair value gain on subordinated debentures	—			—			(66		)	(1,372		)	(608		)
After tax loss on debt extinguishment	—			—			—			42,177			—
Adjusted net income	$	24,560		$	25,019		$	25,950		$	72,980		$	73,158
Earnings per share
Net income	$	0.17		$	0.17		$	0.17		$	0.22		$	0.49
After tax unrealized fair value gain on subordinated debentures	—			—			—			(0.01		)	—
After tax loss on debt extinguishment	—			—			—			0.29			—
Adjusted net income	$	0.17		$	0.17		$	0.17		$	0.50		$	0.49
Average assets	$	8,310,626		$	8,326,499		$	8,386,342		$	8,312,023		$	8,418,843
Adjusted return on average assets	1.17		%	1.21		%	1.23		%	1.17		%	1.16		%
(f) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Part I, Item 2.

During the second and third quarters of 2013, there were no items requiring exclusion from net income to arrive at adjusted net income, therefore, adjusted net income and adjusted ROAA are the same as the unadjusted figures from each period. Adjusted net income in the third quarter of 2012 excluded the effects of the changes in the fair value of the Company's subordinated debentures.

For the nine months ended September 30, 2013, adjusted net income was $73.0 million, or $0.50 per diluted share, and adjusted ROAA was 1.17%, compared to adjusted net income of $73.2 million, or $0.49 per diluted share, and adjusted ROAA of 1.16% for the prior year period. Adjusted net income for the nine months ended September 30, 2013 excluded the effects of the changes in the fair value of the Company's subordinated debentures and the loss on debt extinguishment from the first quarter of 2013, as previously discussed. Adjusted net income has remained stable as the effects of margin compression have been offset by a reduction in the provision for loan losses due to continued asset quality improvements, and well controlled expense levels.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SUMMARY BALANCE SHEET

(dollars in thousands, except per share data)	September 30, 2013			June 30, 2013			December 31, 2012
Total cash and cash equivalents	$	216,690		$	181,768		$	428,128
Investment securities and other securities	2,364,681			2,313,358			2,334,739
Total loans	5,282,691			5,261,296			5,240,882
Total assets	8,424,623			8,316,585			8,529,522
Deposits	6,435,456			6,022,463			5,935,565
Borrowings	761,506			1,089,199			1,344,324
Shareholders' equity	1,131,278			1,115,758			1,161,292
Tangible book value per common share (f)	$	5.94		$	5.83		$	6.15
Tangible common equity / tangible assets (f)	10.61		%	10.55		%	10.80		%

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

Assets

Loans and Allowance for Loan Losses

Regional economic conditions impact the Company’s customers. Although the economy and credit environment continue to be uncertain, the Company’s asset quality metrics continue to be strong and stable. The Company remains focused on attracting and retaining high-quality commercial and retail customers to support quality loan growth, while working with existing customers who experience financial difficulty.

Federal Reserve economic data suggests the following trends:

• Contacts in the Third District have reported a modest pace of growth, in particular, general retail sales, tourism, staffing services and commercial real estate.

• Two sectors that grew at a more than moderate pace included auto dealers, who reported a strong rate of sales growth, and general services.

• The overall outlook for modest growth continues. While some uncertainty remains, particularly due to the federal government fiscal discord and implementation of the Affordable Care Act, contacts among the Third District continued to express confidence in the underlying economy.

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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, 2013		December 31, 2012		Increase/(decrease)
Commercial and industrial	$	2,460,901	$	2,495,855	$	(34,954	)	(1.4	)%
CRE - permanent	964,510		907,760		56,750			6.3	%
CRE - construction	181,683		125,878		55,805			44.3	%
Commercial real estate	1,146,193		1,033,638		112,555			10.9	%
Commercial	3,607,094		3,529,493		77,601			2.2	%
Residential mortgages	652,139		671,772		(19,633		)	(2.9	)%
Home equity	758,750		754,386		4,364			0.6	%
All other consumer	261,956		270,901		(8,945		)	(3.3	)%
Consumer	1,672,845		1,697,059		(24,214		)	(1.4	)%
Loans	$	5,279,939	$	5,226,552	$	53,387		1.0	%
Allowance for loan losses	100,763		110,955		(10,192		)	(9.2	)%
Loans, net	$	5,179,176	$	5,115,597	$	63,579		1.2	%
Loans held-for-sale	$	2,752	$	14,330	$	(11,578	)	(80.8	)%

Net loans increased by $63.6 million, or 1.2%, to $5.2 billion at September 30, 2013 from December 31, 2012. Loans to commercial real estate customers resulted in a $113 million increase to this portfolio during the nine months endedSeptember 30, 2013, while commercial and industrial loans decreased $35.0 million from December 31, 2012. The commercial real estate - permanent and construction portfolios increased to $965 million and $182 million, respectively, at September 30, 2013. Commercial loan growth of $77.6 million was offset by a $24.2 million decrease in consumer loans, primarily resulting from repayments of consumer loans and sales of residential mortgage loan production in the secondary market. Additionally, classified loans decreased $42.7 million, or 16.3%, since December 31, 2012. Continued stable asset quality metrics combined with the continued improvement in the level of classified loans resulted in a decrease to the allowance for loan losses, which totaled $101 million at September 30, 2013. Net charge-offs totaled $14.4 million, and the provision was $4.3 million during the nine months endedSeptember 30, 2013.

