National Penn Bancshares (NPBC) 10-Q 2015 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

OR

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission File Number: 000-22537-01

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) (Zip Code)

(800) 822-3321

Registrant’s telephone number, including area code

(Former name, former address and former fiscal year, 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 October 30, 2015
Common Stock, no stated par value	140,302,259

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	38
Item 3. Quantitative and Qualitative Disclosures About Market Risk	58
Item 4.  Controls and Procedures	58
PART II - OTHER INFORMATION	59
Item 1.  Legal Proceedings	59
Item 1A.  Risk Factors	59
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 3.  Defaults Upon Senior Securities	62
Item 4.  Mine Safety Disclosures	62
Item 5.  Other Information	62
Item 6.  Exhibits	63
SIGNATURES	64

2

 PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)	Unaudited
	September 30, 2015			December 31, 2014
ASSETS
Cash and due from banks	$	101,975		$	110,784
Interest-earning deposits with banks	119,616			303,055
Total cash and cash equivalents	221,591			413,839
Investment securities available-for-sale, at fair value	1,641,230			1,530,661
Investment securities held-to-maturity
(Fair value $832,935 and $949,935 for 2015 and 2014, respectively)	807,574			921,042
Other securities	54,399			67,512
Loans held-for-sale	6,239			4,178
Loans, net of allowance for loan losses of $83,148 and $90,675 at September 30, 2015 and December 31, 2014, respectively	6,079,141			6,051,604
Premises and equipment, net	109,181			116,414
Accrued interest receivable	29,697			29,491
Bank owned life insurance	196,643			171,775
Other real estate owned and other repossessed assets	4,719			4,867
Goodwill	302,940			302,244
Other intangible assets, net	6,725			8,757
Unconsolidated investments	8,552			8,124
Other assets	118,828			120,357
TOTAL ASSETS	$	9,587,459		$	9,750,865
LIABILITIES
Non-interest bearing deposits	$	1,169,922		$	1,085,158
Interest bearing deposits	5,789,353			5,644,587
Total deposits	6,959,275			6,729,745
Customer repurchase agreements	573,986			607,705
Federal Home Loan Bank advances and other borrowings	583,350			910,378
Senior long-term debt	125,000			125,000
Subordinated debentures	77,321			77,321
Accrued interest payable and other liabilities	110,104			112,077
TOTAL LIABILITIES	8,429,036			8,562,226
SHAREHOLDERS' EQUITY
Common stock, no stated par value; authorized 250,000,000 shares, issued: September 30, 2015 - 152,267,940; December 31, 2014 - 152,267,940	1,389,602			1,390,130
Accumulated deficit	(100,459		)	(135,246		)
Accumulated other comprehensive loss	(5,727		)	(10,991		)
Treasury stock: September 30, 2015 - 11,984,545 shares; December 31, 2014 - 5,131,856 shares	(124,993		)	(55,254		)
TOTAL SHAREHOLDERS' EQUITY	1,158,423			1,188,639
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	9,587,459		$	9,750,865
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 September 30,					Nine Months Ended September 30,
	2015		2014			2015		2014
INTEREST INCOME
Loans, including fees	$	59,735	$	53,857		$	176,236	$	158,915
Investment securities
Taxable	11,180		11,365			35,149		34,180
Tax-exempt	5,577		6,114			17,540		18,847
Deposits with banks	37		32			115		87
Total interest income	76,529		71,368			229,040		212,029
INTEREST EXPENSE
Deposits	4,740		4,483			13,879		13,927
Customer repurchase agreements	403		399			1,210		1,192
Repurchase agreements	—		197			—		1,406
Federal Home Loan Bank advances and other borrowings	1,606		1,297			4,858		4,215
Senior long-term debt	1,366		227			4,098		227
Subordinated debentures	547		535			1,611		1,592
Total interest expense	8,662		7,138			25,656		22,559
Net interest income	67,867		64,230			203,384		189,470
Provision for loan losses	1,000		1,000			3,000		2,251
Net interest income after provision for loan losses	66,867		63,230			200,384		187,219
NON-INTEREST INCOME
Wealth management	6,654		6,945			20,158		20,944
Service charges on deposit accounts	3,468		3,826			10,103		10,744
Insurance commissions and fees	3,128		3,029			9,529		9,835
Cash management and electronic banking fees	5,068		4,720			14,935		14,115
Mortgage banking	1,617		987			4,643		2,639
Bank owned life insurance	2,746		1,238			5,683		3,654
Earnings (losses) of unconsolidated investments	133		(20		)	722		(506		)
Gains on sale of non-performing loans	—		—			—		946
Other operating income	2,212		2,146			6,870		6,366
Net gains on sales of available-for-sale investment securities	—		—			—		8
Total non-interest income	25,026		22,871			72,643		68,745
NON-INTEREST EXPENSE
Salaries, wages and employee benefits	29,570		29,655			89,691		87,743
Premises and equipment	8,189		7,769			25,844		23,690
FDIC insurance	1,220		1,140			3,991		3,657
Other operating expenses	13,398		13,594			41,393		41,519
Merger related expenses	1,840		—			1,840		—
Total non-interest expense	54,217		52,158			162,759		156,609
Income before income taxes	37,676		33,943			110,268		99,355
Income tax expense	9,800		8,623			28,427		25,126
NET INCOME	$	27,876	$	25,320		$	81,841	$	74,229
PER SHARE
Basic earnings	$	0.20	$	0.18		$	0.58	$	0.53
Diluted earnings	$	0.20	$	0.18		$	0.58	$	0.53
Dividends paid in cash	$	0.11	$	0.10		$	0.33	$	0.30
The accompanying notes are an integral part of these financial statements.

4

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended September 30, 2015									Nine Months Ended September 30, 2015
(dollars in thousands)	Before Tax Amount			Income Tax Expense (benefit)			Net of Tax Amount			Before Tax Amount			Income Tax Expense (benefit)			Net of Tax Amount
Net income	$	37,676		$	9,800		$	27,876		$	110,268		$	28,427		$	81,841
Unrealized holding gains arising during the period on investment securities	8,467			2,963			5,504			7,199			2,520			4,679
Less net gains on sales of available-for-sale investment securities realized in net income	—			—			—			—			—			—
Unrealized gains on investment securities	8,467			2,963			5,504			7,199			2,520			4,679
Pension adjustments	700			245			455			900			315			585
Other comprehensive income	9,167			3,208			5,959			8,099			2,835			5,264
Total comprehensive income	$	46,843		$	13,008		$	33,835		$	118,367		$	31,262		$	87,105
	Three Months Ended September 30, 2014									Nine Months Ended September 30, 2014
(dollars in thousands)	Before Tax Amount			Income Tax Expense (benefit)			Net of Tax Amount			Before Tax Amount			Income Tax Expense (benefit)			Net of Tax Amount
Net income	$	33,943		$	8,623		$	25,320		$	99,355		$	25,126		$	74,229
Unrealized holding gains (losses) arising during the period on investment securities	(7,069		)	(2,474		)	(4,595		)	24,646			8,626			16,020
Less net gains on sales of available-for-sale investment securities realized in net income	—			—			—			8			3			5
Unrealized gains (losses) on investment securities	(7,069		)	(2,474		)	(4,595		)	24,638			8,623			16,015
Pension adjustments	(4,391		)	(1,537		)	(2,854		)	(4,277		)	(1,497		)	(2,780		)
Other comprehensive income (loss)	(11,460		)	(4,011		)	(7,449		)	20,361			7,126			13,235
Total comprehensive income	$	22,483		$	4,612		$	17,871		$	119,716		$	32,252		$	87,464
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, 2014	147,136,084		$	1,390,130		$	(135,246	)	$	(10,991	)	$	(55,254	)	$	1,188,639
Comprehensive income:
Net income						81,841									81,841
Other comprehensive income, net of taxes									5,264						5,264
Total comprehensive income															87,105
Cash dividends declared, common						(47,054		)							(47,054		)
Shares issued under share-based plans, net of excess tax benefits	617,365		(528		)							6,777			6,249
Common shares repurchased under authorized repurchase plan	(7,470,054	)										(76,516		)	(76,516		)
Balance at September 30, 2015	140,283,395		$	1,389,602		$	(100,459	)	$	(5,727	)	$	(124,993	)	$	1,158,423
The accompanying notes are an integral part of these financial statements.

6

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)	Nine Months Ended September 30,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	81,841		$	74,229
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	3,000			2,251
Depreciation and amortization	9,825			8,743
Amortization (accretion) of premiums and discounts on investment securities, net	1,739			(132		)
Net gains from sales of investment securities	—			(8		)
Bank owned life insurance policy income	(5,683		)	(3,654		)
Share-based compensation expense	3,861			3,210
Unconsolidated investment distributions, net	(428		)	546
Loans originated for resale	(120,938		)	(70,641		)
Proceeds from sale of loans originated for resale	122,374			73,742
Proceeds from sale of non-performing loans	—			3,046
Gains on sale of loans originated for resale, net	(3,497		)	(2,040		)
Gains on sale of non-performing loans, net	—			(946		)
Losses of other real estate owned, net	132			232
Changes in assets and liabilities:
Increase in accrued interest receivable	(206		)	(709		)
Decrease in accrued interest payable	(2,816		)	(2,068		)
(Increase) decrease in other assets	(991		)	2,362
Increase (decrease) in other liabilities	1,065			(11,210		)
Net cash provided by operating activities	89,278			76,953
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and repayments of investment securities held-to-maturity	115,106			66,049
Proceeds from maturities and repayments of investment securities available-for-sale	240,666			209,227
Proceeds from sale of investment securities available-for-sale	—			476
Purchase of investment securities available-for-sale	(346,668		)	(242,008		)
Purchase of investment securities held-to-maturity	(274		)	—
Proceeds from sale of other securities	13,113			7,815
Proceeds from sale of loans previously held for investment	67			943
Proceeds from sale of acquired credit impaired loans	9,620			—
Increase in loans	(41,197		)	(148,202		)
Net change in premises and equipment	(459		)	(21,109		)
Proceeds from the sale of other real estate owned	680			1,323
Net increase in cash surrender value of bank owned life insurance	(20,458		)	—
Net cash used in investing activities	(29,804		)	(125,486		)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in transaction and savings deposit accounts	290,529			353,400
Net decrease in time deposits	(60,999		)	(138,042		)
Net (decrease) increase in customer repurchase agreements	(33,719		)	28,554
Decrease in repurchase agreements	—			(50,000		)
Net decrease in FHLB advances and other borrowings	(327,013		)	(243,821		)
Proceeds from senior debt issuance	—			125,000
Proceeds from shares issued, share-based plans	3,133			2,371
Excess tax (expense) benefit on share-based plans	(83		)	59
Common stock repurchases	(76,516		)	(75,390		)
Cash dividends, common	(47,054		)	(41,753		)
Net cash used in financing activities	(251,722		)	(39,622		)
Net decrease in cash and cash equivalents	(192,248		)	(88,155		)
Cash and cash equivalents at beginning of year	413,839			283,523
Cash and cash equivalents at end of period	$	221,591		$	195,368
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)	Nine Months Ended September 30,
	2015		2014
Interest	$	28,471	$	24,627
Income taxes	17,419		18,218

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, 2014, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (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, 2015.

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.  BUSINESS COMBINATIONS

BB&T Corporation

On August 17, 2015, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with BB&T Corporation, a North Carolina corporation (“BB&T”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, National Penn will merge with and into BB&T, with BB&T as the surviving corporation (the "Merger"). Immediately following the Merger, National Penn’s wholly owned bank subsidiary, National Penn Bank, will merge with and into BB&T’s wholly owned bank subsidiary, Branch Banking and Trust Company (the “Bank Merger”), with Branch Banking and Trust Company as the surviving bank in the Bank Merger. The Merger Agreement was unanimously approved by the Board of Directors of each of National Penn and BB&T.

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), National Penn shareholders will have the right to receive for each share of National Penn common stock, without par value, at their election (subject to proration in the event cash or stock is oversubscribed) either (i) $13.00 in cash or (ii) 0.3206 of a share (the “Exchange Ratio”) of BB&T common stock, par value $5.00 per share (the “Merger Consideration”). At the closing of the Merger, 30% of the outstanding shares of National Penn common stock (including the National Penn restricted stock, restricted stock units and deferred stock units that have the same election rights as common stock), will be converted into the right to receive the cash consideration, with the remaining 70% converted into the right to receive the stock consideration.

