National Penn Bancshares 10Q 2012 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

	x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
		SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended March 31, 2012
		OR
	o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
		SECURITIES EXCHANGE ACT OF 1934

		For the transition period from ________________ to ________________

000-22537-01

(Commission File Number)

NATIONAL PENN BANCSHARES, INC.

(Exact Name of Registrant as Specified in Charter)

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

Philadelphia and Reading Avenues, Boyertown, PA 19512 (Address of Principal Executive Offices)

(800) 822-3321

Registrant’s telephone number, including area code

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xNo 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 x 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 x Accelerated filer ¨

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 x

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

Class		Outstanding at May 4, 2012
Common Stock, no stated par value		152,363,431 shares

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION	3

Item 1. Financial Statements	3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3. Quantitative and Qualitative Disclosures About Market Risk	45

Item 4. Controls and Procedures	45

PART II - OTHER INFORMATION	46

Item 1. Legal Proceedings	46

Item 1A. Risk Factors	46

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 3. Defaults Upon Senior Securities	54

Item 4. Mine Safety Disclosures	54

Item 5. Other Information	54

Item 6. Exhibits	55

SIGNATURES	56

EXHIBITS	57

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	Unaudited
(dollars in thousands)	March 31,			December 31,
	2012			2011
ASSETS
Cash and due from banks	$	108,752		$	129,637
Interest-earning deposits with banks		344,427			321,885
Total cash and cash equivalents		453,179			451,522

Investment securities available-for-sale, at fair value		1,779,613			1,747,019
Investment securities held-to-maturity
(Fair value $521,521 and $528,598 for 2012 and 2011, respectively)		487,507			496,574
Other securities		68,301			70,518
Loans held-for-sale		16,909			12,216
Loans and leases, net of allowance for loan and lease losses of $121,452 and $126,640 for 2012 and 2011, respectively		5,063,295			5,049,245
Premises and equipment, net		95,937			96,198
Accrued interest receivable		31,241			30,991
Bank owned life insurance		139,507			138,274
Other real estate owned and other repossessed assets		7,647			7,716
Goodwill		258,279			258,279
Other intangible assets, net		14,408			15,770
Unconsolidated investments		11,699			12,173
Other assets		96,513			99,786
TOTAL ASSETS	$	8,524,035		$	8,486,281

LIABILITIES
Non-interest bearing deposits	$	884,025		$	863,703
Interest bearing deposits		5,004,358			5,011,116
Total deposits		5,888,383			5,874,819

Customer repurchase agreements		542,706			523,978
Structured repurchase agreements		85,000			85,000
Federal Home Loan Bank advances		615,863			616,111
Subordinated debentures		143,666			145,310
Accrued interest payable and other liabilities		47,587			60,376
TOTAL LIABILITIES		7,323,205			7,305,594

SHAREHOLDERS' EQUITY
Common stock, no stated par value; authorized 250,000,000 shares, issued and
outstanding: March 31, 2012 - 152,295,895; December 31, 2011 - 151,883,036		1,384,657			1,383,082
Accumulated deficit		(205,497	)		(223,189	)
Accumulated other comprehensive income		21,670			20,794
TOTAL SHAREHOLDERS' EQUITY		1,200,830			1,180,687

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	8,524,035		$	8,486,281

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

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended
(dollars in thousands, except per share data)	March 31,
	2012			2011
INTEREST INCOME
Loans and leases, including fees	$	62,291		$	69,228
Investment securities
Taxable		11,209			11,357
Tax-exempt		7,781			8,493
Deposits with banks		133			280
Total interest income		81,414			89,358
INTEREST EXPENSE
Deposits		7,294			11,407
Customer repurchase agreements		550			712
Structured repurchase agreements		915			1,683
Federal Home Loan Bank advances		6,967			7,217
Subordinated debentures		1,870			2,369
Total interest expense		17,596			23,388
Net interest income		63,818			65,970
Provision for loan and lease losses		2,000			10,000
Net interest income after provision for loan and lease losses		61,818			55,970
NON-INTEREST INCOME
Wealth management		6,161			5,924
Service charges on deposit accounts		3,823			4,664
Insurance commissions and fees		3,296			3,221
Cash management and electronic banking fees		4,420			4,371
Mortgage banking		1,335			1,080
Bank owned life insurance		1,209			1,220
(Losses) earnings of unconsolidated investments		(74	)		1,700
Other operating income		2,426			2,055
Net gains (losses) from fair value changes on subordinated debentures		1,645			(51	)
Total non-interest income		24,241			24,184

NON-INTEREST EXPENSE
Salaries, wages and employee benefits		31,381			31,449
Premises and equipment		6,853			7,272
FDIC insurance		1,264			3,457
Other operating expenses		12,942			14,659
Total non-interest expense		52,440			56,837
Income before income taxes		33,619			23,317
Income tax expense		8,317			4,537
NET INCOME		25,302			18,780
Preferred dividends and accretion of preferred discount		-			(1,691	)
Accelerated accretion from redemption of preferred stock		-			(1,452	)
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	25,302		$	15,637
PER SHARE OF COMMON STOCK
Basic earnings available to common shareholders	$	0.17		$	0.10
Diluted earnings available to common shareholders	$	0.17		$	0.10
Dividends paid in cash	$	0.05		$	0.01