The following table demonstrates select asset quality metrics:

(dollars in thousands)	September 30, 2013			June 30, 2013			December 31, 2012
Non-performing loans	$	54,805		$	55,458		$	53,908
Non-performing loans to total loans	1.04		%	1.05		%	1.03		%
Delinquent loans	$	22,550		$	22,512		$	24,048
Delinquent loans to total loans	0.43		%	0.43		%	0.46		%
Classified loans (g)	$	218,615		$	234,085		$	261,293
Classified loans to total loans	4.14		%	4.45		%	4.99		%
Tier 1 capital and allowance	$	1,038,803		$	1,029,455		$	1,093,103
Classified loans to Tier 1 capital and allowance	21.04		%	22.74		%	23.90		%
Total loans	$	5,282,691		$	5,261,296		$	5,240,882
(g) Includes non-performing loans.

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

(dollars in thousands)	September 30, 2013			June 30, 2013			December 31, 2012
Non-accrual commercial and industrial	$	23,101		$	23,023		$	24,653
Non-accrual CRE-permanent	3,760			5,129			2,984
Non-accrual CRE-construction	5,345			5,666			5,446
Total non-accrual commercial real estate	9,105			10,795			8,430
Non-accrual residential mortgages	6,485			6,276			7,066
Non-accrual home equity	4,403			4,339			3,692
All other non-accrual consumer	1,705			1,916			1,705
Total non-accrual consumer	12,593			12,531			12,463
Total non-accrual loans	44,799			46,349			45,546
Restructured loans (h)	10,006			9,109			8,362
Total non-performing loans	54,805			55,458			53,908
Other real estate owned and repossessed assets	1,569			1,899			3,029
Total non-performing assets	56,374			57,357			56,937
Loans 90+ days past due & still accruing	2,608			2,023			2,027
Total non-performing assets and loans 90+ days past due	$	58,982		$	59,380		$	58,964
Total loans	$	5,282,691		$	5,261,296		$	5,240,882
Average total loans	5,229,366			5,244,930			5,206,227
Allowance for loan losses	100,763			104,533			110,955
Allowance for loan losses to:
Non-performing assets and loans 90+ days past due	171		%	176		%	188		%
Non-performing loans	184		%	189		%	206		%
Total loans	1.91		%	1.99		%	2.12		%
(h) Restructured loans at September 30, 2013, included $3.8 million of commercial loans and $6.2 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, 2013			June 30, 2013			December 31, 2012
Total non-accrual loans	$	44,799		$	46,349		$	45,546
Non-accrual loans with partial charge-offs	18,653			16,435			18,221
Life-to-date partial charge-offs on non-accrual loans	21,765			19,276			20,965
Charge-off rate of non-accrual loans	53.8		%	54.0		%	53.5		%
Specific reserves on non-accrual loans	$	5,902		$	7,046		$	1,264

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At September 30, 2013, the Company’s non-accrual loans totaled $44.8 million and included $18.7 million of non-accrual loans which have been partially charged-off by 53.8%, or $21.8 million. Non-accrual and non-performing loan and asset levels continue to improve and represented a small percentage of total loans and total assets. Non-performing loans totaled 1.04% of total loans at September 30, 2013. Additionally, non-performing loans are included in impaired loans and are evaluated individually when determining the allowance. Impaired loans totaled $64.5 million at September 30, 2013, and had a specific reserve in the allowance of $8.0 million related to $19.8 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.

An analysis of net loan charge-offs:

	Three Months Ended									Nine Months Ended
(dollars in thousands)	September 30, 2013			June 30, 2013			September 30, 2012			September 30, 2013			September 30, 2012
Commercial and industrial	$	3,059		$	2,065		$	1,116		$	6,993		$	8,237
CRE - permanent	909			396			481			1,587			3,009
CRE - construction	(29		)	93			1,755			382			2,280
Commercial real estate	880			489			2,236			1,969			5,289
Residential mortgages	209			522			742			2,064			1,630
Home equity	423			903			517			2,073			2,776
All other consumer	449			152			497			1,343			1,166
Consumer	1,081			1,577			1,756			5,480			5,572
Net loans charged-off	$	5,020		$	4,131		$	5,108		$	14,442		$	19,098
Net charge-offs (annualized) to:
Total loans	0.38		%	0.31		%	0.39		%	0.37		%	0.49		%
Average total loans	0.38		%	0.32		%	0.39		%	0.37		%	0.49		%