The completion of the Merger is subject to customary conditions, including, (1) the adoption of the Merger Agreement by National Penn’s shareholders, (2) the authorization for listing on the New York Stock Exchange of the shares of BB&T common stock to be issued in the Merger, (3) the effectiveness of the registration statement on Form S-4 for the BB&T common stock to be issued in the Merger, (4) the absence of any order, injunction or other legal restraint preventing the completion of the Merger or the Bank Merger or making the consummation of the Merger or the Bank Merger illegal and (5) the receipt of required regulatory approvals, including the approval of the Federal Reserve Board, the Federal Deposit Insurance Corporation, the North Carolina Office of the Commissioner of Banks and the Pennsylvania Department of Banking. Each party’s obligation to complete the Merger is also subject to the following additional customary conditions: (1) subject to certain exceptions, the accuracy of the representations and warranties of the other party, (2) performance in all material respects by the other party of its obligations under the Merger Agreement and (3) receipt by such party of an opinion from its counsel to the effect that the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. The SEC declared the registration statement on Form S-4 effective on October 23, 2015, and the proxy statement/prospectus was mailed to National Penn shareholders on or around October 27, 2015.

9

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

2.  BUSINESS COMBINATIONS - Continued

TF Financial Corporation

On October 24, 2014, the Company completed its acquisition of TF Financial Corporation ("TF Financial"), a savings and loan holding company, and its wholly-owned subsidiary, 3rd Fed Bank. Headquartered in Newtown, Pennsylvania, TF Financial operated eighteen branch offices in Pennsylvania and New Jersey and had acquisition date estimated fair values of approximately $801 million of assets, which included $595 million of loans, and $658 million of deposits. The assets and liabilities of TF Financial were recorded on National Penn's consolidated balance sheet at their preliminary estimated fair values as of October 24, 2014, the acquisition date, and TF Financial's results of operations have been included in the Company's consolidated statements of income and comprehensive income since that date.

The acquisition was valued at approximately $136 million, consisting of $58.4 million in cash and the issuance of 8,030,953 shares of the Company's common stock valued at $77.3 million, in exchange for 1,903,139 shares of TF Financial common stock.

Based on a preliminary purchase price allocation, the Company recorded $44 million in goodwill and $4.8 million in core deposit intangibles as a result of the acquisition. The amount of goodwill recorded reflects the excess purchase price over the estimated fair value of the net assets acquired. Based upon further review of the purchased credit-impaired ("PCI") loan portfolio, the Company recorded an additional $0.7 million in goodwill during the first quarter of 2015. None of the goodwill is deductible for income tax purposes. Refer to Footnote 5 within this section for additional information related to the acquired loan portfolio.

3.  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 September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Net income	$	27,876	$	25,320	$	81,841	$	74,229
Calculation of shares
Weighted average basic shares	140,235,094		139,275,683		141,081,076		139,934,960
Dilutive effect of share-based awards	681,100		549,451		636,852		531,477
Weighted average fully diluted shares	140,916,194		139,825,134		141,717,928		140,466,437
Earnings per share
Basic	$	0.20	$	0.18	$	0.58	$	0.53
Diluted	$	0.20	$	0.18	$	0.58	$	0.53

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

	Three Months Ended September 30,		Nine Months Ended September 30,
	2015	2014	2015	2014
Stock options	1,367,774	2,014,419	1,523,274	2,018,705

10

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

4.  INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses, and fair values of the Company’s investment securities at September 30, 2015 are summarized as follows:

(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-Sale
State and municipal bonds	$	60,365	$	3,813	$	(26	)	$	64,152
Agency mortgage-backed securities/collateralized mortgage obligations (a)	1,551,140		21,966		(5,396		)	1,567,710
Corporate securities and other	3,556		148		(303		)	3,401
Marketable equity securities	3,583		2,483		(99		)	5,967
Total	$	1,618,644	$	28,410	$	(5,824	)	$	1,641,230
	Carrying Value (b)		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Held-to-Maturity
U.S. Government agencies	$	3,886	$	113	$	—		$	3,999
State and municipal bonds	496,595		20,330		(320		)	516,605
Agency mortgage-backed securities/collateralized mortgage obligations (a)	306,080		5,510		(266		)	311,324
Corporate securities and other	1,013		—		(6		)	1,007
Total	$	807,574	$	25,953	$	(592	)	$	832,935
(a) Includes U.S. Government sponsored agency securities.
(b) For securities which were transferred from the available-for-sale category to held-to maturity, the carrying value of the transferred securities represents their fair value at the date of transfer adjusted for subsequent amortization.  The carrying value of all other held-to-maturity securities represents their amortized cost.

11

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

4.  INVESTMENT SECURITIES - Continued

The amortized cost, gross unrealized gains and losses, and fair values of the Company’s investment securities at December 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	$	7	$	—		$	1,007
State and municipal bonds	63,674		4,488		(82		)	68,080
Agency mortgage-backed securities/collateralized mortgage obligations (a)	1,442,102		19,234		(9,875		)	1,451,461
Corporate securities and other	4,109		600		(348		)	4,361
Marketable equity securities	3,583		2,169		—			5,752
Total	$	1,514,468	$	26,498	$	(10,305	)	$	1,530,661
	Carrying Value (b)		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Held-to-Maturity
U.S. Government agencies	$	3,869	$	55	$	—		$	3,924
State and municipal bonds	551,627		24,480		(63		)	576,044
Agency mortgage-backed securities/collateralized mortgage obligations (a)	364,100		5,098		(694		)	368,504
Corporate securities and other	1,446		21		(4		)	1,463
Total	$	921,042	$	29,654	$	(761	)	$	949,935
(a) Includes U.S. Government sponsored agency securities.
(b) For securities which were transferred from the available-for-sale category to held-to maturity, the carrying value of the transferred securities represents their fair value at the date of transfer adjusted for subsequent amortization.  The carrying value of all other held-to-maturity securities represents their amortized cost.

Gains and losses from sales of available-for-sale investment securities are as follows:

(dollars in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Gains	$	—	$	—	$	—	$	8
Losses	—		—		—		—
Net gains from sales of available-for-sale investment securities	$	—	$	—	$	—	$	8

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

4.  INVESTMENT SECURITIES - Continued

The following tables indicate the length of time individual securities have been in a continuous unrealized loss position at September 30, 2015 and December 31, 2014, respectively. The tables below include available-for-sale and held-to-maturity investment securities in an unrealized loss position at the specified dates.

September 30, 2015
(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	52	$	27,765	$	(280	)	$	7,537	$	(66	)	$	35,302	$	(346	)
Agency mortgage-backed securities/collateralized mortgage obligations (a)	104	182,137		(868		)	249,808		(4,794		)	431,945		(5,662		)
Corporate securities and other	3	1,008		(6		)	1,195		(303		)	2,203		(309		)
Total debt securities	159	210,910		(1,154		)	258,540		(5,163		)	469,450		(6,317		)
Marketable equity securities	2	347		(99		)	—		—			347		(99		)
Total	161	$	211,257	$	(1,253	)	$	258,540	$	(5,163	)	$	469,797	$	(6,416	)

December 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	29	$	9,166	$	(47	)	$	10,572	$	(98	)	$	19,738	$	(145	)
Agency mortgage-backed securities/collateralized mortgage obligations (a)	123	250,975		(1,763		)	296,419		(8,806		)	547,394		(10,569		)
Corporate securities and other	3	1,010		(4		)	1,150		(348		)	2,160		(352		)
Total	155	$	261,151	$	(1,814	)	$	308,141	$	(9,252	)	$	569,292	$	(11,066	)
(a) Includes U.S. Government sponsored agency securities.

The fair value of investment securities pledged as collateral are presented below and includes available-for-sale and held-to-maturity investment securities:

(dollars in thousands)	September 30, 2015		December 31, 2014
Deposits	$	1,183,717	$	1,043,175
Customer repurchase agreements	624,729		662,737
Other	59,591		70,837
Total	$	1,868,037	$	1,776,749

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

4.  INVESTMENT SECURITIES - Continued

The specified values of investment securities, by contractual maturity, at September 30, 2015 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	$	7,490	$	7,633	$	1,390	$	1,395
Due after one through five years	54,009		57,977		18,293		18,600
Due after five through ten years	152,358		158,335		265,134		275,650
Due after ten years	1,401,204		1,411,318		522,757		537,290
Marketable equity securities	3,583		5,967		—		—
Total	$	1,618,644	$	1,641,230	$	807,574	$	832,935

Evaluation of Impairment of Securities

The Company did not record any other-than-temporary impairment ("OTTI") losses for the three and nine months ended September 30, 2015 and 2014.

As of September 30, 2015 and December 31, 2014, accumulated other comprehensive income did not include any impairment related charges for the non-credit-related components of OTTI.     

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

At September 30, 2015, gross unrealized losses totaled $6.4 million, and the gross unrealized losses of securities in an unrealized loss position for twelve months or longer totaled $5.2 million, of which $4.8 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 $54.4 million and $67.5 million as of September 30, 2015 and December 31, 2014, 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 2015, the FHLB of Pittsburgh and the Federal Reserve Bank repurchased an additional $13.1 million, net, of capital stock from the Company at par/cost. Also, during 2015 and 2014 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

5.  LOANS

The following table summarizes loans outstanding, net of unearned income:

September 30, 2015
(dollars in thousands)	Originated Loans		Acquired Loans		Total
Commercial and industrial	$	2,617,874	$	46,829	$	2,664,703
CRE - permanent	1,183,612		107,495		1,291,107
CRE - construction	133,245		12,730		145,975
Commercial real estate	1,316,857		120,225		1,437,082
Residential mortgages	645,653		216,870		862,523
Home equity	796,999		107,130		904,129
All other consumer	293,722		130		293,852
Consumer	1,736,374		324,130		2,060,504
Loans	$	5,671,105	$	491,184	$	6,162,289

December 31, 2014
(dollars in thousands)	Originated Loans		Acquired Loans		Total
Commercial and industrial	$	2,548,438	$	51,429	$	2,599,867
CRE - permanent	1,092,006		137,312		1,229,318
CRE - construction	196,554		6,988		203,542
Commercial real estate	1,288,560		144,300		1,432,860
Residential mortgages	654,617		253,740		908,357
Home equity	783,248		130,582		913,830
All other consumer	287,224		141		287,365
Consumer	1,725,089		384,463		2,109,552
Loans	$	5,562,087	$	580,192	$	6,142,279

The carrying amount of acquired loans at September 30, 2015 totaled $491 million. The carrying value of acquired loans which were not impaired at acquisition was $490 million as of September 30, 2015, inclusive of a net fair value adjustment of $4.1 million, which will be accreted to interest income over the remaining life of the related portfolio. At September 30, 2015, the carrying value of loans acquired with deteriorated credit quality, or purchased credit-impaired ("PCI") loans, was $1.1 million, inclusive of a $0.5 million fair value adjustment. PCI loans are accounted for in accordance with ASC 310-30. The Company continues to evaluate the credit performance of the PCI loan portfolio and its potential resolution, which may include individual and/or bulk loan settlements.

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

5.  LOANS - Continued

The following tables present classifications for originated loans:

September 30, 2015	Performing
(dollars in thousands)	Pass Rated			Special Mention			Classified			Non-Performing			Total
Commercial and industrial	$	2,533,414		$	17,223		$	61,007		$	6,230		$	2,617,874
CRE - permanent	1,164,931			3,052			8,236			7,393			1,183,612
CRE - construction	122,966			270			1,505			8,504			133,245
Commercial real estate	1,287,897			3,322			9,741			15,897			1,316,857
Residential mortgages	631,338			—			734			13,581			645,653
Home equity	791,173			—			345			5,481			796,999
All other consumer	288,531			—			3,804			1,387			293,722
Consumer	1,711,042			—			4,883			20,449			1,736,374
Originated loans	$	5,532,353		$	20,545		$	75,631		$	42,576		$	5,671,105
Percent of originated loans	97.56		%	0.36		%	1.33		%	0.75		%	100.00		%
December 31, 2014	Performing
(dollars in thousands)	Pass Rated			Special Mention			Classified			Non-Performing			Total
Commercial and industrial	$	2,431,251		$	24,129		$	70,765		$	22,293		$	2,548,438
CRE - permanent	1,065,916			4,351			13,307			8,432			1,092,006
CRE - construction	182,554			701			5,186			8,113			196,554
Commercial real estate	1,248,470			5,052			18,493			16,545			1,288,560
Residential mortgages	640,344			—			314			13,959			654,617
Home equity	778,611			—			335			4,302			783,248
All other consumer	280,975			—			4,256			1,993			287,224
Consumer	1,699,930			—			4,905			20,254			1,725,089
Originated loans	$	5,379,651		$	29,181		$	94,163		$	59,092		$	5,562,087
Percent of originated loans	96.73		%	0.52		%	1.69		%	1.06		%	100.00		%

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

5.  LOANS - Continued

The following tables present classifications for acquired loans:

September 30, 2015	Performing
(dollars in thousands)	Pass Rated			Special Mention			Classified			Non-Performing			PCI			Total
Commercial and industrial	$	43,972		$	—		$	2,473		$	384		$	—		$	46,829
CRE - permanent	104,332			—			1,689			353			1,121			107,495
CRE - construction	12,730			—			—			—			—			12,730
Commercial real estate	117,062			—			1,689			353			1,121			120,225
Residential mortgages	215,863			—			—			1,007			—			216,870
Home equity	106,805			—			—			325			—			107,130
All other consumer	130			—			—			—			—			130
Consumer	322,798			—			—			1,332			—			324,130
Acquired loans	$	483,832		$	—		$	4,162		$	2,069		$	1,121		$	491,184
Percent of acquired loans	98.50		%	—		%	0.85		%	0.42		%	0.23		%	100.00		%

December 31, 2014	Performing
(dollars in thousands)	Pass Rated			Special Mention			Classified			Non-Performing			PCI			Total
Commercial and industrial	$	49,091		$	697		$	418		$	—		$	1,223		$	51,429
CRE - permanent	122,952			7,840			1,409			—			5,111			137,312
CRE - construction	6,931			—			—			—			57			6,988
Commercial real estate	129,883			7,840			1,409			—			5,168			144,300
Residential mortgages	252,454			—			31			—			1,255			253,740
Home equity	130,552			—			30			—			—			130,582
All other consumer	141			—			—			—			—			141
Consumer	383,147			—			61			—			1,255			384,463
Acquired loans	$	562,121		$	8,537		$	1,888		$	—		$	7,646		$	580,192
Percent of acquired loans	96.88		%	1.47		%	0.33		%	—		%	1.32		%	100.00		%

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

5.  LOANS - Continued

The following table presents the details for past due loans: 

September 30, 2015	Past Due and Still Accruing												Accruing Current Balances					Non-Accrual Balances (d)			Total Balances
(dollars in thousands)	30-59 Days			60-89 Days			90 Days or More (c)			Total					PCI Loans
Commercial and industrial	$	475		$	531		$	—		$	1,006		$	2,657,463	$	—		$	6,234		$	2,664,703
CRE - permanent	1,146			639			—			1,785			1,281,133		1,121			7,068			1,291,107
CRE - construction	135			—			—			135			137,336		—			8,504			145,975
Commercial real estate	1,281			639			—			1,920			1,418,469		1,121			15,572			1,437,082
Residential mortgages	6,772			1,235			247			8,254			846,098		—			8,171			862,523
Home equity	4,152			881			342			5,375			894,520		—			4,234			904,129
All other consumer	2,522			1,053			1,163			4,738			287,727		—			1,387			293,852
Consumer	13,446			3,169			1,752			18,367			2,028,345		—			13,792			2,060,504
Loans	$	15,202		$	4,339		$	1,752		$	21,293		$	6,104,277	$	1,121		$	35,598		$	6,162,289
Percent of loans	0.25		%	0.07		%	0.03		%	0.35		%			0.02		%	0.58		%
December 31, 2014	Past Due and Still Accruing												Accruing Current Balances					Non-Accrual Balances (d)			Total Balances
(dollars in thousands)	30-59 Days			60-89 Days			90 Days or More (c)			Total					PCI Loans
Commercial and industrial	$	738		$	369		$	137		$	1,244		$	2,575,469	$	1,223		$	21,931		$	2,599,867
CRE - permanent	2,052			286			57			2,395			1,213,897		5,111			7,915			1,229,318
CRE - construction	425			—			—			425			194,947		57			8,113			203,542
Commercial real estate	2,477			286			57			2,820			1,408,844		5,168			16,028			1,432,860
Residential mortgages	6,013			1,363			304			7,680			891,716		1,255			7,706			908,357
Home equity	4,596			579			365			5,540			904,864		—			3,426			913,830
All other consumer	3,039			657			1,320			5,016			280,603		—			1,746			287,365
Consumer	13,648			2,599			1,989			18,236			2,077,183		1,255			12,878			2,109,552
Loans	$	16,863		$	3,254		$	2,183		$	22,300		$	6,061,496	$	7,646		$	50,837		$	6,142,279
Percent of loans	0.27		%	0.05		%	0.04		%	0.36		%			0.12		%	0.83		%
(c) Loans 90 days or more past due remain on accrual status if they are well secured and collection of all principal and interest is probable.
(d) At September 30, 2015, non-accrual balances included troubled debt restructurings of $2.5 million commercial and industrial, $13.8 million of commercial real estate, and $3.9 million of consumer loans. At December 31, 2014, non-accrual balances included troubled debt restructurings of $8.2 million of commercial and industrial, $14.0 million of commercial real estate, and $3.4 million of consumer loans.

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

5.  LOANS - Continued

Additional details for changes in the allowance for loan losses by loan portfolio are as follows:

September 30, 2015
(dollars in thousands)
Three Months Ended	Commercial and Industrial			Commercial Real Estate			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	36,083		$	17,089		$	20,778		$	10,866	$	84,816
Charge-offs	(2,425		)	—			(1,993		)	—		(4,418		)
Recoveries	981			254			515			—		1,750
Provision	451			(2,091		)	1,624			1,016		1,000
Ending balance	$	35,090		$	15,252		$	20,924		$	11,882	$	83,148
Nine Months Ended	Commercial and Industrial			Commercial Real Estate			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning balance	$	39,982		$	18,696		$	21,390		$	10,607	$	90,675
Charge-offs	(9,157		)	(628		)	(5,496		)	—		(15,281		)
Recoveries	2,417			776			1,561			—		4,754
Provision	1,848			(3,592		)	3,469			1,275		3,000
Ending balance	$	35,090		$	15,252		$	20,924		$	11,882	$	83,148
Allowance for loan losses:
Individually evaluated for impairment	$	902		$	2,588		$	2,316		$	—	$	5,806
Collectively evaluated for impairment	34,188			12,664			18,608			11,882		77,342
Total allowance for loan losses	$	35,090		$	15,252		$	20,924		$	11,882	$	83,148
Loans:
Individually evaluated for impairment	$	6,689		$	18,946		$	22,380		$	—	$	48,015
Collectively evaluated for impairment	2,614,278			1,299,953			1,715,326			—		5,629,557
Loans	$	2,620,967		$	1,318,899		$	1,737,706		$	—	$	5,677,572

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

5.  LOANS - Continued

September 30, 2014
(dollars in thousands)
Three Months Ended	Commercial and Industrial			Commercial Real Estate			Consumer			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	38,078		$	18,563		$	21,570		$	11,637		$	89,848
Charge-offs	(513		)	(1,100		)	(1,484		)	—			(3,097		)
Recoveries	494			249			433			—			1,176
Provision	368			234			835			(437		)	1,000
Ending balance	$	38,427		$	17,946		$	21,354		$	11,200		$	88,927
Nine Months Ended	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	(4,740		)	(2,427		)	(6,073		)	—			(13,240		)
Recoveries	1,522			434			1,593			—			3,549
Provision	357			(2,714		)	4,356			252			2,251
Ending balance	$	38,427		$	17,946		$	21,354		$	11,200		$	88,927
Allowance for loan losses:
Individually evaluated for impairment	$	1,869		$	1,332		$	1,864		$	—		$	5,065
Collectively evaluated for impairment	36,558			16,614			19,490			11,200			83,862
Total allowance for loan losses	$	38,427		$	17,946		$	21,354		$	11,200		$	88,927
Loans:
Individually evaluated for impairment	$	11,429		$	14,722		$	19,622		$	—		$	45,773
Collectively evaluated for impairment	2,446,441			1,280,352			1,693,386			—			5,420,179
Loans	$	2,457,870		$	1,295,074		$	1,713,008		$	—		$	5,465,952

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

5.  LOANS - Continued

Impaired loan details are as follows and exclude loans acquired with deteriorated credit quality:

September 30, 2015	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	$	3,183	$	3,506	$	6,689	$	5,471	$	12,160	$	902
CRE - permanent	8,771		1,671		10,442		5,802		16,244		2,061
CRE - construction	8,000		504		8,504		970		9,474		527
Commercial real estate	16,771		2,175		18,946		6,772		25,718		2,588
Residential mortgages	6,575		8,499		15,074		502		15,576		1,623
Home equity	1,423		4,383		5,806		452		6,258		668
All other consumer	113		1,387		1,500		—		1,500		25
Consumer	8,111		14,269		22,380		954		23,334		2,316
Total	$	28,065	$	19,950	$	48,015	$	13,197	$	61,212	$	5,806
December 31, 2014	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	$	17,343	$	5,041	$	22,384	$	3,981	$	26,365	$	7,165
CRE - permanent	9,062		2,120		11,182		7,821		19,003		2,574
CRE - construction	7,585		528		8,113		970		9,083		1,332
Commercial real estate	16,647		2,648		19,295		8,791		28,086		3,906
Residential mortgages	5,894		8,109		14,003		457		14,460		1,503
Home equity	850		3,452		4,302		436		4,738		295
All other consumer	397		1,596		1,993		—		1,993		200
Consumer	7,141		13,157		20,298		893		21,191		1,998
Total	$	41,131	$	20,846	$	61,977	$	13,665	$	75,642	$	13,069

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

5.  LOANS - Continued

The following table presents additional details related to the Company's impaired loans, excluding PCI loans. Interest income recognized for the three and nine months ended September 30, 2015 and 2014 primarily represents amounts earned on accruing TDR's.

	Three Months Ended September 30,								Nine Months Ended September 30,
	2015				2014				2015				2014
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial and industrial	$	7,271	$	5	$	9,809	$	2	$	15,249	$	15	$	12,053	$	14
CRE - permanent	10,367		7		7,361		5		10,192		20		7,681		17
CRE - construction	8,413		—		8,998		—		8,350		—		9,827		—
Commercial real estate	18,780		7		16,359		5		18,542		20		17,508		17
Residential mortgages	14,978		31		13,070		32		15,163		97		13,351		100
Home equity	5,786		9		4,647		4		5,288		23		4,840		10
All other consumer	1,672		2		1,736		4		1,697		7		1,842		9
Consumer	22,436		42		19,453		40		22,148		127		20,033		119
Total	$	48,487	$	54	$	45,621	$	47	$	55,939	$	162	$	49,594	$	150

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

(dollars in thousands)	September 30, 2015		December 31, 2014
Commercial and industrial	$	380	$	362
CRE - permanent	678		517
Residential mortgages	6,417		6,253
Home equity	1,572		876
All other consumer	—		247
Total restructured loans	$	9,047	$	8,255
Undrawn commitments to lend on restructured loans	$	—	$	—

The Company modifies loans to consumers secured by 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

6.  DEPOSITS

(dollars in thousands)	September 30, 2015		December 31, 2014
NOW accounts	$	2,166,339	$	1,913,399
Money market accounts	1,746,808		1,827,233
Savings accounts	711,544		678,294
Time deposits less than $100	838,417		891,964
Time deposits $100 or greater	326,245		333,697
Total interest bearing deposits	5,789,353		5,644,587
Non-interest bearing deposits	1,169,922		1,085,158
Total deposits	$	6,959,275	$	6,729,745

At September 30, 2015, time deposits were scheduled to mature as follows:

(dollars in thousands)
2015	$	216,491
2016	427,236
2017	145,121
2018	115,031
2019	174,812
Thereafter	85,971
Total	$	1,164,662

7.  CONTINGENCIES

In the normal course of business, the Company is named as a defendant in various lawsuits.  Accruals are established for legal proceedings when information related to the loss contingencies indicates that a loss settlement is both probable and can be estimated. At September 30, 2015, the Company did not have material amounts accrued for legal proceedings as it is the opinion of management that the resolution of such suits will not have a material effect on the financial position or results of operations of the Company. The outcome of legal proceedings is inherently uncertain, and as a result, the amounts recorded may not represent the Company's ultimate loss upon resolution. Thus, the Company’s exposure and ultimate losses may be higher or lower than amounts accrued or estimated as the reasonably possible exposure.

8.  ACCUMULATED OTHER COMPREHENSIVE INCOME

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

(dollars in thousands)	September 30, 2015			December 31, 2014
Unrealized gains on investment securities, net	$	12,915		$	8,236
Net pension loss not yet recognized in net periodic pension cost	(18,642		)	(19,227		)
Total accumulated other comprehensive loss	$	(5,727	)	$	(10,991	)

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

9.  SHAREHOLDERS' EQUITY

In the first quarter of 2015, the Company declared a cash dividend of $0.11 per share, or $16.2 million, which was paid on February 17, 2015, to shareholders of record as of February 2, 2015.

On January 22, 2015, the Company announced that the Board of Directors approved a common share repurchase plan of $125 million. The authorization of this repurchase plan superseded all pre-existing share repurchase plans. During the first quarter of 2015, the Company repurchased 7.5 million shares of common stock totaling $76.5 million pursuant to this plan, inclusive of the repurchase of 7.3 million shares of common stock totaling $75.0 million from Warburg Pincus LLC ("Warburg Pincus") at $10.25 per share. Under the terms of the Merger Agreement with BB&T, National Penn has agreed not to purchase, without BB&T's prior written consent, any shares of its common stock.

