National Penn Bancshares (NPBC) 10-Q 2014 Q1 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 March 31, 2014

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.

645 Hamilton Street, Suite 1100

Allentown, Pennsylvania 18101

(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 May 5, 2014
Common Stock, no stated par value	139,167,940 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	49
Item 1.  Legal Proceedings	49
Item 1A.  Risk Factors	49
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3.  Defaults Upon Senior Securities	58
Item 4.  Mine Safety Disclosures	58
Item 5.  Other Information	58
Item 6.  Exhibits	59
SIGNATURES	60

2

 PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)	Unaudited
	March 31, 2014			December 31, 2013
ASSETS
Cash and due from banks	$	128,991		$	102,241
Interest-earning deposits with banks	55,335			181,282
Total cash and cash equivalents	184,326			283,523
Investment securities available-for-sale, at fair value	1,442,304			1,894,107
Investment securities held-to-maturity
(Fair value $936,088 and $452,202 for 2014 and 2013, respectively)	918,340			438,445
Other securities	63,760			63,746
Loans held-for-sale	5,171			4,951
Loans, net of allowance for loan losses of $93,252 and $96,367 for 2014 and 2013, respectively	5,279,304			5,236,901
Premises and equipment, net	97,707			96,232
Accrued interest receivable	27,408			27,130
Bank owned life insurance	149,045			147,869
Other real estate owned and other repossessed assets	2,138			1,278
Goodwill	258,279			258,279
Other intangible assets, net	6,156			6,854
Unconsolidated investments	8,214			8,713
Other assets	115,229			123,820
TOTAL ASSETS	$	8,557,381		$	8,591,848
LIABILITIES
Non-interest bearing deposits	$	1,028,572		$	970,051
Interest bearing deposits	5,110,852			5,102,527
Total deposits	6,139,424			6,072,578
Customer repurchase agreements	561,170			551,736
Repurchase agreements	50,000			50,000
Federal Home Loan Bank advances	557,434			603,232
Subordinated debentures	77,321			77,321
Accrued interest payable and other liabilities	89,583			105,115
TOTAL LIABILITIES	7,474,932			7,459,982
SHAREHOLDERS' EQUITY
Common stock, no stated par value; authorized 250,000,000 shares, issued: March 31, 2014 - 152,275,706; December 31, 2013 - 152,310,162	1,386,265			1,387,966
Accumulated deficit	(167,191		)	(175,990		)
Accumulated other comprehensive (loss) income	(5,295		)	(21,157		)
Treasury stock: March 31, 2014 - 13,130,037 shares; December 31, 2013 - 6,511,411 shares	(131,330		)	(58,953		)
TOTAL SHAREHOLDERS' EQUITY	1,082,449			1,131,866
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	8,557,381		$	8,591,848
The accompanying notes are an integral part of these financial statements.

3

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands, except per share data)	Three Months Ended March 31,
	2014			2013
INTEREST INCOME
Loans, including fees	$	52,582		$	55,721
Investment securities
Taxable	11,121			9,685
Tax-exempt	6,404			7,114
Deposits with banks	26			75
Total interest income	70,133			72,595
INTEREST EXPENSE
Deposits	4,773			5,914
Customer repurchase agreements	393			498
Repurchase agreements	601			719
Short-term borrowings	—			41
Federal Home Loan Bank advances	1,548			2,334
Subordinated debentures	529			1,465
Total interest expense	7,844			10,971
Net interest income	62,289			61,624
Provision for loan losses	1,251			1,500
Net interest income after provision for loan losses	61,038			60,124
NON-INTEREST INCOME
Wealth management	6,866			6,831
Service charges on deposit accounts	3,384			3,770
Insurance commissions and fees	3,597			3,267
Cash management and electronic banking fees	4,526			4,451
Mortgage banking	716			1,855
Bank owned life insurance	1,198			1,228
Losses of unconsolidated investments	(477		)	(14		)
Other operating income	1,660			2,053
Net gains from fair value changes of subordinated debentures	—			2,111
Net gains on sales of investment securities	8			25
Total non-interest income	21,478			25,577
NON-INTEREST EXPENSE
Salaries, wages and employee benefits	29,201			29,230
Premises and equipment	8,212			7,491
FDIC insurance	1,317			1,213
Other operating expenses	13,607			14,500
Loss on debt extinguishment	—			64,888
Total non-interest expense	52,337			117,322
Income (loss) before income taxes	30,179			(31,621		)
Income tax expense (benefit)	7,469			(14,217		)
NET INCOME (LOSS)	$	22,710		$	(17,404	)
PER SHARE
Basic earnings	$	0.16		$	(0.12	)
Diluted earnings	$	0.16		$	(0.12	)
Dividends paid in cash	$	0.10		$	—		(a)
(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 March 31, 2014
(dollars in thousands)	Before Tax Amount				Income Tax Expense (benefit)			Net of Tax Amount
Net income	$	30,179			$	7,469		$	22,710
				��
Unrealized holding gains arising during the period on investment securities	24,298				8,505			15,793
Less net gains on sales of investment securities realized in net income	8				3			5
Unrealized gains on investment securities	24,290				8,502			15,788
Pension adjustments	114				40			74
Other comprehensive income	24,404				8,542			15,862
Total comprehensive income	$	54,583			$	16,011		$	38,572
	Three Months Ended March 31, 2013
(dollars in thousands)	Before Tax Amount				Income Tax Expense (benefit)			Net of Tax Amount
Net income (loss)	$	(31,621	)		$	(14,217	)	$	(17,404	)
Unrealized holding losses arising during the period on investment securities	(12,933		)		(4,528		)	(8,405		)
Less net gains on sales of investment securities realized in net income	25				9			16
Unrealized losses on investment securities	(12,958		)		(4,537		)	(8,421		)
Pension adjustments	113				40			73
Other comprehensive income (loss)	(12,845		)		(4,497		)	(8,348		)
Total comprehensive income (loss)	$	(44,466	)		$	(18,714	)	$	(25,752	)
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 Deficit			Accumulated Other Comprehensive Income (Loss)
	Shares		Value									Treasury Stock			Total
Balance at December 31, 2013	145,798,751		$	1,387,966		$	(175,990	)	$	(21,157	)	$	(58,953	)	$	1,131,866
Comprehensive income:
Net income						22,710									22,710
Other comprehensive income, net of taxes									15,862						15,862
Total comprehensive income															38,572
Cash dividends declared, common						(13,911		)							(13,911		)
Shares issued under share-based plans, net of excess tax benefits	346,918		(1,701		)							3,013			1,312
Common stock repurchases	(7,000,000	)										(75,390		)	(75,390		)
Balance at March 31, 2014	139,145,669		$	1,386,265		$	(167,191	)	$	(5,295	)	$	(131,330	)	$	1,082,449
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)	Three Months Ended March 31,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	22,710		$	(17,404	)
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	1,251			1,500
Depreciation and amortization	2,690			3,892
Amortization of premiums and discounts on investment securities, net	136			1,073
Net gains from sales of investment securities	(8		)	(25		)
Decrease in fair value of subordinated debentures	—			(2,111		)
Bank owned life insurance policy income	(1,198		)	(1,228		)
Share-based compensation expense	1,014			811
Unconsolidated investment distributions, net	499			1,993
Loans originated for resale	(19,618		)	(54,238		)
Proceeds from sale of loans originated for resale	19,933			55,109
Gains on sale of loans, net	(535		)	(1,475		)
Losses (gains) on sale of other real estate owned, net	42			(81		)
Gains on sale of buildings	—			(149		)
Loss on debt extinguishment	—			64,888
Changes in assets and liabilities:
Increase in accrued interest receivable	(278		)	(998		)
Decrease in accrued interest payable	(1,263		)	(1,146		)
Increase in other assets	(604		)	(27,930		)
Decrease in other liabilities	(14,155		)	(6,277		)
Net cash provided by operating activities	10,616			16,204
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and repayments of investment securities held-to-maturity	8,164			6,045
Proceeds from maturities and repayments of investment securities available-for-sale	68,575			118,771
Proceeds from sale of investment securities available-for-sale	476			1,025
Purchase of investment securities available-for-sale	(81,144		)	(144,856		)
(Purchases) proceeds of other securities	(14		)	6,201
Proceeds from sale of loans previously held for investment	815			1,181
Increase in loans	(45,455		)	(14,865		)
Purchases of premises and equipment	(3,617		)	(1,764		)
Proceeds from the sale of other real estate owned	82			487
Proceeds from sale of buildings	—			418
Net cash used in investing activities	(52,118		)	(27,357		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in transaction and savings deposit accounts	101,912			58,479
Net (decrease) increase in time deposits	(35,066		)	190,016
Net increase (decrease) in customer repurchase agreements	9,434			(10,171		)
Decrease in short-term borrowings	—			(100,000		)
Increase in repurchase agreements	—			100,000
Net decrease in FHLB advances	(45,648		)	(410,218		)
Repayment of subordinated debentures	—			(65,206		)
Proceeds from shares issued, share-based plans	877			677
Excess tax benefit (expense) on share-based plans	97			60
Repurchase of common stock	(75,390		)	—
Cash dividends, common	(13,911		)	—
Net cash used in financing activities	(57,695		)	(236,363		)
Net decrease in cash and cash equivalents	(99,197		)	(247,516		)
Cash and cash equivalents at beginning of year	283,523			428,128
Cash and cash equivalents at end of period	$	184,326		$	180,612
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:

(dollars in thousands)	Three Months Ended March 31,
	2014		2013
Interest	$	6,581	$	12,117
Income taxes	5,028		1,514

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, 2013, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (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, 2014.

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:

(dollars in thousands, except share data)	Three Months Ended March 31,
	2014		2013
Net income (loss)	$	22,710	$	(17,404	)
Calculation of shares
Weighted average basic shares	141,360,180		145,394,967
Dilutive effect of share-based compensation	516,886		—
Weighted average fully diluted shares	141,877,066		145,394,967
Earnings per share
Basic	$	0.16	$	(0.12	)
Diluted	$	0.16	$	(0.12	)

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

	Three Months Ended March 31,
	2014		2013
Stock options (b)	3,213,261		4,252,874
Exercise price
Low	$	8.69	$	5.60
High	$	21.49	$	21.49
(b) For the three months ended March 31, 2013, all outstanding stock options were considered to be anti-dilutive due to the loss reported for the period.