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

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended
	March 31, 2012
	Before				Net of
(dollars in thousands)	Tax		Tax		Tax
	Amount		Expense		Amount

Net income	$	33,619	$	8,317	$	25,302

Unrealized gains on investment securities		1,348		472		876
Other comprehensive income		1,348		472		876

Total comprehensive income	$	34,967	$	8,789	$	26,178


	Three Months Ended
	March 31, 2011
	Before				Net of
(dollars in thousands)	Tax		Tax		Tax
	Amount		Expense		Amount

Net income	$	23,317	$	4,537	$	18,780

Unrealized gains on investment securities		11,232		3,931		7,301
Unrealized gains on cash flow hedges		517		-		517
Other comprehensive income		11,749		3,931		7,818

Total comprehensive income	$	35,066	$	8,468	$	26,598

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

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

								Accumulated
(dollars in thousands, except share data)								Other
	Common				Accumulated			Comprehensive
	Shares		Value		Deficit			Income		Total
Balance at December 31, 2011		151,883,036	$	1,383,082	$	(223,189	)	$	20,794	$	1,180,687
Comprehensive income:
Net income						25,302					25,302
Other comprehensive income, net of taxes									876		876
Total comprehensive income											26,178

Cash dividends declared common						(7,610	)				(7,610	)
Shares issued under share-based plans,
net of excess tax benefits		412,859		1,575							1,575

Balance at March 31, 2012		152,295,895	$	1,384,657	$	(205,497	)	$	21,670	$	1,200,830

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

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS


(dollars in thousands)	Three Months Ended March 31,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	25,302		$	18,780
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses		2,000			10,000
Depreciation and amortization		3,420			4,179
Amortization of premiums and discounts on investment securities, net		888			622
(Decrease) increase in fair value of subordinated debentures		(1,645	)		51
Bank owned life insurance policy income		(1,209	)		(1,220	)
Share-based compensation expense		943			1,528
Losses (gains) on unconsolidated investments, net of distributions		474			(729	)
Loans originated for resale		(43,316	)		(33,951	)
Proceeds from sale of loans		39,669			41,906
Gain on sale of loans, net		(1,046	)		(731	)
Gain on sale of other real estate owned, net		(141	)		-
Changes in assets and liabilities:
Increase in accrued interest receivable		(250	)		(435	)
Decrease in accrued interest payable		(1,997	)		(3,890	)
Decrease in other assets		2,632			3,639
Decrease in other liabilities		(10,792	)		(12,014	)
Net cash provided by operating activities		14,932			27,735
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and repayments of investment securities held-to-maturity		8,949			11,295
Proceeds from maturities and repayments of investment securities available-for-sale		85,307			81,222
Purchase of investment securities available-for-sale		(117,322	)		(60,716	)
Proceeds from sale of other securities		2,217			-
Proceeds from sale of loans previously held for investment		1,336			2,007
Net (increase) decrease in loans and leases		(17,475	)		54,800
Purchases of premises and equipment		(1,969	)		(546	)
Proceeds from the sale of other real estate owned		240			65
Net cash (used in) provided by investing activities		(38,717	)		88,127
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in core deposits		84,381			(18,709	)
Net decrease in certificates of deposit		(70,817	)		(107,448	)
Net increase (decrease) in short-term borrowings and customer repurchase agreements		18,728			(42,015	)
Repayments of FHLB advances and structured repurchase agreements		(76	)		(75,812	)
Proceeds from shares issued under share-based plans		359			678
Excess tax expense (benefit) on share-based plans		40			(351	)
Issuance of shares under dividend reinvestment plan and optional cash		437			274
Issuance of common stock in private placement		-			84,543
Repayment of Series B Preferred stock		-			(150,000	)
Cash dividends, common		(7,610	)		(1,515	)
Cash dividends, preferred		-			(2,521	)
Net cash provided by (used in) financing activities		25,442			(312,876	)
Net increase (decrease) in cash and cash equivalents		1,657			(197,014	)
Cash and cash equivalents at beginning of year		451,522			702,382
Cash and cash equivalents at end of period	$	453,179		$	505,368

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

NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES

SUPPLEMENTAL CASH FLOW DISCLOSURES

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

	Three Months Ended
(dollars in thousands)	March 31,
	2012		2011
Interest	$	19,593	$	27,278
Income taxes		2,893		8,604

The Company’s investing and financing activities that affected assets or liabilities but did not result in cash receipts or cash payments were as follows:

	Three Months Ended
(dollars in thousands)	March 31,
	2012		2011
Transfers of loans to other real estate (a)	$	88	$	452