On March 16, 2015, the Company announced that funds affiliated with Warburg Pincus agreed to sell 11,565,072 shares of National Penn’s common stock, which comprised approximately 8.3% of outstanding shares, at $10.56 per share in an underwritten secondary offering pursuant to National Penn's shelf registration statement filed with the Securities and Exchange Commission. The transaction closed on March 20, 2015. Immediately following the completion of the offering, Warburg Pincus no longer owns any shares of National Penn’s common stock. No shares of common stock were sold by National Penn, and Warburg Pincus received all of the proceeds from the offering.

In the second quarter of 2015, the Company declared a cash dividend of $0.11 per share, or $15.4 million, which was paid on May 15, 2015, to shareholders of record as of May 4, 2015.

In the third quarter of 2015, the Company declared a cash dividend of $0.11 per share, or $15.4 million, which was paid on August 17, 2015, to shareholders of record as of August 3, 2015.

On October 15, 2015, the Company announced a fourth quarter cash dividend of $0.11 per share to be paid on November 17, 2015 to shareholders of record as of November 2, 2015.

10.  FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

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

(dollars in thousands)	September 30, 2015		December 31, 2014
Commitments to extend credit	$	1,946,206	$	1,960,419
Commitments to fund mortgages	44,836		27,599
Commitments to sell mortgages to investors	28,443		20,228
Letters of credit	166,585		152,714

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

10.  FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued

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

September 30, 2015
(dollars in thousands)	Positions	Notional Amount		Asset		Liability		Receive Rate		Pay Rate		Life (Years)
Receive fixed - pay floating interest rate swaps	188	$	665,193	$	33,479	$	—	4.50	%	2.23	%	5.81
Pay fixed - receive floating interest rate swaps	188	665,193		—		33,479		2.23	%	4.50	%	5.81
Interest rate swaps		$	1,330,386	$	33,479	$	33,479	3.37	%	3.37	%	5.81
December 31, 2014
(dollars in thousands)	Positions	Notional Amount		Asset		Liability		Receive Rate		Pay Rate		Life (Years)
Receive fixed - pay floating interest rate swaps	165	$	596,252	$	24,786	$	546	4.64	%	2.28	%	5.89
Pay fixed - receive floating interest rate swaps	165	596,252		546		24,786		2.28	%	4.64	%	5.89
Interest rate swaps		$	1,192,504	$	25,332	$	25,332	3.46	%	3.46	%	5.89

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 are 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 and nine months ended September 30, 2015 and September 30, 2014. For additional analysis of the fair value of interest rate swaps refer to Footnote 12 within this section.

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

10.  FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued

The following summarizes the Company’s derivative activity:

		Income Statement Effect	Income Statement Effect
	Balance Sheet Effect at	for the Three Months Ended	for the Nine Months Ended
Derivative Instruments	September 30, 2015	September 30, 2015	September 30, 2015
Interest rate swaps	Increase to other assets/liabilities of $33.5 million.	No net effect on other operating income from offsetting $9.4 million change in fair value.	No net effect on other operating income from offsetting $8.1 million change in fair value.
Other derivatives:
Interest rate locks	Increase to other assets of $0.1 million.	Increase to mortgage banking income of $0.2 million.	Increase to mortgage banking income of $0.1 million.
Forward sale commitments	Increase to other liabilities of $0.3 million.	Decrease to mortgage banking income of $0.1 million.	Decrease to mortgage banking income of $0.1 million.
		Income Statement Effect	Income Statement Effect
	Balance Sheet Effect at	for the Three Months Ended	for the Nine Months Ended
Derivative Instruments	December 31, 2014	September 30, 2014	September 30, 2014
Interest rate swaps	Increase to other assets/liabilities of $25.3 million.	No net effect on other operating income from offsetting $2.9 million change in fair value.	No net effect on other operating income from offsetting $2.1 million change in fair value.
Other derivatives:
Interest rate locks	Increase to other assets of less than $0.1 million.	Decrease to mortgage banking income of $0.1 million.	Decrease to mortgage banking income of less than $0.1 million.
Forward sale commitments	Increase to other liabilities of $0.2 million.	Increase to mortgage banking income of $0.1 million.	Increase to mortgage banking income of less than $0.1 million.

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

11. 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 10 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:

September 30, 2015
(dollars in thousands)
Liabilities	Gross Amount		Gross Amounts Offset in the Balance Sheet		Net Amounts Presented in the Balance Sheet
Derivatives - Interest Rate Swaps	$	33,479	$	—	$	33,479
December 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	$	546	$	—	$	546
Liabilities
Derivatives - Interest Rate Swaps	$	24,786	$	—	$	24,786

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

11. BALANCE SHEET OFFSETTING - Continued

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:

September 30, 2015
(dollars in thousands)			Gross Amounts Not Offset in the Balance Sheet
Liabilities	Net Amounts Presented in the Balance Sheet		Financial Instruments (e)			Cash Collateral (f)			Net Amount
Counterparty A	$	11,276	$	—		$	(10,485	)	$	791
Counterparty B	10,207		—			(9,980		)	227
Counterparty C	8,865		—			(8,610		)	255
All Other Counterparties	3,131		—			(2,680		)	451
Total Liabilities	$	33,479	$	—		$	(31,755	)	$	1,724
December 31, 2014
(dollars in thousands)			Gross Amounts Not Offset in the Balance Sheet
Assets	Net Amounts Presented in the Balance Sheet		Financial Instruments (e)			Cash Collateral (f)			Net Amount
Counterparty A	$	536	$	(536	)	$	—		$	—
All Other Counterparties	10		(10		)	—			—
Total Assets	$	546	$	(546	)	$	—		$	—
Liabilities
Counterparty A	$	10,142	$	(536	)	$	(9,614	)	$	(8	)
Counterparty B	7,378		—			(7,140		)	238
Counterparty C	4,789		—			(4,590		)	199
All Other Counterparties	2,477		(10		)	(2,481		)	(14		)
Total Liabilities	$	24,786	$	(546	)	$	(23,825	)	$	415
(e) 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.
(f) Amounts represent cash collateral received or posted on interest rate swap transactions with financial institution counterparties.

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

12.  FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

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

Basis of Fair Value Measurement:

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

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

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

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

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

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

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

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

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

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

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

12.  FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

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.

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 September 30, 2015.

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

12.  FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2015 and December 31, 2014, by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

September 30, 2015	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
State and municipal bonds	$	64,152	$	—	$	64,152	$	—
Agency mortgage-backed securities/ collateralized mortgage obligations (a)	1,567,710		—		1,567,710		—
Corporate securities and other	3,401		63		2,143		1,195
Marketable equity securities	5,967		4,915		—		1,052
Investment securities, available-for-sale	1,641,230		4,978		1,634,005		2,247
Interest rate swap agreements	33,479		—		33,479		—
Interest rate locks	82		—		82		—
Total fair value of assets	$	1,674,791	$	4,978	$	1,667,566	$	2,247
Liabilities
Interest rate swap agreements	$	33,479	$	—	$	33,479	$	—
Forward sale commitments	255		—		255		—
Total fair value of liabilities	$	33,734	$	—	$	33,734	$	—
December 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	$	1,007	$	—	$	1,007	$	—
State and municipal bonds	68,080		—		68,080		—
Agency mortgage-backed securities/ collateralized mortgage obligations (a)	1,451,461		—		1,451,461		—
Corporate securities and other	4,361		65		3,146		1,150
Marketable equity securities	5,752		4,676		—		1,076
Investment securities, available-for-sale	1,530,661		4,741		1,523,694		2,226
Interest rate swap agreements	25,332		—		25,332		—
Interest rate locks	30		—		30		—
Total fair value of assets	$	1,556,023	$	4,741	$	1,549,056	$	2,226
Liabilities
Interest rate swap agreements	$	25,332	$	—	$	25,332	$	—
Forward sale commitments	158		—		158		—
Total fair value of liabilities	$	25,490	$	—	$	25,490	$	—
(a) Includes U.S. Government sponsored agency securities.

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

12.  FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

The following table presents activity for investment securities measured at fair value on a recurring basis for the nine months endedSeptember 30, 2015:

(dollars in thousands)
Level 1	Beginning Balance January 1, 2015		Gains/(Losses) Included in Earnings (g)			Gains/(Losses) Included in Other Comprehensive Income			Purchases		Sales		Maturities/ Calls/Paydowns			Transfers		Ending Balance September 30, 2015
Corporate securities and other	$	65	$	—		$	(2	)	$	—	$	—	$	—		$	—	$	63
Marketable equity securities	4,676		—			239			—		—		—			—		4,915
Total level 1	4,741		—			237			—		—		—			—		4,978
Level 2
U.S. Government agencies	1,007		—			(7		)	—		—		(1,000		)	—		—
State and municipal bonds	68,080		1,341			(619		)	580		—		(5,230		)	—		64,152
Agency mortgage-backed securities/ collateralized mortgage obligations (a)	1,451,461		(3,626		)	7,211			346,088		—		(233,424		)	—		1,567,710
Corporate securities and other	3,146		459			(450		)	—		—		(1,012		)	—		2,143
Total level 2	1,523,694		(1,826		)	6,135			346,668		—		(240,666		)	—		1,634,005
Level 3
Corporate securities and other	1,150		—			45			—		—		—			—		1,195
Marketable equity securities	1,076		—			(24		)	—		—		—			—		1,052
Total level 3	2,226		—			21			—		—		—			—		2,247
Total available-for-sale securities	$	1,530,661	$	(1,826	)	$	6,393		$	346,668	$	—	$	(240,666	)	$	—	$	1,641,230
(a) Includes U.S. Government sponsored agency securities.
(g) Represents amortization/accretion.

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

(dollars in thousands)			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
September 30, 2015	Balance		(Level 1)		(Level 2)		(Level 3)
Loans held-for-sale	$	6,239	$	—	$	6,239	$	—
Collateral dependent impaired loans, net (h)	35,894		—		—		35,894
OREO and other repossessed assets	4,719		—		—		4,719
December 31, 2014
Loans held-for-sale	$	4,178	$	—	$	4,178	$	—
Collateral dependent impaired loans, net (h)	43,377		—		—		43,377
OREO and other repossessed assets	4,867		—		—		4,867
(h) Excludes purchased credit impaired loans. For additional information regarding impaired loans, refer to Footnote 5.

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

12.  FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

Fair value for loans held-for-sale is estimated based upon available market data for mortgage-backed securities with similar interest rates and maturities.  Lower of cost or estimated fair value write-downs recorded on loans held-for-sale were zero as of September 30, 2015 and December 31, 2014.

The recorded investment in collateral dependent impaired loans totaled $39.7 million with a specific reserve of $3.8 million at September 30, 2015, compared to $54.6 million with a specific reserve of $11.2 million at December 31, 2014. The fair value of collateral dependent impaired loans is based upon the value of collateral securing these loans, less estimated costs to sell.  Appraised values may be discounted based upon management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the borrower and the borrower’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 $0.2 million were included in the period-ending OREO and other repossessed assets balance at September 30, 2015. There were no additional write-downs included in OREO and other repossessed assets balance at December 31, 2014.

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.  

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

	September 30, 2015				December 31, 2014
(dollars in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets
Cash and cash equivalents	$	221,591	$	221,591	$	413,839	$	413,839
Investment securities available-for-sale	1,641,230		1,641,230		1,530,661		1,530,661
Investment securities held-to-maturity	807,574		832,935		921,042		949,935
Loans held-for-sale	6,239		6,412		4,178		4,306
Loans, net of allowance for loan losses	6,079,141		5,981,269		6,051,604		5,957,399
OREO and other repossessed assets	4,719		4,719		4,867		4,867
Interest rate swap agreements	33,479		33,479		25,332		25,332
Interest rate locks	82		82		30		30
Liabilities
Non-interest bearing deposits	$	1,169,922	$	1,169,922	$	1,085,158	$	1,085,158
Interest bearing deposits, non-maturity	4,624,691		4,624,691		4,418,926		4,418,926
Deposits with stated maturities	1,164,662		1,159,537		1,225,661		1,223,210
Customer repurchase agreements	573,986		573,986		607,705		607,705
Federal Home Loan Bank advances and other borrowings	583,350		589,483		910,378		916,280
Senior long-term debt	125,000		121,901		125,000		127,250
Subordinated debentures	77,321		77,321		77,321		77,321
Interest rate swap agreements	33,479		33,479		25,332		25,332
Forward sale commitments	255		255		158		158

33

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

12.  FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

The fair value of cash and cash equivalents have 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 U.S. Government agencies, 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, and may not be indicative of an exit price.  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.