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 at March 31, 2014 are summarized as follows:

(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-Sale
U.S. Government agencies	$	1,000	$	4	$	—		$	1,004
State and municipal bonds	79,129		5,194		(188		)	84,135
Agency mortgage-backed securities/collateralized mortgage obligations	1,340,763		19,523		(16,369		)	1,343,917
Non-agency collateralized mortgage obligations	3,289		60		—			3,349
Corporate securities and other	4,109		535		(323		)	4,321
Marketable equity securities	3,583		1,995		—			5,578
Total	$	1,431,873	$	27,311	$	(16,880	)	$	1,442,304
	Carrying Value (c)		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Held-to-Maturity
State and municipal bonds	$	529,528	$	16,416	$	(161	)	$	545,783
Agency mortgage-backed securities/collateralized mortgage obligations	383,014		1,488		—			384,502
Non-agency collateralized mortgage obligations	233		5		—			238
Corporate securities and other	5,565		—		—			5,565
Total	$	918,340	$	17,909	$	(161	)	$	936,088
(c) The carrying value of held-to-maturity securities represents the fair value at the date of transfer for securities which were transferred from the available-for-sale category.  The carrying value of all other held-to-maturity securities represents their amortized cost.

At March 31, 2014, 240 available-for-sale debt securities, with an amortized cost basis of $492 million, a net unrealized loss of $4.1 million and a fair value of $488 million, were reclassified as held-to-maturity.  Transfers of debt securities into the held-to-maturity category from the available-for-sale category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in other comprehensive income and in the carrying value of the held-to-maturity securities. Such amounts are amortized over the remaining life of the security which will offset the effect on net interest income.

10

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

The amortized cost, gross unrealized gains and losses, and fair values of the Company’s investment securities at December 31, 2013 are summarized as follows:

(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-Sale
U.S. Government agencies	$	1,000	$	—	$	(10	)	$	990
State and municipal bonds	210,680		7,701		(3,670		)	214,711
Agency mortgage-backed securities/collateralized mortgage obligations	1,683,092		18,040		(41,952		)	1,659,180
Non-agency collateralized mortgage obligations	4,222		44		(8		)	4,258
Corporate securities and other	9,517		646		(495		)	9,668
Marketable equity securities	3,583		1,717		—			5,300
Total	$	1,912,094	$	28,148	$	(46,135	)	$	1,894,107
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Held-to-Maturity
State and municipal bonds	$	403,344	$	13,028	$	(895	)	$	415,477
Agency mortgage-backed securities/collateralized mortgage obligations	34,843		1,624		—			36,467
Non-agency collateralized mortgage obligations	258		—		—			258
Total	$	438,445	$	14,652	$	(895	)	$	452,202

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

(dollars in thousands)	Three Months Ended March 31,
	2014		2013
Gains	$	8	$	25
Losses	—		—
Net gains (losses) from sales of investment securities	$	8	$	25

11

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

The following tables indicate the length of time individual securities have been in a continuous unrealized loss position at March 31, 2014 and December 31, 2013, respectively.

March 31, 2014
(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	47	$	19,004	$	(248	)	$	8,741	$	(101	)	$	27,745	$	(349	)
Agency mortgage-backed securities/collateralized mortgage obligations	133	486,117		(9,930		)	139,881		(6,439		)	625,998		(16,369		)
Corporate securities and other	2	—		—			1,175		(323		)	1,175		(323		)
Total	182	$	505,121	$	(10,178	)	$	149,797	$	(6,863	)	$	654,918	$	(17,041	)

The table above does not include unrealized losses of $9.8 million related to 96 securities transferred to the held-to-maturity category at March 31, 2014.  The unrealized losses related to these securities are now included in their carrying value and will be amortized over their remaining lives.

December 31, 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
U.S. Government agencies	1	$	990	$	(10	)	$	—	$	—		$	990	$	(10	)
State and municipal bonds	145	76,402		(2,282		)	20,708		(2,283		)	97,110		(4,565		)
Agency mortgage-backed securities/collateralized mortgage obligations	241	953,423		(33,990		)	115,815		(7,962		)	1,069,238		(41,952		)
Non-agency collateralized mortgage obligations	5	820		(8		)	—		—			820		(8		)
Corporate securities and other	5	1,966		(35		)	2,708		(460		)	4,674		(495		)
Total	397	$	1,033,601	$	(36,325	)	$	139,231	$	(10,705	)	$	1,172,832	$	(47,030	)

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

(dollars in thousands)	March 31, 2014		December 31, 2013
Deposits	$	897,202	$	966,751
Repurchase agreements	655,437		650,627
Other	79,486		81,408
Total	$	1,632,125	$	1,698,786

12

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

The specified values of investment securities, by contractual maturity, at March 31, 2014 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		Carrying Value		Fair Value
Due in one year or less	$	5,362	$	5,454	$	—	$	—
Due after one through five years	46,446		50,266		5,248		5,353
Due after five through ten years	151,296		156,413		150,620		154,994
Due after ten years	1,225,186		1,224,593		762,472		775,741
Marketable equity securities	3,583		5,578		—		—
Total	$	1,431,873	$	1,442,304	$	918,340	$	936,088

Evaluation of Impairment of Securities

The Company did not record any other-than-temporary impairment ("OTTI") losses for the three months endedMarch 31, 2014 and 2013.

As of March 31, 2014 and December 31, 2013, 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 March 31, 2014, gross unrealized losses totaled $17.0 million, and the gross unrealized losses of securities in an unrealized loss position for twelve months or longer totaled $6.9 million, of which $6.4 million is attributable to agency mortgage-backed securities and $0.4 million attributable to state and municipal 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 $63.8 million and $63.7 million as of March 31, 2014 and December 31, 2013, 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 2014, the Company purchased an additional $14 thousand, net, of capital stock from the FHLB of Pittsburgh at par/cost. Also, during 2014 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:

March 31, 2014	Performing
(dollars in thousands)	Pass Rated			Special Mention			Classified			Non-Performing (d)			Total
Commercial and industrial	$	2,361,736		$	51,409		$	77,627		$	13,822		$	2,504,594
CRE - permanent	979,978			7,112			30,143			4,038			1,021,271
CRE - construction	159,862			1,662			11,637			10,425			183,586
Commercial real estate	1,139,840			8,774			41,780			14,463			1,204,857
Residential mortgages	635,690			—			896			11,609			648,195
Home equity	748,727			—			389			4,181			753,297
All other consumer	253,989			10			5,661			1,953			261,613
Consumer	1,638,406			10			6,946			17,743			1,663,105
Loans	$	5,139,982		$	60,193		$	126,353		$	46,028		$	5,372,556
Percent of loans	95.67		%	1.12		%	2.35		%	0.86		%	100.00		%
December 31, 2013	Performing
(dollars in thousands)	Pass Rated			Special Mention			Classified			Non-Performing			Total
Commercial and industrial	$	2,327,344		$	38,873		$	79,179		$	15,268		$	2,460,664
CRE - permanent	944,589			9,191			36,272			4,786			994,838
CRE - construction	167,710			2,962			15,534			12,128			198,334
Commercial real estate	1,112,299			12,153			51,806			16,914			1,193,172
Residential mortgages	636,829			—			2,243			13,153			652,225
Home equity	757,064			—			137			5,407			762,608
All other consumer	256,957			160			5,633			1,849			264,599
Consumer	1,650,850			160			8,013			20,409			1,679,432
Loans	$	5,090,493		$	51,186		$	138,998		$	52,591		$	5,333,268
Percent of loans	95.45		%	0.96		%	2.60		%	0.99		%	100.00		%
(d) Exclusive of non-accrual residential mortgage and home equity loans of $1.5 million and $0.6 million, respectively, included in loans held-for-sale.

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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: 

March 31, 2014	Past Due and Still Accruing												Accruing Current Balances		Non-Accrual Balances (d) (f)			Total Balances
(dollars in thousands)	30-59 Days			60-89 Days			90 Days or More (e)			Total
Commercial and industrial	$	668		$	1,195		$	—		$	1,863		$	2,489,230	$	13,501		$	2,504,594
CRE - permanent	78			97			—			175			1,017,583		3,513			1,021,271
CRE - construction	193			—			—			193			172,968		10,425			183,586
Commercial real estate	271			97			—			368			1,190,551		13,938			1,204,857
Residential mortgages	3,797			595			852			5,244			637,654		5,297			648,195
Home equity	3,418			722			389			4,529			745,329		3,439			753,297
All other consumer	2,623			1,123			1,069			4,815			255,097		1,701			261,613
Consumer	9,838			2,440			2,310			14,588			1,638,080		10,437			1,663,105
Loans	$	10,777		$	3,732		$	2,310		$	16,819		$	5,317,861	$	37,876		$	5,372,556
Percent of loans	0.20		%	0.07		%	0.04		%	0.31		%			0.70		%
December 31, 2013	Past Due and Still Accruing												Accruing Current Balances		Non-Accrual Balances (f)			Total Balances
(dollars in thousands)	30-59 Days			60-89 Days			90 Days or More (e)			Total
Commercial and industrial	$	3,362		$	1,520		$	11		$	4,893		$	2,440,836	$	14,935		$	2,460,664
CRE - permanent	6,191			181			—			6,372			984,208		4,258			994,838
CRE - construction	373			—			—			373			185,833		12,128			198,334
Commercial real estate	6,564			181			—			6,745			1,170,041		16,386			1,193,172
Residential mortgages	4,509			774			2,197			7,480			637,708		7,037			652,225
Home equity	4,383			1,101			140			5,624			752,197		4,787			762,608
All other consumer	2,761			814			1,118			4,693			258,175		1,731			264,599
Consumer	11,653			2,689			3,455			17,797			1,648,080		13,555			1,679,432
Loans	$	21,579		$	4,390		$	3,466		$	29,435		$	5,258,957	$	44,876		$	5,333,268
Percent of loans	0.40		%	0.08		%	0.07		%	0.55		%			0.84		%
(d) Exclusive of non-accrual residential mortgage and home equity loans of $1.5 million and $0.6 million, respectively, included in loans held-for-sale.
(e) 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.
(f) At March 31, 2014, non-accrual balances included troubled debt restructurings of $5.3 million commercial real estate, $6.5 million of commercial and industrial, and $3.0 million of consumer loans. At December 31, 2013, non-accrual balances included troubled debt restructurings of $6.5 million of commercial real estate loans, $7.7 million of commercial and industrial loans, and $3.0 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:

March 31, 2014
Three Months Ended
(dollars in thousands)	Commercial and Industrial			Commercial Real Estate			Consumer			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	41,288		$	22,653		$	21,478		$	10,948		$	96,367
Charge-offs	(1,335		)	(527		)	(3,156		)	—			(5,018		)
Recoveries	185			74			393			—			652
Provision	559			(2,003		)	3,149			(454		)	1,251
Ending balance	$	40,697		$	20,197		$	21,864		$	10,494		$	93,252
Allowance for loan losses:
Individually evaluated for impairment	$	2,981		$	2,284		$	1,988		$	—		$	7,253
Collectively evaluated for impairment	37,716			17,913			19,876			10,494			85,999
Total allowance for loan losses	$	40,697		$	20,197		$	21,864		$	10,494		$	93,252
Loans:
Individually evaluated for impairment	$	13,822		$	17,266		$	17,787		$	—		$	48,875
Collectively evaluated for impairment	2,490,772			1,187,591			1,645,318			—			5,323,681
Loans	$	2,504,594		$	1,204,857		$	1,663,105		$	—		$	5,372,556

March 31, 2013
Three Months Ended
(dollars in thousands)	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	(2,314		)	(759		)	(3,309		)	—			(6,382		)
Recoveries	445			159			487			—			1,091
Provision	3,117			(2,150		)	2,039			(1,506		)	1,500
Ending balance	$	47,399		$	26,545		$	22,318		$	10,902		$	107,164
Allowance for loan losses:
Individually evaluated for impairment	$	4,144		$	1,654		$	1,186		$	—		$	6,984
Collectively evaluated for impairment	43,255			24,891			21,132			10,902			100,180
Total allowance for loan losses	$	47,399		$	26,545		$	22,318		$	10,902		$	107,164
Loans:
Individually evaluated for impairment	$	24,830		$	18,190		$	15,939		$	—		$	58,959
Collectively evaluated for impairment	2,504,549			1,025,653			1,645,678			—			5,175,880
Loans	$	2,529,379		$	1,043,843		$	1,661,617		$	—		$	5,234,839

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:

March 31, 2014	Recorded Investment
(dollars in thousands)	With Related Allowance		Without Related Allowance (g)		Total		Life-to-date Charge-offs (h)		Total Unpaid Balances		Related Allowance
Commercial and industrial	$	5,368	$	8,454	$	13,822	$	6,445	$	20,267	$	2,981
CRE - permanent	4,330		2,511		6,841		6,609		13,450		917
CRE - construction	8,026		2,399		10,425		3,979		14,404		1,367
Commercial real estate	12,356		4,910		17,266		10,588		27,854		2,284
Residential mortgages	6,044		7,091		13,135		1,964		15,099		1,601
Home equity	829		3,954		4,783		1,063		5,846		334
All other consumer	252		1,701		1,953		61		2,014		53
Consumer	7,125		12,746		19,871		3,088		22,959		1,988
Total	$	24,849	$	26,110	$	50,959	$	20,121	$	71,080	$	7,253
December 31, 2013	Recorded Investment
(dollars in thousands)	With Related Allowance		Without Related Allowance		Total		Life-to-date Charge-offs		Total Unpaid Balances		Related Allowance
Commercial and industrial	$	8,457	$	6,811	$	15,268	$	5,599	$	20,867	$	3,997
CRE - permanent	5,995		3,872		9,867		6,441		16,308		1,073
CRE - construction	9,729		2,399		12,128		6,633		18,761		1,414
Commercial real estate	15,724		6,271		21,995		13,074		35,069		2,487
Residential mortgages	6,088		7,109		13,197		800		13,997		1,589
Home equity	609		4,798		5,407		515		5,922		203
All other consumer	118		1,731		1,849		61		1,910		28
Consumer	6,815		13,638		20,453		1,376		21,829		1,820
Total	$	30,996	$	26,720	$	57,716	$	20,049	$	77,765	$	8,304
(g) Includes non-accrual residential mortgage and home equity loans held-for-sale of $1.5 million and $0.6 million, respectively, at March 31, 2014.
(h) Life-to-date charge-offs include $1.3 million related to non-accrual residential mortgages held-for-sale and $0.5 million related to non-accrual home equity loans held-for-sale.

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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 March 31,
	2014				2013
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized (i)		Average Recorded Investment		Interest Income Recognized (i)
Commercial and industrial	$	14,666	$	6	$	25,529	$	18
CRE - permanent	8,500		6		8,771		23
CRE - construction	10,556		—		7,097		19
Commercial real estate	19,056		6		15,868		42
Residential mortgages	13,934		34		9,795		19
Home equity	5,174		3		4,806		3
All other consumer	1,890		2		1,633		—
Consumer	20,998		39		16,234		22
Total	$	54,720	$	51	$	57,631	$	82
(i) Interest income recognized for the three months end March 31, 2014 and 2013, primarily represent amounts earned on accruing TDRs.

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)	March 31, 2014		December 31, 2013
Commercial and industrial	$	321	$	333
CRE - permanent	525		528
Residential mortgages	6,312		6,116
Home equity	742		620
All other consumer	252		118
Total restructured loans	$	8,152	$	7,715
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)	March 31, 2014		December 31, 2013
NOW accounts	$	1,667,272	$	1,655,425
Money market accounts	1,680,900		1,670,035
Savings accounts	547,255		526,576
Time deposits less than $100	870,921		896,700
Time deposits $100 or greater	344,504		353,791
Total interest bearing deposits	5,110,852		5,102,527
Non-interest bearing deposits	1,028,572		970,051
Total deposits	$	6,139,424	$	6,072,578

At March 31, 2014, time deposits were scheduled to mature as follows:

(dollars in thousands)	2014	$	692,775
	2015	271,062
	2016	126,886
	2017	77,805
	2018	39,457
	Thereafter	7,440
	Total	$	1,215,425

6.  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 March 31, 2014, 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.

7.  ACCUMULATED OTHER COMPREHENSIVE INCOME

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

(dollars in thousands)	March 31, 2014			December 31, 2013
Unrealized gains (losses) on investment securities	$	4,097		$	(11,691	)
Pension	(9,392		)	(9,466		)
Total accumulated other comprehensive income (loss)	$	(5,295	)	$	(21,157	)

At March 31, 2014, 240 available-for-sale debt securities, with an amortized cost basis of $492 million, a net unrealized loss of $4.1 million and a fair value of $488 million, were reclassified as held-to-maturity. The net accumulated other comprehensive loss related to the transferred securities at March 31, 2014 was $2.7 million and will be amortized over the remaining life of the securities.

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

8.  EQUITY

In the first quarter of 2014, the Company paid a cash dividend of $0.10 per share, or $13.9 million, which was paid on February 14, 2014, to shareholders of record as of February 1, 2014.

Additionally on April 14, 2014, the Company announced a second quarter cash dividend of $0.10 per share to be paid on May 16, 2014, to shareholders of record as of May 3, 2014.

In the fourth quarter of 2013, the Board of Directors authorized the repurchase of up to five percent (5%) of the outstanding shares of National Penn common stock during 2014. On January 30, 2014, National Penn completed the repurchase of 7 million shares of its common stock from two affiliates of Warburg Pincus, at $10.77 per share (the closing price of National Penn common stock on the date the repurchase agreement was entered into).

9.  FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The notional amount of financial instruments whose contract amounts represent credit risk:

(dollars in thousands)	March 31, 2014		December 31, 2013
Commitments to extend credit	$	1,769,583	$	1,769,135
Commitments to fund mortgages	31,807		22,242
Commitments to sell mortgages to investors	16,810		15,349
Letters of credit	137,043		142,246

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

March 31, 2014
(dollars in thousands)	Positions	Notional Amount		Asset		Liability		Receive Rate		Pay Rate		Life (Years)
Receive fixed - pay floating interest rate swaps	152	$	511,366	$	16,338	$	3,781	4.57	%	2.30	%	5.75
Pay fixed - receive floating interest rate swaps	152	511,366		3,781		16,338		2.30	%	4.57	%	5.75
Net interest rate swaps		$	1,022,732	$	20,119	$	20,119	3.44	%	3.44	%	5.75
December 31, 2013
(dollars in thousands)	Positions	Notional Amount		Asset		Liability		Receive Rate		Pay Rate		Life (Years)
Receive fixed - pay floating interest rate swaps	148	$	502,833	$	15,906	$	5,718	4.58	%	2.31	%	5.96
Pay fixed - receive floating interest rate swaps	148	502,833		5,718		15,906		2.31	%	4.58	%	5.96
Net interest rate swaps		$	1,005,666	$	21,624	$	21,624	3.45	%	3.45	%	5.96

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 each other, there was no impact on other operating income for the three months endedMarch 31, 2014. For additional analysis of the fair value of interest rate swaps refer to Footnote 11 within this section.

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

The following summarizes the Company’s derivative activity:

			Income Statement Effect
	Balance Sheet Effect at		for the Three Months Ended
Type of Derivative Instruments	March 31, 2014		March 31, 2014
Interest rate swaps	Increase to other assets/liabilities of $20.1 million.		No net effect on other operating income from offsetting $1.5 million change.
Other derivatives:
Interest rate locks	Increase to other liabilities of less than $0.1 million.		Decrease to mortgage banking income of less than $0.1 million.
Forward sale commitments	Increase to other liabilities of $0.3 million.		Decrease to mortgage banking income of $0.2 million.
			Income Statement Effect
	Balance Sheet Effect at		for the Three Months Ended
Type of Derivative Instruments	December 31, 2013		March 31, 2013
Interest rate swaps	Increase to other assets/liabilities of $21.6 million.		No net effect on other operating income from offsetting $3.3 million change.
		��
Other derivatives:
Interest rate locks	Increase to other liabilities of less than $0.1 million.		Decrease to mortgage banking income of $0.1 million.
Forward sale commitments	Increase to other liabilities of $0.1 million.		Increase to mortgage banking income of $0.1 million.

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

10. BALANCE SHEET OFFSETTING

Certain financial instrument related assets and liabilities may be eligible for offset on the consolidated balance sheet because they are subject to master netting agreements or similar agreements. However, the Company does not elect to offset such arrangements on the consolidated financial statements.