(a)	$0.1 million and $0.3 million of OREO was disposed of during the periods ending March 31, 2012 and 2011, respectively.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

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

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

2. EARNINGS PER SHARE

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

	Three Months Ended
(dollars in thousands, except per share data )	March 31,
	2012		2011
Income for EPS:
Net income available to common shareholders	$	25,302	$	15,637

Calculation of shares:
Weighted average basic shares		152,099,546		150,461,063
Dilutive effect of:
Share-based compensation		292,769		304,820
Warrants				-
Weighted average fully diluted shares		152,392,315		150,765,883

Earnings per common share:
Basic	$	0.17	$	0.10
Diluted	$	0.17	$	0.10

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

	Three Months Ended
	March 31,
	2012		2011
Stock options		4,956,732		5,127,737
Exercise price
Low	$	7.07	$	5.85
High	$	21.49	$	21.49

3. INVESTMENT SECURITIES

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

(dollars in thousands)	March 31, 2012
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
Available-for-Sale
U.S. Government agencies	$	2,997	$	62	$	-		$	3,059
State and municipal bonds		307,734		16,152		(2,677	)		321,209
Agency mortgage-backed securities/
collateralized mortgage obligations		1,383,508		43,698		(1,090	)		1,426,116
Non-agency collateralized mortgage obligations		12,947		260		(108	)		13,099
Corporate securities and other		12,016		477		(1,347	)		11,146
Marketable equity securities		3,749		1,260		(25	)		4,984
Total	$	1,722,951	$	61,909	$	(5,247	)	$	1,779,613

Held-to-Maturity
State and municipal bonds	$	417,913	$	30,725	$	(305	)	$	448,333
Agency mortgage-backed securities/
collateralized mortgage obligations		68,899		3,590		-			72,489
Non-agency collateralized mortgage obligations		695		4		-			699
Total	$	487,507	$	34,319	$	(305	)	$	521,521


(dollars in thousands)	December 31, 2011
			Gross		Gross
	Amortized		unrealized		unrealized			Fair
	cost		gains		losses			value
Available-for-Sale
U.S. Government agencies	$	2,997	$	75	$	-		$	3,072
State and municipal bonds		313,607		15,588		(3,573	)		325,622
Agency mortgage-backed securities/
collateralized mortgage obligations		1,344,442		43,230		(56	)		1,387,616
Non-agency collateralized mortgage obligations		14,887		292		(63	)		15,116
Corporate securities and other		12,023		486		(1,320	)		11,189
Marketable equity securities		3,749		758		(103	)		4,404
Total	$	1,691,705	$	60,429	$	(5,115	)	$	1,747,019

Held-to-Maturity
State and municipal bonds	$	421,046	$	29,284	$	(482	)	$	449,848
Agency mortgage-backed securities/
collateralized mortgage obligations		74,714		3,197		-			77,911
Non-agency collateralized mortgage obligations		814		25		-			839
Total	$	496,574	$	32,506	$	(482	)	$	528,598

During the three months ended March 31, 2012 and 2011, the Company did not sell investment securities.

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

March 31, 2012
			Less than 12 months		12 months or longer		Total
(dollars in thousands)		No. of	Fair	Unrealized	Fair	Unrealized	Fair	Unrealized
		Securities	Value	Losses	Value	Losses	Value	Losses
State and municipal bonds		75	$ 18,656	$ (261)	$ 32,920	$ (2,721)	$ 51,576	$ (2,982)
Agency mortgage-backed securities/
	collateralized mortgage obligations	16	74,595	(1,090)	-	-	74,595	(1,090)
Non-agency collateralized mortgage obligations		4	1,588	(108)	-	-	1,588	(108)
Corporate securities and other		7	2,495	(1,032)	2,672	(315)	5,167	(1,347)
	Total debt securities	102	97,334	(2,491)	35,592	(3,036)	132,926	(5,527)
Marketable equity securities		2	615	(25)	-	-	615	(25)
	Total	104	$ 97,949	$ (2,516)	$ 35,592	$ (3,036)	$ 133,541	$ (5,552)



December 31, 2011
			Less than 12 months		12 months or longer		Total
(dollars in thousands)		No. of	Fair	Unrealized	Fair	Unrealized	Fair	Unrealized
		Securities	Value	Losses	Value	Losses	Value	Losses
State and municipal bonds		92	$ 3,263	$ (33)	$ 55,715	$ (4,022)	$ 58,978	$ (4,055)
Agency mortgage-backed securities/
	collateralized mortgage obligations	4	23,226	(56)	-	-	23,226	(56)
Non-agency collateralized mortgage obligations		3	-	-	742	(63)	742	(63)
Corporate securities and other		9	4,461	(909)	2,576	(411)	7,037	(1,320)
	Total debt securities	108	30,950	(998)	59,033	(4,496)	89,983	(5,494)
Marketable equity securities		5	588	(103)	-	-	588	(103)
	Total	113	$ 31,538	$ (1,101)	$ 59,033	$ (4,496)	$ 90,571	$ (5,597)