The fair value of FHLB advances and other borrowings 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 the Company's senior long-term debt is based upon an unadjusted, quoted price (CUSIP: 637138AC2) and as such is classified within Level 1 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.

13.  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 2015 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.

34

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

13.  PENSION PLAN - Continued

On October 24, 2014, the Company acquired the 3rd Fed Bank Retirement Plan as part of the acquisition of TF Financial. The plan is a non-contributory defined benefit pension plan which was frozen by TF Financial prior to the acquisition. A number of plan participants were terminated as a result of the acquisition and have since elected to receive lump sum distributions from the plan. Total lump sum distributions paid in 2015 have exceeded the plan’s projected interest cost for 2015 and therefore a partial settlement of $22.0 thousand has been recognized for the nine months ended September 30, 2015.

The table below reflects the components of the combined net periodic benefit cost of the plans:

(dollars in thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Service cost	$	93		$	65		$	222		$	175
Interest cost	814			611			2,004			1,816
Expected return on plan assets	(1,135		)	(756		)	(2,833		)	(2,226		)
Amortization of unrecognized net actuarial loss	188			80			438			235
Settlement loss	22			—			22			—
Net periodic benefit cost (gain)	$	(18	)	$	—		$	(147	)	$	—

14.  SHARE-BASED COMPENSATION

Share-based compensation awards are currently granted under the National Penn Bancshares, Inc. 2014 Long-Term Incentive Compensation Plan ("2014 Plan"), approved by shareholders in April 2014 and expiring on April 22, 2024. The 2014 Plan replaced the expired Long-Term Incentive Compensation Plan ("2005 Plan") and includes authorized but unissued common shares under the 2005 Plan. Under the terms of the 2014 Plan, 2.8 million shares are available for issuance as of September 30, 2015. The Company has 550 thousand option awards expiring during the twelve months ending September 30, 2016.

As of September 30, 2015, there was approximately $1.1 million of total unrecognized compensation cost related to unvested stock options and approximately $5.4 million of unrecognized compensation cost for other share-based awards that is expected to be recognized within approximately 2.25 years.

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

(dollars in thousands)	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
Share-based compensation expense	$	1,328	$	1,072	$	3,861	$	3,210
Proceeds from stock options exercised	163		103		566		422
Intrinsic value of stock options exercised	70		57		235		159

Employee Stock Purchase Plan

The Company's Employee Stock Purchase Plan ("ESPP") was suspended in connection with the announcement of the proposed merger of NPBC with and into BB&T Corporation. On September 30, 2015, the Company made its final purchase of NPBC common stock under the ESPP, which, as amended, enabled employees to purchase Company shares at a price equal to 90% of the fair market value of the shares on the purchase date. For details regarding the announced merger with BB&T Corporation, refer to Footnote 2.

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

15.  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 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.

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

15.  SEGMENT REPORTING - Continued

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

	As of and for the Three Months Ended September 30, 2015
(dollars in thousands)	Community Banking		Other			Consolidated
Total assets	$	9,549,222	$	38,237		$	9,587,459
Total deposits	6,959,275		—			6,959,275
Net interest income (expense)	69,775		(1,908		)	67,867
Total non-interest income	14,815		10,211			25,026
Total non-interest expense	45,659		8,558			54,217
Net income (loss)	28,266		(390		)	27,876
	For the Nine Months Ended September 30, 2015
(dollars in thousands)	Community Banking		Other			Consolidated
Net interest income (expense)	$	209,074	$	(5,690	)	$	203,384
Total non-interest income	41,575		31,068			72,643
Total non-interest expense	136,836		25,923			162,759
Net income (loss)	82,858		(1,017		)	81,841

	As of and for the Three Months Ended September 30, 2014
(dollars in thousands)	Community Banking		Other			Consolidated
Total assets	$	8,589,143	$	43,857		$	8,633,000
Total deposits	6,287,936		—			6,287,936
Net interest income (expense)	64,985		(755		)	64,230
Total non-interest income	12,305		10,566			22,871
Total non-interest expense	43,429		8,729			52,158
Net income	24,835		485			25,320
	For the Nine Months Ended September 30, 2014
(dollars in thousands)	Community Banking		Other			Consolidated
Net interest income (expense)	$	191,258	$	(1,788	)	$	189,470
Total non-interest income	36,185		32,560			68,745
Total non-interest expense	130,002		26,607			156,609
Net income	72,162		2,067			74,229

37

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 ended and nine months ended September 30, 2015, 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.

The current economic climate and interest rate environment present challenges for financial institutions in achieving their business goals. The Company’s financial performance is substantially affected by external factors beyond its control. Issues such as the uncertainty of the domestic economic climate, counterparty creditworthiness, the functioning and availability of liquidity in capital markets and consumer demand for products and services are all impacted by legislative and regulatory initiatives of the federal government.

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.

38

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.

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 divisions and affiliates include its National Penn Investors Trust Company division; Institutional Advisors LLC; and National Penn Insurance Services Group, Inc.

The Company’s primary business is accepting deposits from customers through its retail branch offices, and investing those deposits, together with funds generated from operations and borrowings, in loans, including commercial business loans, commercial real estate loans, residential mortgages, home equity loans, other consumer loans, and investment securities.

At September 30, 2015, National Penn Bank operated 124 retail branch offices, of which 116 are located in Pennsylvania, seven are located in New Jersey, and one is located in Maryland.

The Company’s results of operations are affected by five major elements: (1) net interest income, or the difference between interest income earned on loans and investments and interest expense paid on deposits and borrowed funds; (2) the provision for loan losses, or the amount added to the allowance for loan losses to provide reserves for inherent losses on loans and leases; (3) non-interest income, which is made up primarily of banking fees, wealth management income, insurance income, 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.

Merger with BB&T Corporation

On August 17, 2015, the Company entered into a Merger Agreement with BB&T. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, National Penn will merge with and into BB&T, with BB&T as the surviving corporation in the Merger. Refer to Footnote 2 for additional information regarding the merger with BB&T.

Merger with TF Financial Corporation

On October 24, 2014, the Company completed its acquisition of TF Financial through a stock and cash merger. The results of operations for the three and nine months ended September 30, 2015 reflect the impact of this acquisition and the realization of the transaction's expected cost reductions. Refer to Footnote 2 for additional information regarding the acquisition of TF Financial.

39

Overview

	Three Months Ended									Nine Months Ended
(dollars in thousands, except per share data)	September 30, 2015			June 30, 2015			September 30, 2014			September 30, 2015			September 30, 2014
EARNINGS
Total interest income	$	76,529		$	75,417		$	71,368		$	229,040		$	212,029
Total interest expense	8,662			8,582			7,138			25,656			22,559
Net interest income	67,867			66,835			64,230			203,384			189,470
Provision for loan losses	1,000			1,000			1,000			3,000			2,251
Net interest income after provision for loan losses	66,867			65,835			63,230			200,384			187,219
Net gains on investment securities	—			—			—			—			8
Other non-interest income	25,026			24,687			22,871			72,643			68,737
Merger related expenses	1,840			—			—			1,840			—
Other non-interest expense	52,377			53,960			52,158			160,919			156,609
Income before income taxes	37,676			36,562			33,943			110,268			99,355
Income tax expense	9,800			9,324			8,623			28,427			25,126
Net income	$	27,876		$	27,238		$	25,320		$	81,841		$	74,229
Basic earnings per share	$	0.20		$	0.19		$	0.18		$	0.58		$	0.53
Diluted earnings per share	0.20			0.19			0.18			0.58			0.53
Adjusted diluted earnings per share (i)	0.21			0.19			0.18			0.59			0.53
Dividends per share	0.11			0.11			0.10			0.33			0.30
Net interest margin	3.25		%	3.24		%	3.43		%	3.28		%	3.43		%
Efficiency ratio (i)	54.23		%	56.59		%	57.29		%	55.97		%	57.95		%
Return on average assets	1.16		%	1.14		%	1.17		%	1.15		%	1.16		%
Adjusted return on average assets (i)	1.22		%	1.14		%	1.17		%	1.17		%	1.16		%
Return on average tangible common equity (i)	13.30		%	13.32		%	11.97		%	13.19		%	11.95		%
Adjusted return on average tangible common equity (i)	13.94		%	13.32		%	11.97		%	13.41		%	11.95		%
Asset Quality Metrics
Allowance for loan losses/total originated loans	1.46		%	1.50		%	1.63		%
Allowance for loan losses/total loans	1.35		%	1.37		%	1.63		%
Non-performing loans/total loans	0.72		%	0.76		%	0.78		%
Delinquent loans/total loans	0.35		%	0.27		%	0.37		%
Allowance for loan losses/non-performing loans	186.2		%	180.3		%	207.5		%
Net loan charge-offs to average total loans (annualized)	0.17		%	0.39		%	0.14		%	0.23		%	0.24		%
(i) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Part I, Item 2 and the Non-GAAP reconciliations below.

• For the three months ended September 30, 2015, the Company recorded net income of $27.9 million, or $0.20 per diluted share, compared to $25.3 million, or $0.18 per diluted share, for the three months ended September 30, 2014. For the nine months ended September 30, 2015, the Company recorded net income of $81.8 million, or $0.58 per diluted share, compared to $74.2 million, or $0.53 per diluted share, in the comparable prior year period. The third quarter of 2015 and nine months ended September 30, 2015 results include after-tax merger related expenses totaling $1.4 million or $0.01 per diluted share. The increase in earnings and earnings per share for both periods is due to growth in earning assets, primarily related to the acquisition of TF Financial, continued focus on managing expenses, and the ongoing benefit of the Company's strong credit quality profile. Excluding the impact of the merger related expenses, adjusted return on average assets was 1.22% and adjusted return on average tangible common equity was 13.94% for the third quarter of 2015.

• Net interest income increased to $203 million for the nine months ended September 30, 2015 compared to $189 million for the comparable period in 2014, primarily as a result of the acquisition of TF Financial. The Company's net interest margin was 3.28% for the nine months ended September 30, 2015, compared to 3.43% for the nine months ended September 30, 2014. The year-to-date net interest margin comparison was impacted by the effects of a prolonged, low interest rate environment, as well as increased mortgage prepayment speeds and refinancing, and the interest expense related to the $125 million of senior notes issued in the third quarter of 2014.

40

• The provision for loan losses totaled $3.0 million for the nine months ended September 30, 2015, compared to $2.3 million for the nine months ended September 30, 2014. The increase in the provision was primarily the result of growth in the originated loan portfolio, partially offset by a continuing trend of improving asset quality as evidenced by classified loans declining 22.9% from December 31, 2014 to September 30, 2015.

• Other non-interest income totaled $72.6 million for the nine months ended September 30, 2015, an increase of $3.9 million compared to the prior year period primarily as a result of increases in income from the Company's mortgage banking operations and bank owned life insurance death benefit proceeds.

• Other non-interest expense of $161 million for the nine months ended September 30, 2015 increased by $4.3 million, or 2.8%, from the comparable period in 2014 despite the acquisition of TF Financial. Overall, expenses continued to be well controlled as evidenced by an efficiency ratio of 55.97% for the nine months ended September 30, 2015 compared to 57.95% for the same period in 2014.

Non-GAAP Reconciliations

Adjusted Net Income and Return on Average Assets⁽ⁱ⁾ 

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

	Three Months Ended									Nine Months Ended
(dollars in thousands, except per share data)	September 30, 2015			June 30, 2015			September 30, 2014			September 30, 2015			September 30, 2014
Adjusted net income reconciliation
Net income	$	27,876		$	27,238		$	25,320		$	81,841		$	74,229
After tax merger related expenses	1,350			—			—			1,350			—
Adjusted net income	$	29,226		$	27,238		$	25,320		$	83,191		$	74,229
Adjusted diluted earnings per share reconciliation
Diluted earnings per share	$	0.20		$	0.19		$	0.18		$	0.58		$	0.53
After tax merger related expenses	0.01			—			—			0.01			—
Adjusted diluted earnings per share	$	0.21		$	0.19		$	0.18		$	0.59		$	0.53
Average assets	$	9,526,850		$	9,544,673		$	8,569,734		$	9,531,944		$	8,521,085
Adjusted return on average assets	1.22		%	1.14		%	1.17		%	1.17		%	1.16		%
(i) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Part I, Item 2.