    The Company enters into interest rate swap agreements with customers and financial institution counterparties. For additional detail regarding interest rate swap agreements refer to Footnote 9 within this section. In the event of default on, or termination of, any one contract, both parties have the right to net settle multiple contracts. Also, certain interest rate swap agreements may require the Company to receive or pledge cash collateral based on the contract provisions.

The Company also enters into agreements to sell securities subject to an obligation to repurchase the same or similar securities, referred to as repurchase agreements on the consolidated balance sheet. Under these agreements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. The obligation to repurchase the securities is reflected as a liability in the Company’s consolidated balance sheet, while the securities underlying the repurchase agreements remain in the respective investment securities account, therefore there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities.    

The following table presents information about financial instruments that are eligible for offset:

March 31, 2014
(dollars in thousands)
Assets	Gross Amount		Gross Amounts Offset in the Balance Sheet		Net Amounts Presented in the Balance Sheet
Derivatives - Interest Rate Swaps	$	3,781	$	—	$	3,781
Liabilities
Derivatives - Interest Rate Swaps	16,338		—		16,338
Repurchase Agreements	50,000		—		50,000
Total Liabilities	$	66,338	$	—	$	66,338
December 31, 2013
(dollars in thousands)
Assets	Gross Amount		Gross Amounts Offset in the Balance Sheet		Net Amounts Presented in the Balance Sheet
Derivatives - Interest Rate Swaps	$	5,718	$	—	$	5,718
Liabilities
Derivatives - Interest Rate Swaps	15,906		—		15,906
Repurchase Agreements	50,000		—		50,000
Total Liabilities	$	65,906	$	—	$	65,906

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

The following table represents a reconciliation of the net amounts of interest rate swap derivative assets and liabilities presented in the balance sheet to the net amounts that would result in the event of offset, by counterparty:

March 31, 2014
(dollars in thousands)			Gross Amounts Not Offset in the Balance Sheet
Assets	Net Amounts Presented in the Balance Sheet		Financial Instruments (j)			Cash Collateral (k)			Net Amount
Counterparty A	$	3,367	$	(3,367	)	$	—		$	—
All Other Counterparties	414		(179		)	(260		)	(25		)
Total Assets	$	3,781	$	(3,546	)	$	(260	)	$	(25	)
Liabilities
Counterparty A	$	12,402	$	(3,367	)	$	(9,085	)	$	(50	)
All Other Counterparties	3,936		(179		)	(3,620		)	137
Total Liabilities	$	16,338	$	(3,546	)	$	(12,705	)	$	87
December 31, 2013
(dollars in thousands)			Gross Amounts Not Offset in the Balance Sheet
Assets	Net Amounts Presented in the Balance Sheet		Financial Instruments (j)			Cash Collateral (k)			Net Amount
Counterparty A	$	4,996	$	(4,996	)	$	—		$	—
All Other Counterparties	722		(328		)	(300		)	94
Total Assets	$	5,718	$	(5,324	)	$	(300	)	$	94
Liabilities
Counterparty A	$	13,111	$	(4,996	)	$	(8,545	)	$	(430	)
All Other Counterparties	2,795		(328		)	(1,960		)	507
Total Liabilities	$	15,906	$	(5,324	)	$	(10,505	)	$	77
(j) For interest rate swap assets, amounts represent any derivative liability fair values that could be offset in the event of default. For interest rate swap liabilities, amounts represent any derivative asset fair values that could be offset in the event of default.
(k) Amounts represent cash collateral received or posted on interest rate swap transactions with financial institution counterparties.

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.

23

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

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:

• 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. Each quarter the Company performs an independent validation of the third-party security pricing by obtaining pricing from other sources and evaluating discrepancies to established tolerances for each security type, including a review of unchanged prices. Additionally, the Company evaluates the third-party service provider's pricing results by periodically reviewing the service provider's practices and procedures.

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.

24

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

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. The Company has not elected to apply the fair value option to any of its financial instruments at March 31, 2014.    

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 March 31, 2014 and December 31, 2013, 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.

March 31, 2014	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	$	1,004	$	—	$	1,004	$	—
State and municipal bonds	84,135		—		84,135		—
Agency mortgage-backed securities/ collateralized mortgage obligations	1,343,917		—		1,343,917		—
Non-agency collateralized mortgage obligations	3,349		—		3,349		—
Corporate securities and other	4,321		61		3,085		1,175
Marketable equity securities	5,578		4,512		—		1,066
Investment securities, available-for-sale	$	1,442,304	$	4,573	$	1,435,490	$	2,241
Interest rate swap agreements	$	20,119	$	—	$	20,119	$	—
Liabilities
Interest rate swap agreements	$	20,119	$	—	$	20,119	$	—
Forward sale commitments	290		—		290		—
Interest rate locks	42		—		42		—
December 31, 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	$	990	$	—	$	990	$	—
State and municipal bonds	214,711		—		214,711		—
Agency mortgage-backed securities/ collateralized mortgage obligations	1,659,180		—		1,659,180		—
Non-agency collateralized mortgage obligations	4,258		—		4,258		—
Corporate securities and other	9,668		61		4,922		4,685
Marketable equity securities	5,300		4,241		—		1,059
Investment securities, available-for-sale	$	1,894,107	$	4,302	$	1,884,061	$	5,744
Interest rate swap agreements	$	21,624	$	—	$	21,624	$	—
Liabilities
Interest rate swap agreements	$	21,624	$	—	$	21,624	$	—
Forward sale commitments	84		—		84		—
Interest rate locks	42		—		42		—

25

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 three months endedMarch 31, 2014:

(dollars in thousands)
Level 1	Beginning Balance January 1, 2014		Gains/(losses) included in earnings (l)			Gains/(losses) included in other comprehensive income		Purchases		Sales			Maturities/ Calls/Paydowns			Reclassified Securities (m)			Transfers		Ending Balance March 31, 2014
Corporate securities and other	$	61	$	—		$	—	$	—	$	—		$	—		$	—		$	—	$	61
Marketable equity securities	4,241		—			271		—		—			—			—			—		4,512
Total level 1	4,302		—			271		—		—			—			—			—		4,573
Level 2
U.S. Government agencies	990		—			14		—		—			—			—			—		1,004
State and municipal bonds	214,711		924			4,071		—		—			(3,690		)	(131,881		)	—		84,135
Agency mortgage-backed securities/ collateralized mortgage obligations	1,659,180		(1,036		)	19,688		81,144		—			(64,419		)	(350,640		)	—		1,343,917
Non-agency collateralized mortgage obligations	4,258		9			24		—		(476		)	(466		)	—			—		3,349
Corporate securities and other	4,922		—			174		—		—			—			(2,011		)	—		3,085
Total level 2	1,884,061		(103		)	23,971		81,144		(476		)	(68,575		)	(484,532		)	—		1,435,490
Level 3
Corporate securities and other	4,685		2			41		—		—			—			(3,553		)	—		1,175
Marketable equity securities	1,059		—			7		—		—			—			—			—		1,066
Total level 3	5,744		2			48		—		—			—			(3,553		)	—		2,241
Total available-for-sale securities	$	1,894,107	$	(101	)	$	24,290	$	81,144	$	(476	)	$	(68,575	)	$	(488,085	)	$	—	$	1,442,304
(l) Includes amortization/accretion
(m) Securities reclassified from available-for-sale to held-to-maturity at March 31, 2014. Refer to Footnote 3 for further details.

26

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
March 31, 2014	Balance		(Level 1)		(Level 2)		(Level 3)
Loans held-for-sale	$	3,087	$	—	$	3,087	$	—
Impaired loans, net	43,706		—		—		43,706
OREO and other repossessed assets	2,138		—		—		2,138
December 31, 2013
Loans held-for-sale	$	4,951	$	—	$	4,951	$	—
Impaired loans, net	49,412		—		—		49,412
OREO and other repossessed assets	1,278		—		—		1,278

Fair value for loans held-for-sale is estimated based upon available market data for mortgage-backed securities with similar interest rates and maturities.  Lower of cost or estimated fair value write-downs recorded on loans held-for-sale were zero as of March 31, 2014 and December 31, 2013. At March 31, 2014, loans held-for-sale in the table above represents accruing loans held-for-sale. Non-accrual loans held-for-sale of $2.1 million are included in impaired loans, net at March 31, 2014.

The recorded investment in impaired loans totaled $51.0 million with a specific reserve of $7.3 million at March 31, 2014, compared to $57.7 million with a specific reserve of $8.3 million at December 31, 2013. 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 were included in the period-ending OREO and other repossessed assets balance at both March 31, 2014 and December 31, 2013.

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, other than mortgage loans held-for-sale.  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.  

27

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:

	March 31, 2014				December 31, 2013
(dollars in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets
Cash and cash equivalents	$	184,326	$	184,326	$	283,523	$	283,523
Investment securities available-for-sale	1,442,304		1,442,304		1,894,107		1,894,107
Investment securities held-to-maturity	918,340		936,088		438,445		452,202
Loans held-for-sale	5,171		5,503		4,951		5,077
Loans, net of allowance for loan losses	5,279,304		5,149,433		5,236,901		5,168,470
OREO and other repossessed assets	2,138		2,138		1,278		1,278
Interest rate swap agreements	20,119		20,119		21,624		21,624
Liabilities
Non-interest bearing deposits	$	1,028,572	$	1,028,572	$	970,051	$	970,051
Interest bearing deposits, non-maturity	3,895,427		3,895,427		3,852,036		3,852,036
Deposits with stated maturities	1,215,425		1,217,734		1,250,491		1,253,920
Customer repurchase agreements	561,170		561,170		551,736		551,736
Repurchase agreements	50,000		50,775		50,000		51,332
Federal Home Loan Bank advances	557,434		565,153		603,232		611,890
Subordinated debentures	77,321		77,321		77,321		77,321
Interest rate swap agreements	20,119		20,119		21,624		21,624
Forward sale commitments	290		290		84		84
Interest rate locks	42		42		42		42

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.

28

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 of subordinated debentures is estimated to equal their par amount as these instruments have floating interest rates based upon LIBOR and are callable at any time. 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 compensation during the highest five consecutive years during the last ten consecutive years of employment. Beginning on April 1, 2006, eligible compensation was limited to $50,000 per year. The Company does not expect to make a contribution in 2014 because the plan’s funding credit balance will be applied toward reducing the contribution requirement. The Company’s expected long-term rate of return on plan assets is 7.25%.