Net loan charge-offs totaled $14.4 million for the nine months endedSeptember 30, 2013, a $4.7 million, or 24.4%, decrease compared to the prior year-to-date period. The net loan charge-offs for the three months ended September 30, 2013 were comparable to the prior year period as the level of net charge-offs is consistent with the Company's steady credit quality improvement. Annualized net charge-offs as a percentage of average total loans totaled 0.38% for the third quarter of 2013 compared to 0.39% for the same period of 2012 and 0.32% for the linked quarter.

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Changes in the allowance for loan losses by loan portfolio:

	Three Months Ended				Nine Months Ended
(dollars in thousands)	September 30,				September 30,
	2013		2012		2013		2012
Balance at beginning of period	$	104,533	$	116,650	$	110,955	$	126,640
Charge-offs:
Commercial and industrial	3,335		1,605		8,084		9,740
Commercial real estate	936		2,273		2,402		5,986
Consumer	1,503		2,115		6,984		6,896
Total charge-offs	5,774		5,993		17,470		22,622
Recoveries:
Commercial and industrial	276		489		1,091		1,503
Commercial real estate	56		37		433		697
Consumer	422		359		1,504		1,324
Total recoveries	754		885		3,028		3,524
Net charge-offs	5,020		5,108		14,442		19,098
Provision charged to expense	1,250		2,000		4,250		6,000
Balance at end of period	$	100,763	$	113,542	$	100,763	$	113,542

The following table presents the components of the allowance:

(dollars in thousands)	September 30, 2013		December 31, 2012
Specific reserves	$	7,971	$	3,110
Allocated reserves	82,486		95,437
Unallocated reserves	10,306		12,408
Total allowance for loan losses	$	100,763	$	110,955

The allowance decreased to $101 million at September 30, 2013 and represented 1.91% of total loans and 184% of non-performing loans, compared to $111 million at December 31, 2012, or 2.12% of total loans and 206% of non-performing loans. The decrease of the allowance during the quarter was due primarily to the continued reduction in classified loans and sustained strong asset quality metrics. These improvements resulted in a provision of $4.3 million for the nine months endedSeptember 30, 2013, a decrease of $1.8 million compared to the nine months endedSeptember 30, 2012.

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Liabilities

Liabilities totaled $7.3 billion at September 30, 2013, a decrease of $74.9 million, or 1.02%, from $7.4 billion at December 31, 2012. The decrease was primarily due to a $583 millionreduction in borrowings, as instruments matured and were replaced with $500 million of lower cost deposits.

During the first quarter of 2013, as part of asset/liability management and capital planning initiatives, the Company repaid $400 million of previously restructured, higher-cost FHLB advances and redeemed all of its 7.85% Cumulative Trust Preferred Securities issued by NPB Capital Trust II, with a par value of $65.2 million. Other significant changes in borrowings consist of a decrease in short-term borrowings of $100 million and $25.0 million of maturing repurchase agreements.

Total deposits, the Company’s primary source of funding, increased$500 million during the first nine months of 2013. The total change in deposits from December 31, 2012 to September 30, 2013 consists of an increase in non-time deposits of $642 million, or 14.3%, offset by a decline in time deposits of $142 million, or 9.93%. The significant increase in NOW deposits can be attributable primarily to increases in government funding deposits. The company experienced a shift from time deposits to non-interest bearing deposits during the nine months endedSeptember 30, 2013. During the first nine months of 2013, the cost of deposits improved to 0.38%, compared to 0.47% at December 31, 2012.

(dollars in thousands)	September 30, 2013			December 31, 2012			Increase/(decrease)
Non-interest bearing deposits	$	1,026,546		$	891,401		$	135,145		15.2	%
NOW accounts	1,958,116			1,472,985			485,131			32.9	%
Money market accounts	1,639,859			1,642,803			(2,944		)	(0.2	)%
Savings accounts	518,430			493,386			25,044			5.1	%
Time deposits less than $100	925,118			1,017,925			(92,807		)	(9.1	)%
Time deposits $100 or greater	367,387			417,065			(49,678		)	(11.9	)%
Total deposits	$	6,435,456		$	5,935,565		$	499,891		8.4	%
Non-time deposits / total deposits	80		%	76		%

Shareholders’ Equity

Shareholders’ equity totaled $1.1 billion at September 30, 2013, a decrease of $30.0 million from December 31, 2012. Significant activity during the nine months ended September 30, 2013 included: 

• Net income of $32.2 million,

• Cash dividends paid to common shareholders of $29.1 million,

• Other comprehensive loss of $37.8 million, primarily attributable to rising long-term interest rates which negatively impacted the fair value of the available-for-sale investment portfolio, and

• Shares issued under share-based plans, net of taxes, of $4.77 million.