41

Efficiency Ratio⁽ⁱ⁾ 

	Three Months Ended									Nine Months Ended
(dollars in thousands)	September 30, 2015			June 30, 2015			September 30, 2014			September 30, 2015			September 30, 2014
Non-interest expense	$	54,217		$	53,960		$	52,158		$	162,759		$	156,609
Less:
Merger related expenses	1,840			—			—			1,840			—
Operating expenses	$	52,377		$	53,960		$	52,158		$	160,919		$	156,609
Net interest income (taxable equivalent)	$	71,563		$	70,660		$	68,166		$	214,877		$	201,509
Non-interest income	25,026			24,687			22,871			72,643			68,745
Less:
Net gains on investment securities	—			—			—			—			8
Adjusted revenue	$	96,589		$	95,347		$	91,037		$	287,520		$	270,246
Efficiency ratio	54.23		%	56.59		%	57.29		%	55.97		%	57.95		%
(i) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Part I, Item 2.

Tangible Common Equity/Tangible Assets⁽ⁱ⁾ 

	As of
(dollars in thousands, except per share data)	September 30, 2015			June 30, 2015			September 30, 2014
Total shareholder's equity	$	1,158,423		$	1,137,678		$	1,107,184
Goodwill and intangibles	(309,665		)	(310,293		)	(263,082		)
Tangible common equity	$	848,758		$	827,385		$	844,102
Shares outstanding	140,283,395			140,184,234			139,305,117
Tangible book value per share	$	6.05		$	5.90		$	6.06
Total assets	$	9,587,459		$	9,604,314		$	8,633,000
Goodwill and intangibles	(309,665		)	(310,293		)	(263,082		)
Tangible assets	$	9,277,794		$	9,294,021		$	8,369,918
Tangible common equity/tangible assets	9.15		%	8.90		%	10.08		%
(i) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Part I, Item 2.

Return on Average Tangible Common Equity⁽ⁱ⁾ 

	Three Months Ended									Nine Months Ended
(dollars in thousands)	September 30, 2015			June 30, 2015			September 30, 2014			September 30, 2015			September 30, 2014
Average shareholder's equity	$	1,141,586		$	1,130,896		$	1,102,608		$	1,139,858		$	1,094,569
Average goodwill and intangibles	(309,969		)	(310,601		)	(263,410		)	(310,458		)	(264,084		)
Average tangible common equity	$	831,617		$	820,295		$	839,198		$	829,400		$	830,485
Net income	$	27,876		$	27,238		$	25,320		$	81,841		$	74,229
Return on average tangible common equity	13.30		%	13.32		%	11.97		%	13.19		%	11.95		%
(i) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Part I, Item 2.

42

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SUMMARY BALANCE SHEET

(dollars in thousands)	September 30, 2015		June 30, 2015		December 31, 2014
Total cash and cash equivalents	$	221,591	$	238,385	$	413,839
Investment securities and other securities	2,503,203		2,507,615		2,519,215
Total loans	6,168,528		6,168,481		6,146,457
Total assets	9,587,459		9,604,314		9,750,865
Deposits	6,959,275		6,733,484		6,729,745
Borrowings	1,359,657		1,631,537		1,720,404
Shareholders' equity	1,158,423		1,137,678		1,188,639

Assets

Loans and Allowance for Loan Losses

Economic conditions impact the Company’s customers. Although the economy and credit environment are inherently uncertain, the Company’s loan portfolio has demonstrated continued asset quality improvement. 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, which consists of eastern Pennsylvania, southern New Jersey, and Delaware, suggests the following trends, which may or may not apply to the Company:

• Contacts in the Third District indicate that aggregate business activity continued to grow at a modest pace, with staffing services reporting strong growth.

• Non-auto retailers experienced moderate growth, while auto dealers reported modest growth more on par with the overall economic activity reported in the District. Nonresidential real estate and general services each reported modest growth.

• Lending volumes have accelerated to a moderate pace of growth, with commercial and industrial and auto lending reporting the strongest growth.

• Contacts continue to anticipate moderate growth over the next six months.

43

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

(dollars in thousands)	September 30, 2015		December 31, 2014		Increase/(decrease)
Commercial and industrial	$	2,664,703	$	2,599,867	$	64,836		2.5	%
CRE - permanent	1,291,107		1,229,318		61,789			5.0	%
CRE - construction	145,975		203,542		(57,567		)	(28.3	)%
Commercial real estate	1,437,082		1,432,860		4,222			0.3	%
Commercial	4,101,785		4,032,727		69,058			1.7	%
Residential mortgages	862,523		908,357		(45,834		)	(5.0	)%
Home equity	904,129		913,830		(9,701		)	(1.1	)%
All other consumer	293,852		287,365		6,487			2.3	%
Consumer	2,060,504		2,109,552		(49,048		)	(2.3	)%
Loans	$	6,162,289	$	6,142,279	$	20,010		0.3	%
Allowance for loan losses	83,148		90,675		(7,527		)	(8.3	)%
Loans, net	$	6,079,141	$	6,051,604	$	27,537		0.5	%
Loans held-for-sale	$	6,239	$	4,178	$	2,061		49.3	%

Total loans of $6.2 billion at September 30, 2015, inclusive of loans held-for-sale, increased $22.1 million from December 31, 2014, driven by an increase of $69.1 million in commercial loans, partially offset by a decrease of $45.8 million in mortgage loans and a net decrease of $3.2 million in home equity and all other consumer loans. The decline in the mortgage loan portfolio is primarily the result of increased prepayment speeds coupled with the Company's ongoing strategy to sell originations of long-term, fixed rate mortgage loans. In addition, in the first quarter of 2015 the Company completed the bulk sale and settlement of approximately $12.9 million in PCI loans.

44

The following table demonstrates select asset quality metrics:

(dollars in thousands)	September 30, 2015			June 30, 2015			December 31, 2014
Non-performing loans	$	44,645		$	47,039		$	59,092
Non-performing loans to total loans	0.72		%	0.76		%	0.96		%
Delinquent loans	$	21,293		$	16,943		$	22,300
Delinquent loans to total loans	0.35		%	0.27		%	0.36		%
Classified originated loans (j)	$	124,438		$	124,837		$	153,255
Acquired classified loans	1,121			2,671			9,534
Total classified loans	$	125,559		$	127,508		$	162,789
Classified originated loans to total originated loans	2.19		%	2.21		%	2.75		%
Total classified loans to total loans	2.04		%	2.07		%	2.65		%
Tier 1 capital and allowance	$	1,008,194		$	991,097		$	1,054,304
Total classified loans to Tier 1 capital and allowance	12.45		%	12.87		%	15.44		%
Originated loans	$	5,671,105		$	5,643,832		$	5,562,087
Loans held-for-sale	6,239			9,693			4,178
Total originated loans	5,677,344			5,653,525			5,566,265
Acquired loans	491,184			514,956			580,192
Total loans	$	6,168,528		$	6,168,481		$	6,146,457
(j) Includes non-performing loans.

45

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

(dollars in thousands)	September 30, 2015			June 30, 2015			December 31, 2014
Non-accrual commercial and industrial	$	6,234		$	8,923		$	21,931
Non-accrual CRE-permanent	7,068			7,160			7,915
Non-accrual CRE-construction	8,504			8,443			8,113
Total non-accrual commercial real estate	15,572			15,603			16,028
Non-accrual residential mortgages	8,171			8,307			7,706
Non-accrual home equity	4,234			4,027			3,426
All other non-accrual consumer	1,387			1,387			1,746
Total non-accrual consumer	13,792			13,721			12,878
Total non-accrual loans	35,598			38,247			50,837
Restructured loans (k)	9,047			8,792			8,255
Total non-performing loans	44,645			47,039			59,092
Acquired other real estate owned	3,450			3,450			3,675
Other real estate owned and repossessed assets	1,269			1,736			1,192
Total non-performing assets	49,364			52,225			63,959
Loans 90+ days past due & still accruing	1,752			1,903			2,183
Total non-performing assets and loans 90+ days past due	$	51,116		$	54,128		$	66,142
Total loans	$	6,168,528		$	6,168,481		$	6,146,457
Total originated loans	5,677,344			5,653,525			5,566,265
Average total loans (three months ended)	6,144,998			6,146,507			5,932,806
Allowance for loan losses	83,148			84,816			90,675
Allowance for loan losses to:
Non-performing assets and loans 90+ days past due (excluding acquired OREO)	174		%	167		%	145		%
Non-performing loans	186		%	180		%	153		%
Total originated loans	1.46		%	1.50		%	1.63		%
(k) Restructured loans at September 30, 2015, included $1.0 million of commercial loans and $8.0 million of consumer loans which were modified for customers who were experiencing financial difficulty and were in jeopardy of losing their homes or businesses to foreclosure.

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

(dollars in thousands)	September 30, 2015			June 30, 2015			December 31, 2014
Total non-accrual loans	$	35,598		$	38,247		$	50,837
Non-accrual loans with partial charge-offs	7,287			10,898			11,630
Life-to-date partial charge-offs on non-accrual loans	13,197			12,072			13,665
Charge-off rate of non-accrual loans	64.4		%	52.6		%	54.0		%
Specific reserves on non-accrual loans	$	3,244		$	5,117		$	10,576

46

The Company continued to demonstrate a strong and stable credit quality profile as evidenced by non-performing loans of $44.6 million, or 0.72% of total loans, and a ratio of allowance for loan losses to non-performing loans of 186% at September 30, 2015, compared to $59.1 million of non-performing loans at December 31, 2014, or 0.96% of total loans, and a 153% ratio of allowance to non-performing loans. Non-accrual loans of $35.6 million at September 30, 2015 included $7.3 million of non-accrual loans which have been partially charged-off by 64.4% , or $13.2 million. Impaired loans totaled $48.0 million at September 30, 2015, and there was a specific reserve of $5.8 million in the allowance related to $28.1 million of underlying principal balances of impaired loans. The remaining $20.0 million of impaired loans have not been reserved or partially charged-off, since the Company has deemed the collection of principal to be probable.

An analysis of net loan charge-offs:

	Three Months Ended									Nine Months Ended
(dollars in thousands)	September 30, 2015			June 30, 2015			September 30, 2014			September 30, 2015			September 30, 2014
Commercial and industrial	$	1,444		$	4,874		$	19		$	6,740		$	3,218
CRE - permanent	(58		)	(308		)	1,072			235			2,094
CRE - construction	(196		)	(92		)	(221		)	(383		)	(101		)
Commercial real estate	(254		)	(400		)	851			(148		)	1,993
Residential mortgages	598			70			138			916			1,981
Home equity	407			1,064			355			1,701			1,528
All other consumer	473			305			558			1,318			971
Consumer	1,478			1,439			1,051			3,935			4,480
Net loans charged-off	$	2,668		$	5,913		$	1,921		$	10,527		$	9,691
Net charge-offs (annualized) to:
Total originated loans	0.19		%	0.42		%	0.14		%	0.25		%	0.24		%
Total loans	0.17		%	0.38		%	0.14		%	0.23		%	0.24		%
Average total loans	0.17		%	0.39		%	0.14		%	0.23		%	0.24		%

Net loan charge-offs totaled $10.5 million for the nine months ended September 30, 2015, or 0.23% of average total loans on an annualized basis, compared to $9.7 million, or 0.24% of average total loans, for the nine months ended September 30, 2014. Net charge-offs totaled $2.7 million, or 0.17% of average total loans on an annualized basis, for the third quarter of 2015, compared to $5.9 million, or 0.39% of average total loans, for the second quarter of 2015. The net charge-offs for the second quarter of 2015 reflect the partial charge-off and full resolution of a large non-performing commercial loan for which a specific loan loss reserve was recorded in the fourth quarter of 2014.

47

Changes in the allowance for loan losses by loan portfolio:

(dollars in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Balance at beginning of period	$	84,816	$	89,848	$	90,675	$	96,367
Charge-offs:
Commercial and industrial	2,425		513		9,157		4,740
Commercial real estate	—		1,100		628		2,427
Consumer	1,993		1,484		5,496		6,073
Total charge-offs	4,418		3,097		15,281		13,240
Recoveries:
Commercial and industrial	981		494		2,417		1,522
Commercial real estate	254		249		776		434
Consumer	515		433		1,561		1,593
Total recoveries	1,750		1,176		4,754		3,549
Net charge-offs	2,668		1,921		10,527		9,691
Provision charged to expense	1,000		1,000		3,000		2,251
Balance at end of period	$	83,148	$	88,927	$	83,148	$	88,927

The following table presents the components of the allowance:

(dollars in thousands)	September 30, 2015		December 31, 2014
Specific reserves	$	5,806	$	13,069
Allocated reserves	65,460		66,999
Unallocated reserves	11,882		10,607
Total allowance for loan losses	$	83,148	$	90,675

The allowance was $83.1 million at September 30, 2015 and represented 1.35% of total loans and 186% of non-performing loans, compared to $90.7 million, or 1.48% of total loans and 153% of non-performing loans at December 31, 2014. The decrease in the allowance during the period primarily reflects the partial charge-off and full resolution of a large non-performing commercial loan for which a specific reserve was recorded in the fourth quarter of 2014. The provision for loan losses was $3.0 million for the nine months ended September 30, 2015, compared to $2.3 million for the prior year period.