Investment securities were pledged as collateral for the following:

(dollars in thousands)	March 31,		December 31,
	2012		2011
Deposits	$	749,395	$	808,873
Repurchase agreements		684,219		688,924
Other		28,648		43,145
Total	$	1,462,262	$	1,540,942

The amortized cost and fair value of investment securities, by contractual maturity, at March 31, 2012 are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(dollars in thousands)	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	842	$	850	$	-	$	-
Due after one through five years		34,467		37,009		-		-
Due after five through ten years		156,487		167,098		49,302		51,928
Due after ten years		1,527,406		1,569,672		438,205		469,593
Marketable equity securities		3,749		4,984		-		-
Total	$	1,722,951	$	1,779,613	$	487,507	$	521,521

Evaluation of Impairment of Securities

As of March 31, 2012 and December 31, 2011, the Company does not have any amortization recorded in AOCI for the non-credit-related components of OTTI.

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

The majority of the unrealized losses for twelve months or longer are attributed to municipal bonds. The Company evaluates a variety of factors in concluding whether the municipal bonds are other-than-temporarily impaired. These factors include, but are not limited to, the type and purpose of the bond, the underlying rating of the bond issuer, and the presence of credit enhancements (i.e. state guarantees, municipal bond insurance, collateral requirements, etc.). At March 31, 2012, approximately 70% of the Company’s municipal investment securities were general obligations of various municipalities and 30% were essential purpose revenue bonds. As a result of its review and considering the attributes of these bonds, the Company concluded that the securities were not other-than-temporarily impaired since the decline in the fair value of these securities is due to changes in relative credit spreads for the industry.

Because the Company does not intend to sell these investments and it is not more likely than not it will be required to sell these investments before a recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.

Other securities on the Company’s consolidated balance sheet totaled $68.3 million and $70.5 million as of March 31, 2012 and December 31, 2011, respectively. The balance includes FHLB of Pittsburgh stock and Federal Reserve Bank stock. These securities lack a market, and as such they are carried at cost since fair value is not readily determinable. The Company evaluates them for impairment each reporting period and has concluded the carrying value of these securities is not impaired. The Company will continue to monitor these investments for impairment each reporting period. During the first quarter of 2012, the FHLB of Pittsburgh repurchased $2.2 million of its capital stock from the Company at par.

4. LOANS

The following table represents loan and lease classifications as of March 31, 2012 and December 31, 2011:


March 31, 2012	Performing
(dollars in thousands)	Pass Rated Loans		Special Mention Loans		Classified Loans		Non-Performing Loans		Total

Commercial and industrial loans and leases	$	2,150,611	$	82,140	$	176,668	$	32,485	$	2,441,904

CRE - permanent		775,676		37,867		56,382		8,574		878,499
CRE - construction		86,641		8,917		41,803		14,336		151,697
Commercial real estate		862,317		46,784		98,185		22,910		1,030,196

Residential mortgages		688,063		-		-		6,746		694,809
Home equity lines and loans		734,553		-		234		2,529		737,316
All other consumer		270,427		2,819		5,581		1,695		280,522
Consumer loans		1,693,043		2,819		5,815		10,970		1,712,647

Loans and leases	$	4,705,971	$	131,743	$	280,668	$	66,365	$	5,184,747


December 31, 2011	Performing
(dollars in thousands)	Pass Rated Loans		Special Mention Loans		Classified Loans		Non-Performing Loans		Total

Commercial and industrial loans and leases	$	2,113,637	$	75,988	$	199,262	$	31,140	$	2,420,027

CRE - permanent		746,741		42,259		56,663		9,861		855,524
CRE - construction		89,085		14,140		40,622		12,217		156,064
Commercial real estate		835,826		56,399		97,285		22,078		1,011,588

Residential mortgages		703,150		-		-		7,172		710,322
Home equity lines and loans		743,356		-		-		4,202		747,558
All other consumer		274,271		2,819		4,906		4,394		286,390
Consumer loans		1,720,777		2,819		4,906		15,768		1,744,270

Loans and leases	$	4,670,240	$	135,206	$	301,453	$	68,986	$	5,175,885

The following table represents the details for past-due loans and leases as of March 31, 2012 and December 31, 2011:

March 31, 2012	30-59 Days Past Due and Still Accruing			60-89 Days Past Due and Still Accruing			90 Days or More Past Due and Still Accruing (1)			Total Past Due and Still Accruing			Accruing Current Balances		Non-Accrual Balances (2)			Total Loan Balances
(dollars in thousands)

Commercial and industrial loans and leases	$	2,636		$	946		$	181		$	3,763		$	2,405,656	$	32,485		$	2,441,904

CRE - permanent		6,960			-			-			6,960			866,383		5,156			878,499
CRE - construction		-			-			-			-			137,361		14,336			151,697
Commercial real estate		6,960			-			-			6,960			1,003,744		19,492			1,030,196