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Results of operations for the nine months endedSeptember 30, 2013 and September 30, 2012

Net Interest Income

The following table presents average balances, average yields, and net interest margin information for the nine months endedSeptember 30, 2013 as compared to the same period in 2012.  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,
	2013							2012
(dollars in thousands)	Average Balance			Interest		Average Rate		Average Balance			Interest		Average Rate
Interest Earning Assets:
Interest earning deposits at banks	$	105,671		$	164	0.21	%	$	289,272		$	484	0.22	%
U.S. Government agencies	960			28		3.90	%	2,711			47		2.32	%
Mortgage-backed securities/collateralized mortgage obligations	1,581,634			26,827		2.27	%	1,496,323			29,925		2.67	%
State and municipal*	666,872			32,884		6.59	%	733,543			35,858		6.53	%
Other bonds and securities	75,796			1,979		3.49	%	83,117			1,951		3.14	%
Total investments	2,325,262			61,718		3.55	%	2,315,694			67,781		3.91	%
Commercial loans*	3,556,488			111,740		4.20	%	3,458,327			125,282		4.84	%
Installment loans	1,011,509			32,190		4.25	%	1,019,780			33,229		4.35	%
Mortgage loans	664,463			23,388		4.71	%	710,954			27,020		5.08	%
Total loans	5,232,460			167,318		4.28	%	5,189,061			185,531		4.78	%
Total earning assets	7,663,393			229,200		4.00	%	7,794,027			253,796		4.35	%
Allowance for loan losses	(108,257		)					(122,803		)
Non-interest earning assets	756,887							747,619
Total assets	$	8,312,023						$	8,418,843
Interest Bearing Liabilities:
Interest bearing deposits	$	5,169,446		$	17,213	0.45	%	$	4,972,835		$	20,645	0.55	%
Customer repurchase agreements	529,847			1,398		0.35	%	527,278			1,606		0.41	%
Repurchase agreements	82,750			1,956		3.16	%	82,774			2,673		4.31	%
Short-term borrowings	12,557			41		0.44	%	91			—		—	%
Federal Home Loan Bank advances	296,417			5,042		2.27	%	562,474			18,573		4.41	%
Subordinated debentures	93,107			2,554		3.67	%	144,476			5,586		5.16	%
Total interest bearing liabilities	6,184,124			28,204		0.61	%	6,289,928			49,083		1.04	%
Non-interest bearing deposits	916,936							880,556
Other non-interest bearing liabilities	80,894							49,937
Total liabilities	7,181,954							7,220,421
Equity	1,130,069							1,198,422
Total liabilities and equity	$	8,312,023						$	8,418,843
NET INTEREST INCOME/MARGIN (FTE)				200,996		3.51	%				204,713		3.51	%
Tax equivalent interest				13,006							14,142
Net interest income				$	187,990						$	190,571

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

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

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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, 2013 compared to 2012
Increase (decrease) in:	Volume			Rate			Total
Interest income:
Interest earning deposits at banks	$	(287	)	$	(33	)	$	(320	)
U.S. Government agencies	(40		)	21			(19		)
Mortgage-backed securities/collateralized mortgage obligations	1,635			(4,733		)	(3,098		)
State and municipal	(3,285		)	311			(2,974		)
Other bonds and securities	(180		)	208			28
Total investments	(1,870		)	(4,193		)	(6,063		)
Commercial loans	3,473			(17,015		)	(13,542		)
Installment loans	(268		)	(771		)	(1,039		)
Mortgage loans	(1,706		)	(1,926		)	(3,632		)
Total loans	1,499			(19,712		)	(18,213		)
Total interest income	(658		)	(23,938		)	(24,596		)
Interest expense:
Interest bearing deposits	789			(4,221		)	(3,432		)
Customer repurchase agreements	8			(216		)	(208		)
Repurchase agreements	(1		)	(716		)	(717		)
Short-term borrowings	41			—			41
Federal Home Loan Bank advances	(6,682		)	(6,849		)	(13,531		)
Subordinated debentures	(1,668		)	(1,364		)	(3,032		)
Total borrowed funds	(8,302		)	(9,145		)	(17,447		)
Total interest expense	(7,513		)	(13,366		)	(20,879		)
Increase (decrease) in net interest income (FTE)	$	6,855		$	(10,572	)	$	(3,717	)

Short-term interest rates remain at historically low levels and continued to impact loan yields. However, since the end of the first quarter in 2013, the ten year Treasury yield has increased 76 basis points to 2.61% at September 30, 2013. Additionally, economic conditions continue to constrain 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, 2013, unchanged from the prior year period. Net interest income declined by $2.6 million, or 1.4%, to $188 million for the nine months endedSeptember 30, 2013, compared to the prior year period. The following initiatives were employed to mitigate the 9.8%, or $23.5 million ($24.6 million on a FTE basis), decrease to interest income for the nine months endedSeptember 30, 2013:

• Interest expense on FHLB advances decreased $13.5 million due to the termination of $400 million of FHLB advances on February 8, 2013, which were previously restructured during the third quarter of 2012.