48

Liabilities

Liabilities totaled $8.4 billion at September 30, 2015, decreasing $133 million from December 31, 2014. The decrease in total liabilities was primarily due to a decrease in borrowings of $361 million, offset by an increase in total deposits of $230 million. The reduction in borrowings is comprised of decreases in FHLB advances and other borrowings of $327 million and customer repurchase agreements of $33.7 million.

Total deposits of $7.0 billion at September 30, 2015 increased $230 million from December 31, 2014. The increase in deposits is attributable to increases in NOW accounts of $253 million, non-interest bearing deposits of $84.8 million, and savings account deposits of $33.3 million, offset by decreases in money market accounts and time deposits of $80.4 million and $61.0 million, respectively. The increase in NOW accounts is primarily the result of a seasonal increase in municipal deposits during the third quarter.

(dollars in thousands)	September 30, 2015			December 31, 2014			Increase/(decrease)
Non-interest bearing deposits	$	1,169,922		$	1,085,158		$	84,764		7.8	%
NOW accounts	2,166,339			1,913,399			252,940			13.2	%
Money market accounts	1,746,808			1,827,233			(80,425		)	(4.4	)%
Savings accounts	711,544			678,294			33,250			4.9	%
Time deposits less than $100	838,417			891,964			(53,547		)	(6.0	)%
Time deposits $100 or greater	326,245			333,697			(7,452		)	(2.2	)%
Total deposits	$	6,959,275		$	6,729,745		$	229,530		3.4	%
Non-time deposits / total deposits	83.3		%	81.8		%

Shareholders’ Equity

Shareholders’ equity totaled $1.2 billion at September 30, 2015, decreasing$30.2 million from December 31, 2014. Significant activity during the nine months ended September 30, 2015 included: 

• Net income of $81.8 million,

• Shares issued under share-based plans, net of taxes, of $6.2 million,

• Other comprehensive income of $5.3 million,

• The repurchase of 7.5 million common shares at a cost of $76.5 million, and

• Cash dividends paid to common shareholders of $47.1 million

49

RESULTS OF OPERATIONS

Net Interest Income

The following table presents average balances, average yields, and net interest margin information for the nine months endedSeptember 30, 2015 as compared to the same period in 2014.  Interest income and yields are presented on a fully taxable equivalent (“FTE”) basis using an statutory tax rate of 35%.  Net interest margin is expressed as net interest income (FTE) as a percentage of average total interest earning assets.

Average Balances, Average Rates, and Net Interest Margin*

	For the Nine Months Ended September 30,
	2015							2014
(dollars in thousands)	Average Balance			Interest		Average Rate		Average Balance			Interest		Average Rate
Interest Earning Assets:
Interest earning deposits at banks	$	94,145		$	115	0.16	%	$	73,940		$	87	0.16	%
U.S. Government agencies	4,649			79		2.27	%	1,005			14		1.86	%
Agency mortgage-backed securities/collateralized mortgage obligations (a)	1,847,319			30,218		2.19	%	1,725,736			30,059		2.33	%
State and municipal*	588,248			28,008		6.37	%	602,190			29,746		6.60	%
Other bonds and securities	74,274			3,829		6.89	%	79,111			3,356		5.67	%
Total investments	2,514,490			62,134		3.30	%	2,408,042			63,175		3.51	%
Commercial loans*	4,066,517			113,418		3.73	%	3,684,144			107,079		3.89	%
Installment loans	1,190,732			36,026		4.05	%	1,028,703			31,654		4.11	%
Mortgage loans	883,730			28,840		4.36	%	657,172			22,073		4.49	%
Total loans	6,140,979			178,284		3.88	%	5,370,019			160,806		4.00	%
Total earning assets	8,749,614			240,533		3.68	%	7,852,001			224,068		3.82	%
Allowance for loan losses	(90,181		)					(93,557		)
Non-interest earning assets	872,511							762,641
Total assets	$	9,531,944						$	8,521,085
Interest Bearing Liabilities:
Interest bearing deposits	$	5,612,811		13,879		0.33	%	$	5,134,563		13,927		0.36	%
Customer repurchase agreements	558,992			1,210		0.29	%	544,500			1,192		0.29	%
Repurchase agreements	—			—		—	%	38,553			1,406		4.87	%
Federal Home Loan Bank advances and other borrowings	777,088			4,858		0.84	%	541,108			4,215		1.04	%
Senior long-term debt	125,000			4,098		4.38	%	6,868			227		4.42	%
Subordinated debentures	77,321			1,611		2.79	%	77,321			1,592		2.75	%
Total interest bearing liabilities	7,151,212			25,656		0.48	%	6,342,913			22,559		0.48	%
Non-interest bearing deposits	1,138,352							993,372
Other non-interest bearing liabilities	102,522							90,231
Total liabilities	8,392,086							7,426,516
Equity	1,139,858							1,094,569
Total liabilities and equity	$	9,531,944						$	8,521,085
NET INTEREST INCOME/MARGIN (FTE)				214,877		3.28	%				201,509		3.43	%
Tax equivalent interest				11,493							12,039
Net interest income				$	203,384						$	189,470
(a) Includes U.S. Government sponsored agency securities.

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

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

50

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

(dollars in thousands)	Nine Months Ended September 30, 2015 compared to 2014
Increase (decrease) in:	Volume			Rate			Total
Interest income:
Interest earning deposits at banks	$	25		$	3		$	28
U.S. Government agencies	61			4			65
Agency mortgage-backed securities/collateralized mortgage obligations (a)	2,049			(1,890		)	159
State and municipal	(679		)	(1,059		)	(1,738		)
Other bonds and securities	(215		)	688			473
Total investments	1,216			(2,257		)	(1,041		)
Commercial loans	10,790			(4,451		)	6,339
Installment loans	4,910			(538		)	4,372
Mortgage loans	7,410			(643		)	6,767
Total loans	23,110			(5,632		)	17,478
Total interest income	24,351			(7,886		)	16,465
Interest expense:
Interest bearing deposits	1,238			(1,286		)	(48		)
Customer repurchase agreements	31			(13		)	18
Repurchase agreements	(1,406		)	—			(1,406		)
Federal Home Loan Bank advances and other borrowings	1,588			(945		)	643
Senior long-term debt	3,873			(2		)	3,871
Subordinated debentures	—			19			19
Total borrowed funds	4,086			(941		)	3,145
Total interest expense	5,324			(2,227		)	3,097
Increase (decrease) in net interest income (FTE)	$	19,027		$	(5,659	)	$	13,368
(a) Includes U.S. Government sponsored agency securities.

Fully taxable equivalent net interest income for the comparative periods increased by $13.4 million to $215 million for the nine months ended September 30, 2015. This increase was driven by an increase of $19.0 million related to volume, primarily as a result of the acquisition of TF Financial, partially offset by a decrease of $5.7 million related to rate as the Company's net interest margin was 3.28% for the nine months ended September 30, 2015 compared to 3.43% for the nine months ended September 30, 2014. The trend in the Company's net interest margin, year-over-year, was impacted by a combination of the prolonged low interest rate environment, the issuance of the senior long-term debt in the latter part of the third quarter of 2014, and increased mortgage prepayment speeds and refinancings.

Provision for Loan Losses

The provision for loan losses for the nine months ended September 30, 2015 was $3.0 million, compared to $2.3 million for the nine months ended September 30, 2014. Credit quality metrics remained strong as annualized net charge-offs of 0.23% of average total loans for the nine months ended September 30, 2015 compared to 0.24% for the same period in 2014. Classified loans declined to $126 million, or 2.04% of total loans, at September 30, 2015, from $170 million, or 3.10% of total loans, at September 30, 2014. The continued improvement in the Company's credit quality resulted in an allowance for loan losses of $83.1 million, or 1.46% of total originated loans, at September 30, 2015, compared to $90.7 million, or 1.63% of total originated loans, at December 31, 2014. The allowance as a percentage of non-performing loans increased to 186% at September 30, 2015 from 153% at December 31, 2014. For additional analysis of the allowance refer to “Loans and Allowance for Loan Losses” within Part I, Item 2 of this Report.

51

Non-Interest Income

(dollars in thousands)	Nine Months Ended September 30,
	2015		2014			Increase/(decrease)
Wealth management	$	20,158	$	20,944		$	(786	)	(3.8	)%
Service charges on deposit accounts	10,103		10,744			(641		)	(6.0	)%
Insurance commissions and fees	9,529		9,835			(306		)	(3.1	)%
Cash management and electronic banking fees	14,935		14,115			820			5.8	%
Mortgage banking	4,643		2,639			2,004			75.9	%
Bank owned life insurance	5,683		3,654			2,029			55.5	%
Earnings (losses) of unconsolidated investments	722		(506		)	1,228			NM
Gain on sale of non-performing loans	—		946			(946		)	NM
Other operating income	6,870		6,366			504			7.9	%
Net gains on sales of investment securities	—		8			(8		)	NM
Total non-interest income	$	72,643	$	68,745		$	3,898		5.7	%
"NM" - Denotes a value displayed as a percentage change is not meaningful

Non-interest income for the nine months endedSeptember 30, 2015 and 2014 totaled $72.6 million and $68.7 million, respectively, and its components changed primarily due to the following items:

• Mortgage banking income increased $2.0 million due to the interest rate environment and resultant purchase and refinance activity.

• Bank owned life insurance increased $2.0 million primarily due to death benefit proceeds of $1.2 million received in the third quarter of 2015. The year-over-year increase was also impacted by the bank owned life insurance acquired via the TF Financial acquisition in the fourth quarter of 2014, as well as the purchase of an additional $25 million of bank owned life insurance in the first quarter of 2015.

• The Company's unconsolidated equity investment portfolio recorded earnings of $0.7 million for the nine months ended September 30, 2015 compared to a $0.5 million loss for the nine months ended September 30, 2014.

• In the second quarter of 2014, the Company recorded a $0.9 million gain on the sale of non-performing loans as part of its proactive management of the credit quality of the loan portfolio.

52

Non-Interest Expense

(dollars in thousands)	Nine Months Ended September 30,
	2015			2014			Increase/(decrease)
Salaries, wages and employee benefits	$	89,691		$	87,743		$	1,948		2.2	%
Premises and equipment	25,844			23,690			2,154			9.1	%
FDIC insurance	3,991			3,657			334			9.1	%
Other operating expenses	41,393			41,519			(126		)	(0.3	)%
Merger related expenses	1,840			—			1,840			NM
Total non-interest expense	$	162,759		$	156,609		$	6,150		3.9	%
Operating expenses (i)	$	160,919		$	156,609		$	4,310		2.8	%
Adjusted revenue (i)	$	287,520		$	270,246		$	17,274		6.4	%
Efficiency ratio (i)	55.97		%	57.95		%
(i) Refer to the Statement Regarding Non-GAAP Financial Measures at the beginning of Part I, Item 2.

Non-interest expense totaled $163 million for the nine months ended September 30, 2015, compared to $157 million for the prior year period. The increase in non-interest expense and adjusted revenue is primarily the result of the TF Financial acquisition. Continued focus on controlling expenses resulted in an improved efficiency ratio of 55.97% for the nine months ended September 30, 2015 compared to 57.95% for the nine months ended September 30, 2014.

Income Tax Expense

Income tax expense for the nine months ended September 30, 2015 and September 30, 2014 was $28.4 million and $25.1 million, respectively. The effective tax rate of 25.8% for the nine months ended September 30, 2015 remained consistent with 25.3% for the same period last year. The Company’s net deferred tax asset decreased to $46.4 million at September 30, 2015 from $57.5 million at December 31, 2014, primarily as a result of decreases in the allowance for loan losses and other tax credits and an increase in the fair value of available-for-sale securities in 2015.