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

Net periodic benefit cost includes the following components:

(dollars in thousands)	Three Months Ended March 31,
	2014			2013
Service cost	$	55		$	41
Interest cost	603			558
Expected return on plan assets	(735		)	(734		)
Amortization of unrecognized net actuarial loss	77			158
Net periodic benefit cost	$	—		$	23

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 March 31, 2014, 0.9 million of these shares remain available for issuance.  The Company has 1.7 million awards expiring during the twelve months ending March 31, 2015.

On April 22, 2014, shareholders approved the National Penn Bancshares, Inc. 2014 Long-Term Incentive Compensation Plan ("2014 Plan") to replace the expiring 2005 Plan. Under the terms of the 2014 Plan, an additional 2.3 million shares will be subject to awards, plus any common shares that were authorized for issuance under the 2005 Plan that, as of the effective date of the 2014 Plan, remain available for issuance. Due to the approval of the 2014 Plan, no additional shares will be issued under the 2005 Plan. The effective date of the 2014 Plan is April 22, 2014 and will remain in effect until all awards granted under the 2014 Plan have been paid or otherwise disposed of in accordance with the provisions of the 2014 Plan, except that no awards may be granted on or after April 22, 2024.

As of March 31, 2014, there was approximately $1.9 million of total unrecognized compensation cost related to unvested stock options and approximately $7.1 million of unrecognized compensation cost for other share-based awards that is expected to be recognized within approximately three years.

29

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:

(dollars in thousands)	Three Months Ended March 31,
	2014		2013
Share-based compensation expense	$	1,014	$	820
Proceeds from stock options exercised	191		398
Intrinsic value of stock options exercised	65		150

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 March 31, 2014
(dollars in thousands)	Community Banking			Other			Consolidated
Total assets	$	8,519,083		$	38,298		$	8,557,381
Total deposits	6,139,424			—			6,139,424
Net interest income (expense)	62,806			(517		)	62,289
Total non-interest income	10,407			11,071			21,478
Total non-interest expense	43,341			8,996			52,337
Net income	22,007			703			22,710
	As of and for the Three Months Ended March 31, 2013
(dollars in thousands)	Community Banking			Other			Consolidated
Total assets	$	8,282,478		$	41,299		8,323,777
Total deposits	6,184,060			—			6,184,060
Net interest income (expense)	62,868			(1,244		)	61,624
Total non-interest income	14,716			10,861			25,577
Total non-interest expense	107,742			9,580			117,322
Net income (loss)	(18,668		)	1,264			(17,404		)

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 months endedMarch 31, 2014, 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 adjusted return on assets excludes the effects of certain gains and losses, adjusted for applicable taxes. Adjusted net income and adjusted return on assets provides a method to assess earnings performance by excluding items that 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 Allentown, 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 is designed to enhance shareholder value by operating a highly profitable financial services company within the markets it serves. Specifically, management is focused on increasing market penetration in selected geographic areas and achieving excellence in both retail and commercial lines of business.  The Company also intends to grow revenue through appropriate and targeted acquisitions, through expanding into new geographical markets, or through further penetrating existing markets or business lines.

At March 31, 2014, National Penn Bank operated 119 retail branch offices, of which 118 are located in Pennsylvania and one is located in Maryland. As part of a restructuring plan announced during the fourth quarter of 2013, the Company plans to close 8 branches during the second quarter of 2014.

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.

32

Overview

	Three Months Ended
(dollars in thousands, except per share data)	March 31, 2014			December 31, 2013			March 31, 2013
EARNINGS
Total interest income	$	70,133		$	72,085		$	72,595
Total interest expense	7,844			8,013			10,971
Net interest income	62,289			64,072			61,624
Provision for loan losses	1,251			1,000			1,500
Net interest income after provision for loan losses	61,038			63,072			60,124
Net gains from fair value changes of subordinated debentures	—			—			2,111
Net gains on investment securities	8			—			25
Other non-interest income	21,470			22,714			23,441
Loss on debt extinguishment	—			—			64,888
Corporate reorganization expense	—			6,000			—
Other non-interest expense	52,337			51,833			52,434
Income (loss) before income taxes	30,179			27,953			(31,621		)
Income tax expense (benefit)	7,469			6,741			(14,217		)
Net income (loss)	$	22,710		$	21,212		$	(17,404	)
Basic earnings per share	$	0.16		$	0.15		$	(0.12	)
Diluted earnings per share	0.16			0.15			(0.12		)
Dividends per share	0.10			0.10			—			(a)
Net interest margin	3.44		%	3.51		%	3.49		%
Efficiency ratio (n)	59.60		%	57.00		%	58.61		%
Return on average assets	1.09		%	1.00		%	NM
Adjusted return on average assets (n)	1.09		%	1.19		%	1.14		%
Asset Quality Metrics
Allowance / total loans	1.73		%	1.81		%	2.04		%
Non-performing loans / total loans	0.89		%	0.99		%	1.02		%
Delinquent loans / total loans	0.31		%	0.55		%	0.46		%
Allowance / non-performing loans	194		%	183		%	199		%
Annualized net charge-offs / average loans	0.33		%	0.41		%	0.41		%
(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.
(n) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Part I, Item 2.

• For the three months endedMarch 31, 2014, the Company recorded net income of $22.7 million, or $0.16 per diluted share, compared to a net loss of $17.4 million, or $(0.12) per diluted share, in the comparable prior year period. The net loss in the comparable prior year period was the result of 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 since 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 $62.3 million for the three months endedMarch 31, 2014 compared to $61.6 million for the three months endedMarch 31, 2013. Average earning assets increased$153 million to $7.8 billion. The Company's net interest margin declined five basis points to 3.44% for the three months endedMarch 31, 2014, compared to 3.49% for the three months ended March 31, 2013 as the prolonged low interest rate environment continued to impact loan and investment yields.

• The Company continued to experience improvements in asset quality. Classified loans declined by 28.1% since March 31, 2013 and non-performing loans declined to 0.89% of total loans at March 31, 2014, compared to 1.02% at March 31, 2013.

33

• Other non-interest income totaled $21.5 million for the three months endedMarch 31, 2014, a decrease of $2.0 million, when compared to the prior year period. The decrease is attributable to a $0.5 million loss on an unconsolidated equity investment incurred during the current year period and a decrease in mortgage banking income of $1.1 million when compared to the three months endedMarch 31, 2013.

• Other non-interest expense for the three months endedMarch 31, 2014 remained stable at $52.3 million compared to $52.4 million for the three months endedMarch 31, 2013.

Adjusted net income and adjusted return on average assets⁽ⁿ⁾ 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⁽ⁿ⁾.

	Three Months Ended
(dollars in thousands, except per share data)	March 31, 2014			December 31, 2013				March 31, 2013
Adjusted net income reconciliation
Net income (loss)	$	22,710		$	21,212			$	(17,404	)
After tax unrealized fair value gain on subordinated debentures	—			—				(1,372		)
After tax loss on debt extinguishment	—			—				42,177
After tax corporate reorganization expense	—			3,900				—
Adjusted net income	$	22,710		$	25,112			$	23,401
Earnings per share
Net income (loss)	$	0.16		$	0.15			$	(0.12	)
After tax unrealized fair value gain on subordinated debentures	—			—				(0.01		)
After tax loss on debt extinguishment	—			—				0.29
After tax corporate reorganization expense	—			0.03				—
Adjusted net income	$	0.16		$	0.17		(o)	$	0.16
Average assets	$	8,479,686		$	8,385,094			$	8,298,815
Adjusted return on average assets	1.09		%	1.19		%		1.14		%
(n) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Part I, Item 2.
(o) Difference in summation of quarterly adjusted net income due to rounding.

Adjusted net income in the fourth quarter of 2013 excluded the effects of the corporate reorganization expense of $6.0 million ($3.9 million after-tax). Adjusted net income in the first quarter of 2013 excluded the loss on debt extinguishment of $64.9 million ($42.2 million after-tax) and the gain on the Company's subordinated debentures accounted for at fair value of $2.1 million ($1.4 million after-tax).

First quarter 2014 adjusted net income remained relatively stable when compared to the three months ended March 31, 2013, as asset quality continues to improve and expense levels remain well controlled. The $0.7 milliondecrease in adjusted net income for the three months ended March 31, 2014, when compared to the prior year period, is related to a $0.5 million loss on an unconsolidated equity investment.

34

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SUMMARY BALANCE SHEET

(dollars in thousands, except per share data)	March 31, 2014			December 31, 2013			March 31, 2013
Total cash and cash equivalents	$	184,326		$	283,523		$	180,612
Investment securities and other securities	2,424,404			2,396,298			2,333,548
Total loans	5,377,727			5,338,219			5,249,773
Total assets	8,557,381			8,591,848			8,323,777
Deposits	6,139,424			6,072,578			6,184,060
Borrowings	1,245,925			1,282,289			922,092
Shareholders' equity	1,082,449			1,131,866			1,136,798
Tangible book value per common share (n)	$	5.88		$	5.94		$	5.97
Tangible common equity / tangible assets (n)	9.86		%	10.41		%	10.79		%
(n) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Part I, Item 2.

Assets

Loans and Allowance for Loan Losses

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

Federal Reserve economic data regarding the Third District, in which the Company operates, suggests the following trends:

• Contacts in the Third District indicate that many sectors grew at a moderate pace after recovering from the economic disruptions caused by severe winter weather. Auto and general retail sales reported volumes rebounded to prior year levels while the construction and real estate sectors resumed growth at a slight pace.

• Financial firms reported slight increases in total loan volume as credit quality continued to improve.

• The overall outlook for most sectors remains positive as contacts continue to express confidence in the underlying economy.