• On March 7, 2013, the Company redeemed all of the 7.85% Cumulative Trust Preferred Securities issued by NPB Capital Trust II. The redemption contributed to the $3.0 million decrease in interest expense on subordinated debentures.

• Deposit pricing initiatives resulted in a 9 basis point reduction to the cost of deposits for the nine months endedSeptember 30, 2013, compared to the nine months endedSeptember 30, 2012, as the Company's average deposit rate declined to 0.38%. The decline in deposit cost reduced interest expense by $3.4 million for the comparative period.

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Provision for Loan Losses

Provision for the nine months endedSeptember 30, 2013 was $4.3 million, compared to $6.0 million for the same period in 2012. A $4.7 million reduction to net charge-offs for the nine months endedSeptember 30, 2013, combined with a continued decline of classified loans and improving asset quality metrics resulted in a reduction to the allowance, which totaled $101 million at September 30, 2013. The allowance as a percentage of non-performing loans decreased to 184% at September 30, 2013 from 189% at June 30, 2013 and 195% at September 30, 2012. The allowance amounted to 1.91% of total loans at September 30, 2013.  For additional analysis of the allowance refer to “Loans and Allowance for Loan Losses”.

Non-Interest Income

	Nine Months Ended
(dollars in thousands)	September 30,
	2013		2012			Increase/(decrease)
Wealth management	$	20,700	$	18,405		$	2,295		12.5	%
Service charges on deposit accounts	11,407		11,723			(316		)	(2.7	)%
Insurance commissions and fees	9,664		9,745			(81		)	(0.8	)%
Cash management and electronic banking fees	14,132		13,753			379			2.8	%
Mortgage banking	5,598		5,142			456			8.9	%
Bank owned life insurance	3,727		3,783			(56		)	(1.5	)%
Earnings (losses) of unconsolidated investments	653		1,349			(696		)	(51.6	)%
Other operating income	7,307		6,903			404			5.9	%
Net gains (losses) from fair value changes of subordinated debentures	2,111		936			1,175			125.5	%
Net gains (losses) on sales of investment securities	54		(123		)	177			NM
Impairment related losses on investment securities	—		(154		)	154			NM
Total non-interest income	$	75,353	$	71,462		$	3,891		5.4	%
"NM" - Denotes a value displayed as a percentage change is not meaningful

Non-interest income for the nine months endedSeptember 30, 2013 and 2012 totaled $75.4 million and $71.5 million, respectively, and its components changed primarily due to the following items:

• Wealth management income increased $2.3 million for the nine months endedSeptember 30, 2013 compared to the nine months endedSeptember 30, 2012 due to improved new account activity in the brokerage unit and market value appreciation in the asset management unit of the Company's wealth management division.

• The nine months endedSeptember 30, 2013 included a gain of $2.1 million from the redemption of the Company's subordinated debentures accounted for at fair value (formerly Nasdaq: "NPBCO") compared to a $0.9 million gain recognized in the prior year period for the change in fair value.

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Non-Interest Expense

	Nine Months Ended
(dollars in thousands)	September 30,
	2013			2012			Increase/(decrease)
Salaries, wages and employee benefits	$	93,824		$	94,170		$	(346	)	(0.4	)%
Premises and equipment	22,726			21,428			1,298			6.1	%
FDIC insurance	4,111			3,734			377			10.1	%
Other operating expenses	38,529			38,716			(187		)	(0.5	)%
Loss on debt extinguishment	64,888			—			64,888			NM
Total non-interest expense	$	224,078		$	158,048		$	66,030		NM
"NM" - Denotes a value displayed as a percentage change is not meaningful
Reconciliation Table For Non-GAAP Financial Measures - Efficiency Ratio (f)
	Nine Months Ended
	September 30,
Efficiency ratio calculation	2013			2012
Non-interest expense	$	224,078		$	158,048
Less:
Loss on debt extinguishment	64,888			—
Operating expenses	$	159,190		$	158,048
Net interest income (taxable equivalent)	$	200,996		$	204,713
Non-interest income	75,353			71,462
Less:
Net gains (losses) from fair value changes of subordinated debentures	2,111			936
Net gains (losses) on investment securities	54			(277		)
Adjusted revenue	$	274,184		$	275,516
Efficiency ratio	58.06		%	57.36		%

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

Non-interest expense, inclusive of a loss on debt extinguishment of $64.9 million, totaled $224 million for the nine months ended September 30, 2013, compared to $158 million for the prior year period. The loss on debt extinguishment during the first quarter of 2013 is related to the repayment of $400 million of FHLB advances. Continued focus on expense controls resulted in stable operating expenses^(f) of $159 million, as demonstrated by a 2013 year-to-date efficiency ratio^(f) of 58.06%, consistent with the prior year period. Year-to-date operating expenses increased less than 1%, compared to the nine months ended September 30, 2012.