53

LIQUIDITY, COMMITMENTS, CAPITAL AND INTEREST RATE SENSITIVITY

Analysis of Liquidity and Capital Resources

Liquidity

The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of September 30, 2015:

			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 five years
Maturities of time deposits	$	1,164,662	$	599,702	$	298,430	$	266,293	$	237
Federal Home Loan Bank advances and other borrowings	583,350		436,216		74,543		63,220		9,371
Senior long-term debt	125,000		—		—		—		125,000
Subordinated debentures	77,321		—		—		—		77,321
Minimum annual rentals on non-cancelable operating leases	55,099		6,802		12,340		10,691		25,266
Total	$	2,005,432	$	1,042,720	$	385,313	$	340,204	$	237,195

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 $192 million of cash and cash equivalents during the nine month period ended September 30, 2015, compared to deploying $88.2 million of net cash for the nine months ended September 30, 2014. Operating activities generated $89.3 million of net cash year-to-date 2015, compared to $77.0 million for the same period in 2014. During the current year, cash was deployed primarily in the following ways:

Investing activities

• $347 million of available-for-sale investment security purchases

• $41.2 million net increase in loans

• $20.5 million net increase in cash surrender value of bank owned life insurance

Financing activities

• $327 million net reduction in FHLB advances and other borrowings

• $76.5 million for the repurchase of common stock

• $61.0 million net decrease in time deposits

• $47.1 million in cash dividends paid to common stock shareholders

• $33.7 million net decrease in customer repurchase agreements

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During the nine months ended September 30, 2015, cash was generated primarily from the following additional sources:

Investing activities

• $356 million of proceeds from maturities and repayments of investment securities

• $13.1 million of proceeds from the sale of other securities

• $9.6 million of proceeds from the sale of acquired credit impaired loans

Financing activities

• $291 million net increase in transaction and savings deposit accounts

Other Commitments

The following table sets forth the notional amounts of other commitments as of September 30, 2015:

(dollars in thousands)	Total		One year or less		After one year to three years		After three years to five years		More than five years
Loan commitments	$	1,946,206	$	715,152	$	207,732	$	206,167	$	817,155
Letters of credit	166,585		147,761		18,685		139		—
Total	$	2,112,791	$	862,913	$	226,417	$	206,306	$	817,155

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 10 to the consolidated financial statements.

Capital

In July 2013, the Federal Reserve, the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency (“OCC”) published final rules establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. Basel III refers to various documents released by the Basel Committee on Banking Supervision. The new rules became effective for National Penn and National Penn Bank in January 2015, with some rules transitioned into full effectiveness over two to four years. The new capital rules, among other things, introduce a new capital measure called common equity Tier 1, increase the required leverage and Tier 1 capital ratios, change the risk-weightings of certain assets for purposes of risk-based capital ratios, create an additional capital conservation buffer over the required capital ratios, and change what qualifies as capital for purposes of meeting the various capital requirements. The new capital rules most significantly impacted the treatment of the Company's deferred tax assets when calculating capital and the increased risk-weighting of certain non-performing loans, as well as the new requirement to risk-weight loan commitments with a maturity of less than one year. The adoption of the new capital rules did not have a significant impact on the Company's capital ratios.

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At September 30, 2015, National Penn and National Penn Bank’s capital ratios exceeded the criteria to be considered a “well-capitalized” institution under the final rules.  Management believes that, under current regulations, the Company and National Penn Bank will each continue to exceed the "Well Capitalized" capital requirements in the foreseeable future.

September 30, 2015									To be Well
									Capitalized Under
(dollars in thousands)					For Capital				Prompt Corrective
	Actual				Adequacy Purposes				Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Common equity Tier 1 capital (to risk-weighted assets)
National Penn	$	855,130	12.27	%	$	313,643	4.50	%	n/a		n/a
National Penn Bank	850,235		12.23	%	312,871		4.50	%	$	451,925	6.50	%
Tier I capital (to risk-weighted assets)
National Penn	$	925,046	13.27	%	$	418,191	6.00	%	n/a		n/a
National Penn Bank	850,235		12.23	%	417,162		6.00	%	$	556,215	8.00	%
Total capital (to risk-weighted assets)
National Penn	$	1,008,194	14.47	%	$	557,588	8.00	%	n/a		n/a
National Penn Bank	933,384		13.42	%	556,215		8.00	%	$	695,269	10.00	%
Tier I capital (to average assets)
National Penn	$	925,046	10.06	%	$	367,849	4.00	%	n/a		n/a
National Penn Bank	850,235		9.26	%	367,396		4.00	%	$	459,245	5.00	%

December 31, 2014									To be Well
									Capitalized Under
(dollars in thousands)					For Capital				Prompt Corrective
	Actual				Adequacy Purposes				Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Tier I capital (to risk-weighted assets)
National Penn	$	963,629	13.91	%	$	277,169	4.00	%	n/a		n/a
National Penn Bank	767,993		11.18	%	274,774		4.00	%	$	412,161	6.00	%
Total capital (to risk-weighted assets)
National Penn	$	1,050,295	15.16	%	$	554,339	8.00	%	n/a		n/a
National Penn Bank	853,919		12.43	%	549,548		8.00	%	$	686,935	10.00	%
Tier I capital (to average assets)
National Penn	$	963,629	10.78	%	$	357,615	4.00	%	n/a		n/a
National Penn Bank	767,993		8.61	%	356,769		4.00	%	$	445,961	5.00	%

On January 22, 2015, the Company announced that the Board of Directors approved a common share repurchase plan of $125 million. The authorization of this repurchase plan superseded all pre-existing share repurchase plans. During the first quarter of 2015, the Company repurchased 7.5 million shares of common stock totaling $76.5 million pursuant to this plan, inclusive of the repurchase of 7.3 million shares of common stock totaling $75.0 million from Warburg Pincus at $10.25 per share. Under the terms of the Merger Agreement with BB&T, National Penn has agreed not to purchase, without BB&T's prior written consent, any shares of its common stock.

On March 16, 2015, the Company announced that funds affiliated with Warburg Pincus agreed to sell 11,565,072 shares of National Penn’s common stock, which comprised approximately 8.3% of outstanding shares, at $10.56 per share in an underwritten secondary offering pursuant to National Penn's shelf registration statement filed with the Securities and Exchange Commission. The transaction closed on March 20, 2015. Immediately following the completion of the offering, Warburg Pincus no longer owns any shares of National Penn’s common stock. No shares of common stock were sold by National Penn, and Warburg Pincus received all of the proceeds from the offering. 

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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, and/or

• Other techniques as appropriate.

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 interest 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 interest 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 an interest rate shift on the Company’s net interest income for the subsequent twelve months:

	Change in Net Interest Income
Change in Interest Rates	September 30,
(in basis points)	2015	2014
+300	3%	3%
+200	2%	2%
+100	1%	1%
-100	N/A*	N/A*

* Certain short-term interest rates are currently below 1%. Therefore, in a scenario where interest rates decline by 100 basis points, short-term interest rates decline to zero, resulting in a non-parallel downward shift. In this interest rate scenario, net interest income is estimated to decline for the subsequent twelve months by 2% based upon net interest income for the twelve months ended September 30, 2015 and 2014, respectively.

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ALCO forecasts net interest income and evaluates net interest income sensitivity on a continual basis, based on a variety of factors and assumptions. ALCO believes an interest rate ramp over twelve months, as reflected for 2015 in the table above, is a more probable rate scenario than an instantaneous shock, which was utilized in the September 30, 2014 results disclosed above. As illustrated in the table above, the Company has positioned itself to have a modest asset sensitivity 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 sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Report is incorporated herein by reference.

Item 4.  Controls and Procedures

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

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

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

As of September 30, 2015, National Penn’s management, under the supervision 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 Chief Executive Officer and Chief Financial Officer concluded that National Penn’s disclosure controls and procedures were effective as of September 30, 2015.

There were no changes in National Penn’s internal control over financial reporting during the quarter ended September 30, 2015 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

For a discussion of risk factors that could adversely affect our business, financial condition and/or results of operations, refer to Part I, "Item 1A. Risk Factors" of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014. Except as set forth below with respect to risk factors related to the merger with BB&T Corporation, there have been no material changes in the risk factors set forth in the 2014 Annual Report on Form 10-K.

Risk Factors Related to the Merger

National Penn will be subject to business uncertainties while the merger is pending, which could adversely affect its business.

Uncertainty about the effect of the merger on employees and customers may have an adverse effect on National Penn, and, consequently, the surviving corporation. These uncertainties may impair National Penn’s ability to attract, retain and motivate key personnel until the merger is consummated and for a period of time thereafter, and could cause customers and others that deal with National Penn to seek to change their existing business relationships with National Penn. Employee retention at National Penn may be particularly challenging during the pendency of the merger, as employees may experience uncertainty about their roles with the surviving corporation following the merger. In addition, the merger agreement restricts National Penn from making certain acquisitions and taking other specified actions without the consent of BB&T, and generally requires National Penn to continue its operations in the ordinary course, until the merger closes. These restrictions may prevent National Penn from pursuing attractive business opportunities that may arise prior to the completion of the merger.

The merger agreement may be terminated in accordance with its terms and the merger may not be completed.

The merger agreement is subject to a number of conditions which must be fulfilled in order to complete the merger. Those conditions include: the approval of the merger proposal by National Penn shareholders, the receipt of all required regulatory approvals and expiration or termination of all statutory waiting periods in respect thereof, the accuracy of representations and warranties under the merger agreement (subject to the materiality standards set forth in the merger agreement), BB&T’s and National Penn’s performance of their respective obligations under the merger agreement in all material respects and each of BB&T’s and National Penn’s receipt of a tax opinion to the effect that the merger will be treated as a “reorganization” within the meaning of Section 368(a) of the Code. These conditions to the closing of the merger may not be fulfilled in a timely manner or at all, and, accordingly, the merger may be delayed or may not be completed.

In addition, if the merger is not completed by August 17, 2016, either BB&T or National Penn may choose not to proceed with the merger, and the parties can mutually decide to terminate the merger agreement at any time, before or after shareholder approval. In addition, BB&T and National Penn may elect to terminate the merger agreement in certain other circumstances. If the merger agreement is terminated under certain circumstances, National Penn may be required to pay a termination fee of $64.5 million to BB&T.

Failure to complete the merger could negatively impact the stock price and the future business and financial results of National Penn.

If the merger is not completed for any reason, including as a result of National Penn shareholders declining to approve the merger agreement, the ongoing business of National Penn may be adversely affected and, without realizing any of the benefits of having completed the merger, National Penn would be subject to a number of risks, including the following:

• National Penn may experience negative reactions from the financial markets, including negative impacts on its stock price;

• National Penn may experience negative reactions from its customers, vendors and employees;

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• National Penn will have incurred substantial expenses and will be required to pay certain costs relating to the merger, whether or not the merger is completed;

• the merger agreement places certain restrictions on the conduct of National Penn’s businesses prior to completion of the merger. Such restrictions, the waiver of which is subject to the consent of BB&T (not to be unreasonably withheld), may prevent National Penn from making certain acquisitions or taking certain other specified actions during the pendency of the merger; and

• matters relating to the merger (including integration planning) will require substantial commitments of time and resources by National Penn management, which would otherwise have been devoted to other opportunities that may have been beneficial to National Penn as an independent company.

In addition to the above risks, if the merger agreement is terminated and National Penn’s board of directors seeks another merger or business combination, National Penn shareholders cannot be certain that National Penn will be able to find a party willing to offer equivalent or more attractive consideration than the consideration BB&T has agreed to provide in the merger. If the merger agreement is terminated under certain circumstances, National Penn may be required to pay a termination fee of $64.5 million to BB&T.

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:

• Risks, uncertainties and other factors relating to the merger of National Penn with and into BB&T, including the ability to obtain regulatory approvals and meet other closing conditions to the merger, including approval of the merger by National Penn shareholders and delay in closing the merger.

• 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.

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• 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.

• 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.

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 September 30, 2015.

(dollars in thousands, except share and per share data)
Period	Total No. of Shares Purchased (1)	Weighted-average Price Paid per Share		Total No. of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Dollar Value of Shares that may yet be Purchased Under the Plans or Programs (2)
July 1, 2015 through July 31, 2015	—	$	—	—	$	48,484
August 1, 2015 through August 31, 2015	115	10.80		—	48,484
September 1, 2015 through September 30, 2015	—	—		—	48,484
Total	115			—

1. Represents shares of National Penn common stock acquired by National Penn in connection with the satisfaction of tax withholding obligations on vested restricted stock.

2. National Penn's current stock repurchase program was announced by the Company on January 22, 2015 and is authorized for the remainder of 2015. This repurchase program authorizes the repurchase of up to $125 million. Under the terms of the Merger Agreement with BB&T, National Penn has agreed not to purchase, without BB&T's prior written consent, any shares of its common stock.

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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

2.1	Agreement and Plan of Merger, dated as of August 17, 2015, by and between BB&T Corporation and National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 2.1 in National Penn’s Current Report on Form 8-K, filed August 20, 2015).
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	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	Statement or Certificate of Change of Registered Office (Incorporated by reference to Exhibit 3.4 to National Penn’s Annual Report on Form 10-K, as filed on March 3, 2014).
3.4	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.)
31.1	Certification of 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 Chief Executive Officer of National Penn Bancshares, Inc., pursuant to Commission Rule 13a-14(b) and 18 U.S.C. Section 1350.
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.

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:	November 4, 2015	By:	/s/ Scott V. Fainor
			Name:	Scott V. Fainor
			Title:	President and Chief Executive Officer
Date:	November 4, 2015	By:	/s/ Michael J. Hughes
			Name:	Michael J. Hughes
			Title:	Senior Executive Vice President and
				Chief Financial Officer

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