35

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)	March 31, 2014		December 31, 2013		Increase/(decrease)
Commercial and industrial	$	2,504,594	$	2,460,664	$	43,930		1.8	%
CRE - permanent	1,021,271		994,838		26,433			2.7	%
CRE - construction	183,586		198,334		(14,748		)	(7.4	)%
Commercial real estate	1,204,857		1,193,172		11,685			1.0	%
Commercial	3,709,451		3,653,836		55,615			1.5	%
Residential mortgages	648,195		652,225		(4,030		)	(0.6	)%
Home equity	753,297		762,608		(9,311		)	(1.2	)%
All other consumer	261,613		264,599		(2,986		)	(1.1	)%
Consumer	1,663,105		1,679,432		(16,327		)	(1.0	)%
Loans	$	5,372,556	$	5,333,268	$	39,288		0.7	%
Allowance for loan losses	93,252		96,367		(3,115		)	(3.2	)%
Loans, net	$	5,279,304	$	5,236,901	$	42,403		0.8	%
Loans held-for-sale	$	5,171	$	4,951	$	220		4.4	%

Loans increased by $39.3 million, or 0.7%, to $5.4 billion at March 31, 2014 from December 31, 2013. Emphasis on loans to commercial customers resulted in loan growth of $55.6 million, or 1.5%, from December 31, 2013. The growth in the commercial portfolio was offset by payments and prepayments of consumer loans and sales of residential mortgage loans in the secondary market of $16.3 million during the same period. Additionally, loan growth was inclusive of a $17.1 million, or 8.9%, decrease to classified loans since December 31, 2013. Net charge-offs during the three months ended March 31, 2014 totaled $4.4 million compared to $5.3 million for the prior year period, and the provision was $1.3 million during the three months ended March 31, 2014, resulting in a decrease to the allowance for loan losses, which totaled $93.3 million at March 31, 2014.

The following table demonstrates select asset quality metrics:

(dollars in thousands)	March 31, 2014			December 31, 2013
Non-performing loans (g)	$	48,112		$	52,591
Non-performing loans to total loans	0.89		%	0.99		%
Delinquent loans	$	16,819		$	29,435
Delinquent loans to total loans	0.31		%	0.55		%
Classified loans (p)	$	174,465		$	191,589
Classified loans to total loans	3.24		%	3.59		%
Tier 1 capital and allowance	$	981,817		$	1,038,293
Classified loans to Tier 1 capital and allowance	17.77		%	18.45		%
Total loans	$	5,377,727		$	5,338,219
(g) Includes non-accrual residential mortgage and home equity loans held-for-sale of $1.5 million and $0.6 million, respectively, at March 31, 2014.
(p) Includes non-performing loans.

36

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

(dollars in thousands)	March 31, 2014			December 31, 2013
Non-accrual commercial and industrial	$	13,501		$	14,935
Non-accrual CRE-permanent	3,513			4,258
Non-accrual CRE-construction	10,425			12,128
Total non-accrual commercial real estate	13,938			16,386
Non-accrual residential mortgages	6,779			7,037
Non-accrual home equity	4,041			4,787
All other non-accrual consumer	1,701			1,731
Total non-accrual consumer	12,521			13,555
Total non-accrual loans (g)	39,960			44,876
Restructured loans (q)	8,152			7,715
Total non-performing loans	48,112			52,591
Other real estate owned and repossessed assets	2,138			1,278
Total non-performing assets	50,250			53,869
Loans 90+ days past due & still accruing	2,310			3,466
Total non-performing assets and loans 90+ days past due	$	52,560		$	57,335
Total loans	$	5,377,727		$	5,338,219
Average total loans	5,342,648			5,256,841
Allowance for loan losses	93,252			96,367
Allowance for loan losses to:
Non-performing assets and loans 90+ days past due	177		%	168		%
Non-performing loans	194		%	183		%
Total loans	1.73		%	1.81		%
(g) Includes non-accrual residential mortgage and home equity loans held-for-sale of $1.5 million and $0.6 million, respectively, at March 31, 2014.
(q) Restructured loans at March 31, 2014, included $0.9 million of commercial loans and $7.3 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)	March 31, 2014			December 31, 2013
Total non-accrual loans (g)	$	39,960		$	44,876
Non-accrual loans with partial charge-offs	16,805			13,671
Life-to-date partial charge-offs on non-accrual loans	20,121			20,049
Charge-off rate of non-accrual loans	54.5		%	59.5		%
Specific reserves on non-accrual loans	$	4,613		$	5,761
(g) Includes non-accrual residential mortgage and home equity loans held-for-sale of $1.5 million and $0.6 million, respectively, at March 31, 2014.

37

At March 31, 2014, the Company’s non-accrual loans totaled $40.0 million and included $16.8 million of non-accrual loans which have been partially charged-off by 54.5%, or $20.1 million. Non-accrual loans include residential mortgage and home equity held-for-sale loans of $1.5 million and $0.6 million, respectively, as of March 31, 2014. 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 0.89% of total loans at March 31, 2014. Additionally, non-performing loans are included in impaired loans and are evaluated individually when determining the allowance. Impaired loans totaled $51.0 million, inclusive of $2.1 million of non-accrual held-for-sale loans, at March 31, 2014, and had a specific reserve in the allowance of $7.3 million related to $24.8 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
(dollars in thousands)	March 31, 2014			December 31, 2013			March 31, 2013
Commercial and industrial	$	1,150		$	5,157		$	1,869
CRE - permanent	423			(523		)	282
CRE - construction	30			(167		)	318
Commercial real estate	453			(690		)	600
Residential mortgages	1,681			56			1,333
Home equity	784			439			747
All other consumer	298			434			742
Consumer	2,763			929			2,822
Net loans charged-off	$	4,366		$	5,396		$	5,291
Net charge-offs (annualized) to:
Total loans	0.33		%	0.40		%	0.41		%
Average total loans	0.33		%	0.41		%	0.41		%

Net loan charge-offs totaled $4.4 million for the three months endedMarch 31, 2014, a $1.0 million, or 19.1% decrease from December 31, 2013, and a $0.9 million, or 17.5%, decrease compared to the prior year period. The decrease in net charge-offs is the result of continued credit quality improvement. Annualized net charge-offs as a percentage of average total loans were 0.33% for the first quarter of 2014 compared to 0.41% for both the same period of 2013 and for the linked quarter.

38

Changes in the allowance for loan losses by loan portfolio:

(dollars in thousands)	Three Months Ended March 31,
	2014		2013
Balance at beginning of period	$	96,367	$	110,955
Charge-offs:
Commercial and industrial	1,335		2,314
Commercial real estate	527		759
Consumer	3,156		3,309
Total charge-offs	5,018		6,382
Recoveries:
Commercial and industrial	185		445
Commercial real estate	74		159
Consumer	393		487
Total recoveries	652		1,091
Net charge-offs	4,366		5,291
Provision charged to expense	1,251		1,500
Balance at end of period	$	93,252	$	107,164

The following table presents the components of the allowance:

(dollars in thousands)	March 31, 2014		December 31, 2013
Specific reserves	$	7,253	$	8,304
Allocated reserves	75,505		77,115
Unallocated reserves	10,494		10,948
Total allowance for loan losses	$	93,252	$	96,367

The allowance decreased to $93.3 million at March 31, 2014 and represented 1.73% of total loans and 194% of non-performing loans, compared to $96.4 million at December 31, 2013, or 1.81% of total loans and 183% 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 $1.3 million for the three months endedMarch 31, 2014, a decrease of $0.2 million compared to the three months endedMarch 31, 2013.

39

Liabilities

Liabilities totaled $7.5 billion at March 31, 2014, an increase of $15.0 million from December 31, 2013. The increase was primarily due to a $66.8 million increase in deposits, offset by a $36.4 million reduction in borrowings, and a $15.5 million reduction in other liabilities. The reduction in borrowings from December 31, 2013 to March 31, 2014 is the result of a decrease of $45.8 million in FHLB advances offset by an increase of $9.4 million in customer repurchase agreements.

Deposits, the Company’s primary source of funding, increased$66.8 million during the first three months of 2014. The change in deposits from December 31, 2013 to March 31, 2014 consists of an increase in non-time deposits of $102 million, or 2.1%, offset by a decline in time deposits of $35.1 million, or 2.8%. The significant increase in the current quarter of non-interest bearing deposits of $58.5 million, or 6.0%, can be attributable to fluctuations relating to seasonality, consistent with prior years.

(dollars in thousands)	March 31, 2014			December 31, 2013			Increase/(decrease)
Non-interest bearing deposits	$	1,028,572		$	970,051		$	58,521		6.0	%
NOW accounts	1,667,272			1,655,425			11,847			0.7	%
Money market accounts	1,680,900			1,670,035			10,865			0.7	%
Savings accounts	547,255			526,576			20,679			3.9	%
Time deposits less than $100	870,921			896,700			(25,779		)	(2.9	)%
Time deposits $100 or greater	344,504			353,791			(9,287		)	(2.6	)%
Total deposits	$	6,139,424		$	6,072,578		$	66,846		1.1	%
Non-time deposits / total deposits	80.2		%	79.4		%

Shareholders’ Equity

Shareholders’ equity totaled $1.1 billion at March 31, 2014, a decrease of $49.4 million from December 31, 2013. Significant activity during the three months ended March 31, 2014 included: 

• Net income of $22.7 million,

• Other comprehensive income of $15.9 million,

• Cash dividends paid to common shareholders of $13.9 million,

• Shares issued under share-based plans, net of taxes, of $1.3 million, and

• The repurchase of 7 million common shares at a cost of $75.4 million.