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Income Tax Expense

Income tax expense for the nine months endedSeptember 30, 2013 was $2.8 million compared to $24.2 million for the nine months endedSeptember 30, 2012. The reduced income tax expense for the nine months endedSeptember 30, 2013, resulted from the first quarter pre-tax loss on debt extinguishment, thus the effective tax rate was 8.1% compared to 24.7% for the prior year period. The Company’s net deferred tax asset increased to $69.4 million at September 30, 2013, from $51.4 million at December 31, 2012, primarily from the impact of rising long-term interest rates which negatively impacted the fair value of the available-for-sale investment portfolio.

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, 2013:

			Payments Due by Period:
(dollars in thousands)	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	$	1,292,505	$	822,528	$	341,944	$	127,858	$	175
Repurchase agreements	50,000		50,000		—		—		—
Federal Home Loan Bank advances	112,406		32,954		24,000		55,418		34
Subordinated debentures	77,321		—		—		—		77,321
Minimum annual rentals on non-cancelable operating leases	64,251		7,806		13,168		10,316		32,961
Total	$	1,596,483	$	913,288	$	379,112	$	193,592	$	110,491

The Company does not presently have any commitments for significant capital expenditures. The table above includes lease obligations related to the Company's corporate relocation plan, announced in October 2012.

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 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 deployed $211 million of cash and cash equivalents during the nine month period ended September 30,2013, compared to deploying $119 million of net cash for the nine months ended September 30, 2012. Operating activities generated $125 million of net cash year-to-date 2013, compared to $83.8 million for the same period in 2012. During the current year, cash was deployed in the following ways:

Investing activities

• $489 million of investment security purchases

• $69.5 million net increase in loans

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Financing activities

• $417 million net decrease of FHLB advances

• $100 million decrease in short-term borrowings

• $142 million decrease in time deposits

• $65.2 million decrease in subordinated debentures as the result of the redemption of all of the 7.85% Cumulative Trust Preferred Securities issued by NPB Capital Trust II

During the nine months ended September 30, 2013, cash was generated from the following additional sources:

Investing activities

• $368 million of proceeds from maturities and repayments of investment securities

Financing activities

• $642 million increase in transaction and savings accounts

Capital

At September 30, 2013, 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, 2013		December 31, 2012		September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012
National Penn	11.67	%	12.16	%	15.63	%	16.54	%	16.89	%	17.80	%
National Penn Bank	10.26	%	10.02	%	13.77	%	13.83	%	15.02	%	15.09	%
"Well Capitalized" institution under banking regulations	5.00	%	5.00	%	6.00	%	6.00	%	10.00	%	10.00	%

The Company executed two strategic initiatives (redemption of $65.2 million of subordinated debentures and repayment of $400 million of FHLB advances) during the first quarter of 2013 for asset/liability, interest rate risk, and capital management purposes. The changes in the Company's capital from December 31, 2012 to September 30, 2013 fully reflect the effect of these initiatives.

In July 2013, the Basel III capital rules were finalized and shall be effective January 1, 2015, with some transition period. National Penn's preliminary evaluation indicates that the impact of these rules on its capital levels and ratios, including the impact on National Penn Bank, is not expected to be material.

Other Commitments

The following table sets forth the notional amounts of other commitments as of September 30, 2013:

(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	$	1,717,746	$	670,204	$	294,953	$	124,800	$	627,789
Letters of credit	139,981		113,841		26,063		63		14
Total	$	1,857,727	$	784,045	$	321,016	$	124,863	$	627,803

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 $1.5 million at September 30, 2013.

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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.

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,

• Use of wholesale products such as advances from the FHLB or interest rate swaps, and/or

• Purchase or sale of investment securities.

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.

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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 based upon the Company's internal modeling:

	Change in Net Interest Income
Change in Interest Rates	September 30,
(in basis points)	2013	2012
+300	4%	2%
+200	3%	2%
+100	1%	1%
-100	N/A*	N/A*

* Certain short-term interest rates are currently below 1%. 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% based upon net interest income for both the twelve months ended September 30, 2013 and 2012.

Changes between periods in the table above reflect the Company's asset/liability management initiatives executed during the third quarter of 2012 and the first quarter of 2013, namely the restructuring and subsequent repayment of $400 million of FHLB advances and the redemption of $65.2 million of fixed rate subordinated debentures. Refer to Footnote 6 to the consolidated financial statements for additional details. 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's net interest income should benefit over the next twelve months.