Residential mortgages		4,605			80			-			4,685			686,047		4,077			694,809
Home equity lines and loans		3,231			813			247			4,291			730,915		2,110			737,316
All other consumer		2,268			941			1,160			4,369			274,458		1,695			280,522
Consumer loans		10,104			1,834			1,407			13,345			1,691,420		7,882			1,712,647

Loans and leases	$	19,700		$	2,780		$	1,588		$	24,068		$	5,100,820	$	59,859		$	5,184,747

Percent of loans and leases		0.38	%		0.05	%		0.03	%		0.46	%				1.15	%


December 31, 2011	30-59 Days Past Due and Still Accruing			60-89 Days Past Due and Still Accruing			90 Days or More Past Due and Still Accruing (1)			Total Past Due and Still Accruing			Accruing Current Balances		Non-Accrual Balances (2)			Total Loan Balances
(dollars in thousands)

Commercial and industrial loans and leases	$	8,113		$	2,253		$	59		$	10,425		$	2,378,521	$	31,081		$	2,420,027

CRE - permanent		724			209			-			933			847,188		7,403			855,524
CRE - construction		1,324			389			-			1,713			142,133		12,218			156,064
Commercial real estate		2,048			598			-			2,646			989,321		19,621			1,011,588

Residential mortgages		2,209			603			4			2,816			703,002		4,504			710,322
Home equity lines and loans		2,953			756			728			4,437			740,075		3,046			747,558
All other consumer		2,325			933			1,219			4,477			278,737		3,176			286,390
Consumer loans		7,487			2,292			1,951			11,730			1,721,814		10,726			1,744,270

Loans and leases	$	17,648		$	5,143		$	2,010		$	24,801		$	5,089,656	$	61,428		$	5,175,885

Percent of loans and leases		0.34	%		0.10	%		0.04	%		0.48	%				1.19	%

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

(2) At March 31, 2012, non-accrual balances included troubled debt restructurings of $5.6 million commercial real estate and $11.1 million of commercial and industrial loans. At December 31, 2011, non-accrual balances included troubled debt restructurings of $8.6 million commercial real estate and $11.2 million of commercial and industrial loans.

Changes in the allowance for loan and lease losses by loan portfolio for the three months ended March 31, 2012 and 2011 are as follows:

March 31, 2012
(dollars in thousands)	Commercial (1)			Commercial Real Estate (2)			Consumer (3)			Unallocated			Total
Allowance for loan and lease losses:
Beginning balance	$	55,815		$	40,722		$	19,660		$	10,443		$	126,640
Charge-offs		(2,692	)		(2,785	)		(3,245	)		-			(8,722	)
Recoveries		767			179			588			-			1,534
Provision		997			1,900			1,430			(2,327	)		2,000
Ending balance	$	54,887		$	40,016		$	18,433		$	8,116		$	121,452
Allowance for loan and lease losses:
Individually evaluated for impairment	$	6,662		$	3,318		$	1,142		$	-		$	11,122
Collectively evaluated for impairment		48,225			36,698			17,291			8,116			110,330
Total allowance for loan and lease losses	$	54,887		$	40,016		$	18,433		$	8,116		$	121,452
Loans and leases:
Individually evaluated for impairment	$	32,485		$	25,332		$	10,970		$	-		$	68,787
Collectively evaluated for impairment		2,409,419			1,004,864			1,701,677			-			5,115,960
Loans and leases	$	2,441,904		$	1,030,196		$	1,712,647		$	-		$	5,184,747

March 31, 2011
(dollars in thousands)	Commercial (1)			Commercial Real Estate (2)			Consumer (3)			Unallocated			Total
Allowance for loan and lease losses:
Beginning balance	$	69,655		$	51,177		$	20,897		$	8,325		$	150,054
Charge-offs		(9,569	)		(5,313	)		(3,871	)		-			(18,753	)
Recoveries		250			494			915			-			1,659
Provision		5,455			2,553			2,177			(185	)		10,000
Ending balance	$	65,791		$	48,911		$	20,118		$	8,140		$	142,960
Allowance for loan and lease losses:
Individually evaluated for impairment	$	3,147		$	1,453		$	73		$	-		$	4,673
Collectively evaluated for impairment		62,644			47,458			20,045			8,140			138,287
Total allowance for loan and lease losses	$	65,791		$	48,911		$	20,118		$	8,140		$	142,960
Loans and leases:
Individually evaluated for impairment	$	34,122		$	33,419		$	9,429		$	-		$	76,970
Collectively evaluated for impairment		2,376,809			993,380			1,797,987			-			5,168,176
Loans and leases	$	2,410,931		$	1,026,799		$	1,807,416		$	-		$	5,245,146

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

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

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

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

Impaired loan and lease details as of March 31, 2012 and December 31, 2011 are as follows:

March 31, 2012
(dollars in thousands)	Recorded Investment With Related Allowance		Recorded Investment Without Related Allowance		Total Recorded Investment		Life-to-date Charge-offs		Total Unpaid Balances		Related Allowance		Average Recorded Investment
Commercial and industrial loans and leases	$	17,651	$	14,834	$	32,485	$	3,980	$	36,465	$	6,662	$	31,476

CRE - permanent		6,198		4,798		10,996		6,749		17,745		655		11,809
CRE - construction		13,439		897		14,336		13,148		27,484		2,663		12,783
Commercial real estate		19,637		5,695		25,332		19,897		45,229		3,318		24,592

Residential mortgages		2,648		4,098		6,746		428		7,174		633		7,241
Home equity lines and loans		771		1,758		2,529		2,314		4,843		509		3,286
All other consumer		-		1,695		1,695		-		1,695		-		2,720
Consumer loans		3,419		7,551		10,970		2,742		13,712		1,142		13,247

Total	$	40,707	$	28,080	$	68,787	$	26,619	$	95,406	$	11,122	$	69,315

December 31, 2011
(dollars in thousands)	Recorded Investment With Related Allowance		Recorded Investment Without Related Allowance		Total Recorded Investment		Life-to-date Charge-offs		Total Unpaid Balances		Related Allowance		Average Recorded Investment
Commercial and industrial loans and leases	$	13,363	$	17,718	$	31,081	$	5,992	$	37,073	$	4,003	$	31,845

CRE - permanent		2,285		7,575		9,860		6,586		16,446		1,160		14,079
CRE - construction		8,698		3,519		12,217		14,711		26,928		1,972		15,560
Commercial real estate		10,983		11,094		22,077		21,297		43,374		3,132		29,639

Residential mortgages		2,698		4,470		7,168		560		7,728		662		6,479
Home equity lines and loans		1,374		2,100		3,474		1,919		5,393		1,112		2,244
All other consumer		-		3,176		3,176		516		3,692		-		2,025
Consumer loans		4,072		9,746		13,818		2,995		16,813		1,774		10,748

Total	$	28,418	$	38,558	$	66,976	$	30,284	$	97,260	$	8,909	$	72,232


	Three Months Ended
(dollars in thousands)	March 31,
	2012			2011
Gross interest due on impaired loans	$	1,280		$	2,148
Interest received on impaired loans		(20	)		(510	)
Net impact of impaired loans on interest income	$	1,260		$	1,638

Average recorded investment in impaired loans	$	69,315		$	81,967

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

(dollars in thousands)	March 31,		December 31,
	2012		2011
CRE - permanent	$	3,418	$	2,456
Residential mortgages		2,669		2,664
Home equity lines and loans		419		428
Total restuctured loans	$	6,506	$	5,548

Undrawn commitments to lend on restructured loans	$	-	$	-

5. DEPOSITS

(dollars in thousands)	March 31, 2012					December 31, 2011
	Balance		Cost (a)			Balance		Cost (a)
NOW accounts	$	1,294,591		0.15	%	$	1,293,148		0.17	%
Money market accounts		1,698,427		0.40	%		1,686,909		0.44	%
Savings		495,191		0.13	%		454,003		0.15	%
CDs less than $100		1,089,601		1.32	%		1,138,908		1.43	%
CDs $100 or greater		426,548		1.27	%		438,148		1.22	%
Total interest bearing deposits		5,004,358		0.59	%		5,011,116		0.65	%
Non-interest bearing deposits		884,025		-			863,703		-
Total deposits	$	5,888,383		0.51	%	$	5,874,819		0.56	%

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

At March 31, 2012, the scheduled maturities of certificates of deposit were as follows:

(dollars in thousands)	2012	$	735,099
	2013		356,513
	2014		237,910
	2015		70,791
	2016		94,184
	Thereafter		21,652
	Total	$	1,516,149

6. BORROWINGS

(dollars in thousands)	March 31, 2012					December 31, 2011
	Balance		Cost (a)			Balance		Cost (a)
Customer repurchase agreements	$	542,706		0.42	%	$	523,978		0.43	%
Structured repurchase agreements		85,000		4.33	%		85,000		4.05	%
Federal Home Loan Bank advances		615,863		4.55	%		616,111		4.50	%
Subordinated debentures accounted for at fair value		66,345		7.85	%		67,989		7.85	%
Subordinated debentures accounted for at amortized cost		77,321		3.07	%		77,321		3.84	% (b)
Total borrowings and other debt obligations	$	1,387,235		3.03	%	$	1,370,399		3.07	%


(a) Cost represents interest incurred during the respective quarter.
(b) The cost includes the impact of the interest rate swaps until their expiration in the fourth quarter of 2011.

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 March 31, 2012, the Company did not have material amounts accrued for legal proceedings as it is the opinion of management that the resolution of such suits will not have a material effect on the financial position or results of operations of the Company. The outcome of legal proceedings is inherently uncertain, and as a result, the amounts recorded may not represent the ultimate loss upon resolution by the Company. Thus, the Company’s exposure and ultimate losses may be higher or lower than amounts accrued or estimated as reasonably possible exposure.