40

RESULTS OF OPERATIONS

Net Interest Income

The following table presents average balances, average yields, and net interest margin information for the three months endedMarch 31, 2014 as compared to the same period in 2013.  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 Three Months Ended March 31,
	2014							2013
(dollars in thousands)	Average Balance			Interest		Average Rate		Average Balance			Interest		Average Rate
Interest Earning Assets:
Interest earning deposits at banks	$	69,222		$	26	0.15	%	$	119,834		$	75	0.25	%
U.S. Government agencies	998			5		2.03	%	1,019			11		4.38	%
Mortgage-backed securities/collateralized mortgage obligations	1,712,961			10,113		2.39	%	1,555,340			8,786		2.29	%
State and municipal*	614,713			10,102		6.66	%	688,290			11,195		6.60	%
Other bonds and securities	80,615			753		3.79	%	80,576			638		3.21	%
Total investments	2,409,287			20,973		3.53	%	2,325,225			20,630		3.60	%
Commercial loans*	3,667,382			35,302		3.90	%	3,528,550			37,813		4.35	%
Installment loans	1,022,174			10,512		4.17	%	1,015,607			10,398		4.15	%
Mortgage loans	653,092			7,382		4.58	%	678,858			8,070		4.82	%
Total loans	5,342,648			53,196		4.04	%	5,223,015			56,281		4.37	%
Total earning assets	7,821,157			74,195		3.85	%	7,668,074			76,986		4.07	%
Allowance for loan losses	(96,367		)					(111,662		)
Non-interest earning assets	754,896							742,403
Total assets	$	8,479,686						$	8,298,815
Interest Bearing Liabilities:
Interest bearing deposits	$	5,058,240		$	4,773	0.38	%	$	5,098,405		$	5,914	0.47	%
Customer repurchase agreements	541,041			393		0.29	%	547,706			498		0.37	%
Repurchase agreements	50,000			601		4.87	%	135,454			719		2.15	%
Short-term borrowings	—			—		—	%	39,200			41		0.42	%
Federal Home Loan Bank advances	596,818			1,548		1.05	%	262,067			2,334		3.61	%
Subordinated debentures	77,321			529		2.77	%	125,207			1,465		4.75	%
Total interest bearing liabilities	6,323,420			7,844		0.50	%	6,208,039			10,971		0.72	%
Non-interest bearing deposits	968,129							876,700
Other non-interest bearing liabilities	94,340							71,247
Total liabilities	7,385,889							7,155,986
Equity	1,093,797							1,142,829
Total liabilities and equity	$	8,479,686						$	8,298,815
NET INTEREST INCOME/MARGIN (FTE)				66,351		3.44	%				66,015		3.49	%
Tax equivalent interest				4,062							4,391
Net interest income				$	62,289						$	61,624

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

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

41

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)	Three Months Ended March 31, 2014 compared to 2013
Increase (decrease) in:	Volume			Rate			Total
Interest income:
Interest earning deposits at banks	$	(25	)	$	(24	)	$	(49	)
U.S. Government agencies	—			(6		)	(6		)
Mortgage-backed securities/collateralized mortgage obligations	918			409			1,327
State and municipal	(1,208		)	115			(1,093		)
Other bonds and securities	—			115			115
Total investments	(290		)	633			343
Commercial loans	1,446			(3,957		)	(2,511		)
Installment loans	67			47			114
Mortgage loans	(300		)	(388		)	(688		)
Total loans	1,213			(4,298		)	(3,085		)
Total interest income	898			(3,689		)	(2,791		)
Interest expense:
Interest bearing deposits	(46		)	(1,095		)	(1,141		)
Customer repurchase agreements	(6		)	(99		)	(105		)
Repurchase agreements	(645		)	527			(118		)
Short-term borrowings	(41		)	—			(41		)
Federal Home Loan Bank advances	1,622			(2,408		)	(786		)
Subordinated debentures	(449		)	(487		)	(936		)
Total borrowed funds	481			(2,467		)	(1,986		)
Total interest expense	435			(3,562		)	(3,127		)
Increase (decrease) in net interest income (FTE)	$	463		$	(127	)	$	336

For the three months endedMarch 31, 2014, net interest income was $62.3 million, an increase of $0.7 million, or 1.1%, compared to the three months ended March 31, 2013. While net interest income increased, net interest margin for the tthree months endedMarch 31, 2014 declined 5 basis points to 3.44% from 3.49% for the prior year period as average total earning assets increased $153 million, or 2.0%.

While interest income for the three months endedMarch 31, 2014 declined by $2.8 million on an FTE basis , or 3.4%, when compared to the prior year period, the decline was offset by various initiatives undertaken to manage the impact of the prolonged low interest rate environment as interest expense declined by $3.1 million, or 28.5%, to $7.8 million for the three months endedMarch 31, 2014, compared to $11.0 million for the prior year period. These initiatives included:

• Reducing the cost of interest bearing deposits from 0.47% for the three month period ended March 31, 2013, to 0.38% for the three months endedMarch 31, 2014, a decline of 9 basis points and $1.1 million of interest expense.

• Interest expense on borrowed funds for the three months endedMarch 31, 2014 decreased by $2.0 million when compared to the prior year period. The extinguishment of $400 million of FHLB advances and the redemption of the NPB Capital Trust II trust preferred securities during the first quarter of 2013 contributed to this decline.

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Provision for Loan Losses

Provision for the three months endedMarch 31, 2014 was $1.3 million, compared to $1.5 million for the same period in 2013. A $1.0 million reduction to net charge-offs at March 31, 2014 from December 31, 2013, combined with a continued decline of classified loans and improving asset quality metrics resulted in a reduction to the allowance, which totaled $93.3 million at March 31, 2014. The allowance as a percentage of non-performing loans decreased to 194% at March 31, 2014 from 199% at March 31, 2013. The allowance amounted to 1.73% of total loans at March 31, 2014 compared to 1.81% at December 31, 2013.  For additional analysis of the allowance refer to “Loans and Allowance for Loan Losses”.

Non-Interest Income

(dollars in thousands)	Three Months Ended March 31,
	2014			2013			Increase/(decrease)
Wealth management	$	6,866		$	6,831		$	35		0.5	%
Service charges on deposit accounts	3,384			3,770			(386		)	(10.2	)%
Insurance commissions and fees	3,597			3,267			330			10.1	%
Cash management and electronic banking fees	4,526			4,451			75			1.7	%
Mortgage banking	716			1,855			(1,139		)	(61.4	)%
Bank owned life insurance	1,198			1,228			(30		)	(2.4	)%
Earnings (losses) of unconsolidated investments	(477		)	(14		)	(463		)	NM
Other operating income	1,660			2,053			(393		)	(19.1	)%
Net gains from fair value changes of subordinated debentures	—			2,111			(2,111		)	(100.0	)%
Net gains on sales of investment securities	8			25			(17		)	(68.0	)%
Total non-interest income	$	21,478		$	25,577		$	(4,099	)	(16.0	)%
"NM" - Denotes a value displayed as a percentage change is not meaningful

Non-interest income for the three months endedMarch 31, 2014 and 2013 totaled $21.5 million and $25.6 million, respectively, and its components changed primarily due to the following items:

• Mortgage banking income decreased $1.1 million for the three months endedMarch 31, 2014 compared to the three months endedMarch 31, 2013 due to lower volumes of new mortgage applications.

• The three months endedMarch 31, 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").

• The Company experienced a $0.5 million loss on an unconsolidated equity investment for the three months endedMarch 31, 2014.

• Revenue generated from service charges on deposit accounts was impacted during the first quarter of 2014 by severe weather conditions and trends in customer behavior.

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Non-Interest Expense

(dollars in thousands)	Three Months Ended March 31,
	2014			2013			Increase/(decrease)
Salaries, wages and employee benefits	$	29,201		$	29,230		$	(29	)	(0.1	)%
Premises and equipment	8,212			7,491			721			9.6	%
FDIC insurance	1,317			1,213			104			8.6	%
Other operating expenses	13,607			14,500			(893		)	(6.2	)%
Loss on debt extinguishment	—			64,888			(64,888		)	NM
Total non-interest expense	$	52,337		$	117,322		$	(64,985	)	NM
"NM" - Denotes a value displayed as a percentage change is not meaningful
Reconciliation Table For Non-GAAP Financial Measures - Efficiency Ratio (n)
	Three Months Ended March 31,
Efficiency ratio calculation	2014			2013
Non-interest expense	$	52,337		$	117,322
Less:
Loss on debt extinguishment	—			64,888
Operating expenses	$	52,337		$	52,434
Net interest income (taxable equivalent)	$	66,351		$	66,015
Non-interest income	21,478			25,577
Less:
Net gains from fair value changes of subordinated debentures	—			2,111
Net gains on investment securities	8			25
Adjusted revenue	$	87,821		$	89,456
Efficiency ratio	59.60		%	58.61		%
(n) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Part I, Item 2.

Non-interest expense totaled $52.3 million for the three months ended March 31, 2014, compared to $117 million for the prior year period. The loss on debt extinguishment during the first quarter of 2013 was related to the repayment of $400 million of FHLB advances. Continued focus on expense controls resulted in stable operating expenses⁽ⁿ⁾ of $52.3 million, as demonstrated by an efficiency ratio⁽ⁿ⁾ of 59.60% for the first quarter of 2014, consistent with the prior year period.

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Income Tax Expense

Income tax expense for the three months endedMarch 31, 2014 was $7.5 million compared to a benefit of $14.2 million for the three months endedMarch 31, 2013. The prior year benefit was the result of the loss incurred upon the extinguishment of $400 million of FHLB advances. The effective tax rate for the first quarter of 2014 was 24.8% compared to 44.9% for the prior year period. Exclusive of non-recurring items, the effective tax rates are comparable for the two periods. The Company’s net deferred tax asset decreased to $65.8 million at March 31, 2014, primarily from fluctuations in interest rates which 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 March 31, 2014:

			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	$	1,215,425	$	815,467	$	304,062	$	95,720	$	176
Repurchase agreements	50,000		50,000		—		—		—
Federal Home Loan Bank advances	557,434		498,151		4,709		54,543		31
Subordinated debentures	77,321		—		—		—		77,321
Minimum annual rentals on non-cancelable operating leases	58,070		6,512		11,732		9,855		29,971
Total	$	1,958,250	$	1,370,130	$	320,503	$	160,118	$	107,499

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

The Company’s primary source of liquidity is deposits obtained from retail, business and institutional banking customers. The Company supplements liquidity with a mix of wholesale funding. The Company’s wholesale sources of funds 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 $99.2 million of cash and cash equivalents during the three month period ended March 31,2014, compared to deploying $248 million of net cash for the three months ended March 31, 2013. Operating activities generated $10.6 million of net cash year-to-date 2014, compared to $16.2 million for the same period in 2013. During the current year, cash was deployed in the following ways:

Investing activities

• $81.1 million of investment security purchases

• $45.5 million net increase in loans

Financing activities

• $75.4 million for the repurchase of common stock

• $45.6 million net decrease of FHLB advances

• $35.1 million decrease in time deposits

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During the three months ended March 31, 2014, cash was generated from the following additional sources:

Investing activities

• $76.7 million of proceeds from maturities and repayments of investment securities

Financing activities

• $102 million increase in transaction and savings deposit accounts

Capital

At March 31, 2014, 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
	March 31, 2014		December 31, 2013		March 31, 2014		December 31, 2013		March 31, 2014		December 31, 2013
National Penn	10.83	%	11.63	%	14.44	%	15.46	%	15.69	%	16.72	%
National Penn Bank	10.14	%	9.85	%	13.54	%	13.15	%	14.79	%	14.40	%
"Well Capitalized" institution under banking regulations	5.00	%	5.00	%	6.00	%	6.00	%	10.00	%	10.00	%

In January of 2014, the Company announced the repurchase of 7 million shares or approximately 27% of the outstanding common shares owned by Warburg Pincus. The repurchase is part of the Company's previously announced capital management strategy and deployed $75.4 million of excess capital.