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, 2013, 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, 2013.

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There were no changes in National Penn’s internal control over financial reporting during the quarter ended September 30, 2013 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

Difficult conditions in the capital markets and the economy generally may materially adversely affect our business and results of operations, and we do not expect these conditions to significantly improve in the near future.

Our business and results of operations are materially affected by conditions in the capital markets and the economy generally. Concerns over the slow economic recovery, the level of national debt, unemployment, the availability and cost of credit, the housing market, inflation levels, the U.S. debt ceiling, the European sovereign debt crisis, energy costs and geopolitical issues have contributed to increased volatility and diminished expectations for the economy and the markets. In addition, the financial turmoil in Europe continues to be a threat to global capital markets. As a result, the market for fixed income instruments has experienced decreased liquidity, increased price volatility, credit downgrade events, and increased probability of default. Securities that are less liquid are more difficult to value and may be hard to dispose of. Domestic and international equity markets have also experienced periods of heightened volatility and turmoil, with issuers (such as our Company) that have exposure to the real estate, mortgage, automobile and credit markets particularly affected. These events and other market disturbances may have an adverse effect on us, in part because a portion of our assets are investment securities and also because we are dependent upon customer behavior. Our revenues, including net interest income and net interest margin, are susceptible to decline in such circumstances, and our profit margins could erode. In addition, in the event of extreme and prolonged market events, such as the global credit crisis, we could incur significant losses. Even in the absence of a market downturn, we are exposed to substantial risk of loss due to market volatility.

Factors such as consumer spending, business investment, government spending, the volatility and strength of the capital markets, and inflation all affect the business and economic environment and, ultimately, the profitability of our business. In an economic downturn characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending, the demand for our financial products could be adversely affected. Adverse changes in the economy could affect earnings negatively and could have a material adverse effect on our business, results of operations and financial condition. The economic slowdown has resulted in legislative and regulatory actions including the enactment of the Dodd-Frank Act that will further impact our business. In addition, we cannot predict whether there will be additional legislative or regulatory actions, when such actions may occur or what impact, if any, such actions could have on our business, results of operations and financial condition.

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 put 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.

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The impact of legislation, including proposed legislation, and government programs adopted in response to the economic downturn, the recent U.S. debt ceiling and budget deficit concerns 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 continues to require significant changes to the U.S. financial system, including among others:

• 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 proprietary trading and the sponsorship of, or the acquisition or retention of ownership interests in, private equity funds.

• The creation of the 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 Bureau of Consumer Financial Protection has issued new regulations that may have a significant impact on compliance requirements for National Penn Bank, including in the area of mortgage lending activities.

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

• 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.

Some of these provisions 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.  

On July 2, 2013, the Federal Reserve Board unanimously approved its final rule implementing Basel III. The rule was subsequently approved as a final rule by the Office of the Comptroller of the Currency on July 9, 2013 and requires banking organizations, such as National Penn, to calculate their risk-weighted assets under the final rule's standardized approach. The rule will be effective January 1, 2015, with some additional transition periods, and requires compliance with the revised definitions of regulatory capital, revised minimum capital ratios, and revised regulatory capital adjustments and deductions, among other issues. 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, which 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.

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Past deterioration in credit quality, particularly in commercial, construction and real estate loans, has adversely impacted National Penn and delayed improvement in credit quality could 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.

Delayed improvement or another period of 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.

Commercial, construction and real estate loans increase our exposure to credit risk.

At September 30, 2013, $3.6 billion, or 68.3%, of our loan portfolio consisted of commercial real estate loans and commercial and industrial loans. Subject to market conditions, we intend to increase our origination of these loans. Commercial real estate loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property and the income stream of the borrowers. Commercial real estate loans also typically involve larger loan balances to single borrowers or groups of related borrowers both at origination and at maturity. Commercial business loans expose us to additional risks since they typically are made on the basis of the borrower's ability to make repayments from the cash flow of the borrower's business and are secured by non-real estate collateral that may depreciate over time. In addition, some of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship may expose us to a greater risk of loss.

If we do not manage our capital position strategically, our return on equity could be lower compared to our competitors as a result of our high level of capital.

If we are unable to use strategically our excess capital, or to successfully continue our capital management programs (such as the stock repurchase program or quarterly dividends to our investors), then our goal of generating a return on average equity that is competitive, by increasing earnings per share and book value per share, without assuming undue risk, could be delayed or may not be attained. Failure to achieve a competitive return on average equity might decrease investments in our common stock and might cause our common stock to trade at lower prices.

National Penn is subject to regulatory capital requirements and 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.