8. ACCUMULATED OTHER COMPREHENSIVE INCOME

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

(dollars in thousands)	March 31,			December 31,
	2012			2011
Unrealized gains on investment securities	$	36,831		$	35,955
Pension		(15,161	)		(15,161	)
Total accumulated other comprehensive income	$	21,670		$	20,794

9. EQUITY

On April 2, 2012, National Penn announced an increase to the second quarter cash dividend to seven cents per share from five cents per share in the first quarter of 2012.

Additionally, the Board of Directors authorized the repurchase of up to 7.5 million shares of National Penn’s common stock throughout 2012, which represents approximately five percent (5%) of the outstanding shares. The authorization of this repurchase plan supersedes all pre-existing share repurchase plans.

10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

Contract or notional amounts are as follows:

	As of:
(dollars in thousands)	March 31, 2012		December 31, 2011
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	1,484,073	$	1,452,348
Commitments to fund mortgages		34,003		27,067
Commitments to sell mortgages to investors		51,172		39,283
Letters of credit		148,834		157,240

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

Summary information regarding interest rate swap derivative positions which were not designated in hedging relationships at March 31, 2012 and December 31, 2011 are as follows:

(dollars in thousands)
			Notional						Receive			Pay			Life
March 31, 2012	Positions		Amount		Asset		Liability		Rate			Rate			(Years)

Receive fixed - pay floating interest rate swaps		86	$	258,326	$	21,705	$	-		5.67	%		2.12	%		5.44
Pay fixed - receive floating interest rate swaps		86		258,326		-		21,705		2.12	%		5.67	%		5.44
Net interest rate swaps			$	516,652	$	21,705	$	21,705		3.90	%		3.90	%		5.44

December 31, 2011

Receive fixed - pay floating interest rate swaps		78	$	195,263	$	22,598	$	-		5.90	%		2.11	%		5.03
Pay fixed - receive floating interest rate swaps		78		195,263		-		22,598		2.11	%		5.90	%		5.03
Net interest rate swaps			$	390,526	$	22,598	$	22,598		4.01	%		4.01	%		5.03

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

The following summarizes the Company’s derivative activity:

		Income Statement Effect
	Balance Sheet Effect at	for the Three Months Ended
Derivative Activity	March 31, 2012	March 31, 2012

Interest rate swaps:	Increase to other assets/liabilities	No net effect on other operating income from
	of $21.7 million.	offsetting $0.9 million change.

Other derivatives:
Interest rate locks	Increase to other liabilities of $0.2 million.	Decrease to mortgage banking income of $0.8 million.
Forward sale commitments	Increase to other assets of $0.4 million.	Increase to mortgage banking income of $1.3 million.

		Income Statement Effect
	Balance Sheet Effect at	for the Three Months Ended
Derivative Activity	December 31, 2011	March 31, 2011

Cash flow hedges:
Pay fixed - receive floating	There was no impact due to the	The ineffective portion is zero.
interest rate swaps	expiration of all cash flow hedges.	Increase to interest expense of $0.6 million for net
		settlements.

Interest rate swaps:	Increase to other assets/liabilities	No net effect on other operating income from
	of $22.6 million.	offsetting $2.5 million change.

Other derivatives:
Interest rate locks	Increase to other assets of $0.6 million.	Increase to mortgage banking income of $0.1 million.
Forward sale commitments	Increase to other liabilities of $0.9 million.	Decrease to mortgage banking income of $0.1 million.

11. FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

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

Basis of Fair Value Measurement:

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

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

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

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

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

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

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

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

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

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

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions. Valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Internal cash flow models using a present value formula along with indicative exit pricing obtained from broker/dealers are used to fair value Level 3 investments.

Management changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows. Fair values for securities classified within Level 3 are determined as follows:

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

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

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

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

Specifically, the fair value option was applied to the Company’s only fixed rate subordinated debenture liability with a cost basis of $65.2 million and fair value of $66.3 million at March 31, 2012. Non-interest income included a gain of $1.6 million and a loss of $0.1 million for the change in fair value of the subordinated debenture for the three months ended March 31, 2012 and 2011, respectively. This subordinated debenture has a fixed rate of 7.85% and a maturity date of September 30, 2032 with a call provision after September 30, 2007. The Company elected the fair value option for asset/liability management purposes. The subordinated debenture is measured based on an unadjusted, quoted price of the traded asset (Nasdaq: “NPBCO”) in an active market on the final day of each month.