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 March 31, 2014:

(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	$	1,769,583	$	637,222	$	288,742	$	155,753	$	687,866
Letters of credit	137,043		105,944		31,034		51		14
Total	$	1,906,626	$	743,166	$	319,776	$	155,804	$	687,880

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 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 9 to the consolidated financial statements.

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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, which include:

• 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.

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

	Change in Net Interest Income
Change in Interest Rates	March 31,
(in basis points)	2014	2013
+300	1%	3%
+200	1%	2%
+100	0%	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% and 5% based upon net interest income for the twelve months ended March 31, 2014 and 2013, respectively.

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The Federal Reserve continues to indicate that the federal funds rate will remain at lower levels for a considerable time. As illustrated in the table above, based upon current interest rate modeling forecasts the Company continues to have a modest asset sensitive interest rate risk profile.

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 March 31, 2014, 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 March 31, 2014.

There were no changes in National Penn’s internal control over financial reporting during the quarter ended March 31, 2014 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.

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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 these conditions may not 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. 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 National Penn) 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 financial 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 climate 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. Issues with respect to the U.S. government’s debt ceiling and other budgetary and spending matters could contribute to the risk of slower economic growth. The nature and ultimate resolution of these issues, or a failure to achieve a timely and effective resolution, may adversely affect the U.S. economy through possible consequences including further downgrades in the ratings for U.S. Treasury securities, government shutdowns, or substantial spending cuts resulting from sequestration. 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.

National Penn is subject to pervasive and comprehensive federal and state regulatory requirements and possible regulatory enforcement actions, which may harm its business and financial results, its reputation, and its share price.

National Penn is supervised by the Federal Reserve, and National Penn Bank is supervised by the Office of the Comptroller of the Currency (the “OCC”). Accordingly, National Penn and its subsidiaries are subject to extensive federal and state legislation, regulation, and supervision that govern almost all aspects of business operations, which puts each of them at risk of being the subject of a formal or informal supervisory enforcement action. The expansive regulatory framework is primarily designed to protect consumers, depositors and the government's deposit insurance funds, and to accomplish other governmental policy objectives such as combating terrorism; that framework is not designed to protect shareholders.  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.  While National Penn has policies and procedures designed to prevent regulatory violations, there is a risk that such violations will occur. 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 adversely affect 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 U.S. debt ceiling and budget deficit concerns cannot be predicted at this time, and such legislation is subject to change.

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 adversely 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.

The impact of legislation, including proposed legislation, and government programs adopted in response to the economic downturn, the U.S. debt ceiling and budget deficit concerns cannot be predicted at this time, and such legislation is subject to change.  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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Our credit quality has been and may continue to be adversely affected by economic conditions.

Economic conditions have adversely impacted National Penn’s business and its results of operations, including the quality of National Penn’s credit portfolio. Beginning in late 2008, we experienced a downturn in the overall credit performance of our loan portfolio. Our loan portfolio has improved in credit quality since the downturn; however, in the aftermath of recessionary conditions, national and regional unemployment remains high and individuals have fewer sources of liquidity, many borrowers may continue to have a decreased ability to meet their loan obligations. Delayed improvement or another period of deterioration in the quality of our 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 our capital, financial condition and results of operations.

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

As of March 31, 2014, $3.7 billion, or 69.0%, of National Penn’s loan portfolio consisted of commercial real estate loans and commercial and industrial loans. Subject to market conditions, we intend to continue 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.

Our allowance for loan losses may prove inadequate or we may be required to make further additions to our allowance for loan losses because of credit risk exposure.

We maintain an allowance for possible loan losses. 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. Our primary source of income currently is net interest income. Net interest income 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. Net interest margin is affected by changes in market interest rates, because different types of assets and liabilities may react differently, and at different times, to market rate changes. When our interest-bearing liabilities reprice or mature more quickly than interest-earning assets in a period, an increase in market interest rates could reduce our net interest income. Similarly, when interest-earning assets reprice or mature more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income. These rates are sensitive to many factors that are beyond National Penn’s control, including general economic conditions, and monetary and fiscal policies of various governmental regulatory agencies, including the Federal Reserve.

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We attempt to manage our risk from changes in market interest rates by adjusting the rates, maturity, repricing and balance of the different types of interest-earning assets and interest-bearing liabilities. 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 materially adversely affect our 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.

As part of our corporate relocation plan, announced in October 2012, we opened a new Reading Area Business Center and moved our corporate headquarters to Allentown, Pennsylvania in the first quarter of 2014, 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. In addition, the process of moving various business units into our new 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, our 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 caused 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. Delayed improvement or another decline in the regional real estate market could again harm our 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 another decline in real estate values in our market area, the collateral for National Penn's loans will provide less security. As a result, our ability to recover on defaulted loans by selling the underlying real estate will be diminished, and we will be more likely to suffer losses on defaulted loans.

Declines in asset values may result in impairment charges and adversely impact the value of our 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. We periodically, but not less than quarterly, evaluate investments and other assets for impairment indicators. We may be required to record additional impairment charges if investments suffer a decline in value that is considered other-than-temporary. If we determine that a significant impairment has occurred, we 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.

Our investment portfolio includes approximately $37.6 million in capital stock of the Federal Home Loan Bank (“FHLB”) of Pittsburgh as of March 31, 2014. This stock ownership is required for National Penn to qualify for membership in the FHLB system, which enables it to borrow funds under the FHLB advance program. If the FHLB 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 FHLB. If the FHLB was to cease operations, or if National Penn was required to write-off its investment in the FHLB, National Penn's business, financial condition, liquidity, capital and results of operations may be materially and adversely affected.

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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 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 investigate or 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 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.

National Penn may incur impairments to goodwill.

At March 31, 2014, 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 March 31, 2014, National Penn had a deferred tax asset of approximately $65.8 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 requires 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. 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. Additionally, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. 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 and its subsidiaries face intense competition from 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. As a result, National Penn may not be able to attract or retain talented employees, 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. 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.

Interruptions to or security breaches of National Penn's information systems could 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. Fraudulent activity committed against National Penn or its clients, such as check fraud, electronic fraud, wire fraud, “phishing”, social engineering or other deceptive acts, could also jeopardize the security of information stored in and transmitted through National Penn’s computer systems and network infrastructure. 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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We rely on third-party vendors to provide key components of our business infrastructure.

We rely heavily on third-party service providers for much of our communications, information, operating and financial control systems technology, including customer relationship management, internet banking, website, general ledger, investment, deposit, loan servicing and loan origination systems. While we have selected these third-party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of inadequate or interrupted service, could adversely affect our ability to deliver products and services to our customers and otherwise conduct our business. Financial or operational difficulties of a third-party vendor could also hurt our operations if those difficulties interfere with the vendor’s ability to serve us, and replacing these third party vendors could result in significant delay and expense. Accordingly, use of such third parties creates an unavoidable inherent risk to our business operations as well as reputational risk.

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. National Penn's continued success depends, 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.

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 139 million shares were outstanding as of March 31, 2014, 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 March 31, 2014, 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 January 2014, the Board of Directors approved a first quarter 2014 cash dividend of $0.10 per share, and in April 2014 the Board of Directors declared a second quarter 2014 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 maintain or increase the level of its dividend.  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.

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

• Significant negative industry or economic trends, including declines 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 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.

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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.

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

The following table provides information on repurchases by National Penn of its common stock in each month of the quarter ended March 31, 2014.

Period	Total No. of Shares Purchased	Weighted-average Price Paid per Share		Total No. of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum No. of Shares that may yet be Purchased Under the Plans or Programs
January 1, 2014 through January 31, 2014	7,000,000	$	10.77	7,000,000	289,810
February 1, 2014 through February 28, 2014	—	—		—	289,810
March 1, 2014 through March 31, 2014	—	—		—	289,810
Total	7,000,000	$	10.77	7,000,000

1. National Penn's current stock repurchase program was announced by the Company on December 20, 2013 and is authorized for the remainder of 2014.

2. National Penn's current stock repurchase program authorizes the repurchase of up to 5% of the outstanding shares as of December 18, 2013, the date of authorization of the repurchase plan by the Board of Directors, or 7,289,810 shares of common stock.

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

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

None.

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Item 6.  Exhibits

3.1	Articles of Incorporation, as amended and restated, of National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 3.1 to National Penn's Current Report on Form 8-K dated April 24, 2009 as filed on April 24, 2009.)
3.2	Amendment to Articles of Incorporation of National Penn Bancshares, Inc. (Statement with Respect to Shares) (Incorporated by reference to Exhibit 3.1 to National Penn's Current Report on Form 8-K dated October 27, 2009 as filed on November 2, 2009.)
3.3	Bylaws, as amended and restated, of National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 3.1 to National Penn's Current Report on Form 8-K dated September 25, 2013, as filed on September 30, 2013.)
10.1	Share Repurchase Agreement, dated as of January 27, 2014, by and between Warburg Pincus Private Equity X, LP, Warburg Pincus X Partners, LP and National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 99.2 to National Penn’s Current Report on Form 8-K dated January 27, 2014, as filed on January 28, 2014).
31.1	Certification of President and Chief Executive Officer of National Penn Bancshares, Inc., pursuant to Commission Rule 13a-14(a).
31.2	Certification of Chief Financial Officer of National Penn Bancshares, Inc., pursuant to Commission Rule 13a-14(a).
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.  (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.  (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

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SIGNATURES

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

		NATIONAL PENN BANCSHARES, INC.
		(Registrant)
Date:	May 9, 2014	By:	/s/ Scott V. Fainor
			Name:	Scott V. Fainor
			Title:	President and Chief Executive Officer
Date:	May 9, 2014	By:	/s/ Michael J. Hughes
			Name:	Michael J. Hughes
			Title:	Senior Executive Vice President and
				Chief Financial Officer

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