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National Penn's allowance for loan losses may prove inadequate or National Penn may be required to make further additions to its allowance for loan and lease losses because of credit risk exposure.

If the economy and/or the real estate market weakens, we may be required to add further provisions to our allowance for loan losses as nonperforming assets could increase or the value of the collateral securing loans may be insufficient to cover any remaining net loan balance, which could have a negative effect on our results of operations.

National Penn 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 evaluates the need to increase or decrease its allowance for loan losses.  This evaluation is inherently subjective, as it requires numerous estimates and there may be unanticipated adverse changes to the economy caused by recession, inflation, unemployment or other factors beyond National Penn's control.  Because of the degree of uncertainty and susceptibility of these factors to change, our actual losses may vary materially from our current estimates. 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.

National Penn's financial performance is directly affected 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. Because our interest-bearing liabilities reprice or mature at different times than our interest-earning assets, interest rates and changes thereto may result in a decrease in our net interest income. However, our ability to lower our interest expense is limited at the current lower interest rate levels, while the average yield on our interest-earning assets may continue to decrease. We have been able to achieve a relatively stable net interest margin over the last several years; however, a failure to effectively manage our interest rate risk could adversely affect us. Factors beyond our control can significantly influence the interest rate environment and increase our risk, and could materially adversely affect National Penn's net interest spread, loan origination volume, asset quality and overall profitability.

National Penn could experience unanticipated costs and disruptions to our operations in connection with our corporate relocation plan.

National Penn announced in October 2012, a corporate relocation plan, whereby we plan to open a Reading Area Business Center and move our corporate headquarters to Allentown, Pennsylvania over the next two years, while maintaining a presence in Boyertown. Due to the inherent difficulty in estimating costs associated with projects of this scale and nature, the costs associated with this project may be higher than we have estimated and it may take us longer than expected to complete the project. In addition, the process of moving our corporate headquarters is inherently complex and not part of our day to day operations. Thus, that process could cause significant disruption to our operations and cause the temporary diversion of management resources, all of which could have a material adverse effect on our business.

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, and to a lesser extent, National Penn's deposit base is primarily 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 beginning in 2008 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 $18 million in capital stock of the Federal Home Loan Bank of Pittsburgh as of September 30, 2013. This stock ownership is required of all Home Loan Bank members as part of the overall Home Loan Bank capitalization. If the Home Loan Bank experiences a capital shortfall, it could suspend its quarterly cash dividend, and 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, 2013, 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.

As of September 30, 2013, National Penn had a deferred tax asset of approximately $69.4 million. Our ability to realize these tax benefits ultimately depends on the existence of sufficient taxable income of the appropriate character (ordinary income or capital gains) within the applicable carryback and carryforward periods provided under the tax law. Estimation of the deferred tax asset's realizability 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.

National Penn may be required to pay 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. In addition, the FDIC may issue a special assessment across all FDIC insured institutions. Any future increases in assessments or higher periodic fees could adversely affect National Penn's earnings.

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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, 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.

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 its 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.

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. As technology in the financial services industry changes and evolves, as is occurring in the payments industry, 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. In addition, the ongoing development and increasing use of "social media" presents challenges and opportunities that can lead to product communication and innovation issues as well as reputation risk.

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 approximately 146 million shares were outstanding as of September 30, 2013, 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 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 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, 2013, 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 lieu of a first quarter 2013 cash dividend, the Board of Directors approved an additional cash dividend of $0.10 per share, which was declared and paid in December 2012. In October 2013, the Board of Directors approved a fourth quarter 2013 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.

Severe weather and natural disasters may negatively affect National Penn's local economies or disrupt its operations, which could have an adverse effect on our business or results of operations.

National Penn's market area may experience severe weather events or natural disasters, such as hurricanes, blizzards, and other extreme weather conditions. Natural disasters and other severe weather events could negatively impact regional economic conditions; result in a decline in local loan demand and loan originations; cause a decline in the value or destruction of properties securing National Penn's loans and an increase in delinquencies, foreclosures or loan losses; damage its banking facilities and offices; and negatively impact National Penn's growth strategy. National Penn's management cannot calculate the effect of or predict whether or to what extent damage caused by severe weather or natural disasters would affect National Penn's operations. National Penn's business or results of operations may be adversely affected by these and other negative effects of such natural disasters.

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 purported 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.

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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.

• 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

There were no repurchases by National Penn of its common stock at any time during the quarter ended September 30, 2013.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

None.

Item 5.  Other Information

None.

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 25, 2013, as filed on September 30, 2013.)
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 7, 2013	By:	/s/ Scott V. Fainor
			Name:	Scott V. Fainor
			Title:	President and Chief Executive Officer
Date:	November 7, 2013	By:	/s/ Michael J. Hughes
			Name:	Michael J. Hughes
			Title:	Senior Executive Vice President and
				Chief Financial Officer

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