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

			Quoted Prices		Significant
			in Active		Other		Significant
(dollars in thousands)	Total		Markets for		Observable		Unobservable
	Fair Value at		Identical Assets		Inputs		Inputs
	March 31, 2012		(Level 1)		(Level 2)		(Level 3)
Assets
U.S. Government agencies	$	3,059	$	-	$	3,059	$	-
State and municipal bonds		321,209		-		321,209		-
Agency mortgage-backed securities/collateralized mortgage obligations		1,426,116		-		1,426,116		-
Non-agency collateralized mortgage obligations		13,099		-		13,099		-
Corporate securities and other		11,146		1,178		8,493		1,475
Marketable equity securities		4,984		3,849		-		1,135
Investment securities, available-for-sale	$	1,779,613	$	5,027	$	1,771,976	$	2,610

Forward sale commitments		448		-		448		-
Interest rate swap agreements		21,705		-		21,705		-

Liabilities
Subordinated debentures	$	66,345	$	66,345	$	-	$	-
Interest rate locks		189		-		189		-
Interest rate swap agreements		21,705		-		21,705		-


			Quoted Prices		Significant
			in Active		Other		Significant
(dollars in thousands)	Total		Markets for		Observable		Unobservable
	Fair Value at		Identical Assets		Inputs		Inputs
	December 31, 2011		(Level 1)		(Level 2)		(Level 3)
Assets
U.S. Government agencies	$	3,072	$	-	$	3,072	$	-
State and municipal bonds		325,622		-		325,622		-
Agency mortgage-backed securities/collateralized mortgage obligations		1,387,616		-		1,387,616		-
Non-agency collateralized mortgage obligations		15,116		-		15,116		-
Corporate securities and other		11,189		1,117		8,452		1,620
Marketable equity securities		4,404		3,278		-		1,126
Investment securities, available-for-sale	$	1,747,019	$	4,395	$	1,739,878	$	2,746

Interest rate locks		587		-		587		-
Interest rate swap agreements		22,598		-		22,598		-

Liabilities
Subordinated debentures	$	67,989	$	67,989	$	-	$	-
Forward sale commitments		852		-		852		-
Interest rate swap agreements		22,598		-		22,598		-

The following table presents activity for assets measured at fair value on a recurring basis for the three months ended March 31, 2012:

(dollars in thousands)
	Beginning Balance			Gains/ (losses)			Gains/ (losses) included in other							Maturities/								Ending Balance
Level 1	January 1,		included in			comprehensive								Calls/			Accretion/					March 31,
	2012			earnings			income			Purchases		Sales		Paydowns			Amortization			Transfers		2012
Corporate securities and other	$	1,117		$	-		$	62		$	-	$	-	$	-		$	(1	)	$	-	$	1,178
Marketable equity securities		3,278			-			571			-		-		-			-			-	$	3,849
Total level 1	$	4,395		$	-		$	633		$	-	$	-	$	-		$	(1	)	$	-	$	5,027


Level 2

U.S. Government agencies	$	3,072		$	-		$	(13	)	$	-	$	-	$	-		$	-		$	-	$	3,059
State and municipal bonds		325,622			-			1,459			-		-		(6,775	)		903			-	$	321,209
Agency mortgage-backed securities/collateralized mortgage obligations		1,387,616			-			(566	)		117,322		-		(76,585	)		(1,671	)		-	$	1,426,116
Non-agency collateralized
mortgage obligations		15,116			-			(77	)		-		-		(1,947	)		7			-	$	13,099
Corporate securities and other		8,452			-			48			-		-		-			(7	)		-	$	8,493
Total level 2	$	1,739,878		$	-		$	851		$	117,322	$	-	$	(85,307	)	$	(768	)	$	-	$	1,771,976


Level 3

Corporate securities and other	$	1,620		$	-		$	(145	)	$	-	$	-	$	-		$	-		$	-	$	1,475
Marketable equity securities		1,126			-			9			-		-		-			-			-	$	1,135
Total level 3	$	2,746		$	-		$	(136	)	$	-	$	-	$	-		$	-		$	-	$	2,610


Total available-for-sale securities	$	1,747,019		$	-		$	1,348		$	117,322	$	-	$	(85,307	)	$	(769	)	$	-	$	1,779,613

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.

	Quoted Prices
	in Active		Significant
(dollars in thousands)	Markets for		Other		Significant
	Identical		Observable		Unobservable
	Assets		Inputs		Inputs
March 31, 2012	(Level 1)		(Level 2)		(Level 3)		Balance
Assets
Loans held-for-sale	$	-	$	16,909	$	-	$	16,909
Impaired loans, net		-		-		57,665		57,665
OREO and other repossessed assets		-		-		7,647		7,647

December 31, 2011
Assets
Loans held-for-sale	$	-	$	12,216	$	-	$	12,216
Impaired loans, net		-		-		58,067		58,067
OREO and other repossessed assets		-		-		7,716		7,716

Fair value for loans held-for-sale is estimated based upon available market data for mortgage-backed securities with similar interest rates and maturities. Lower of cost or estimated fair value write-downs recorded on loans held-for-sale were $0.3 million for the three months ended March 31, 2012 and zero as of December 31, 2011.

Impaired loans totaled $68.8 million with a specific reserve of $11.1 million at March 31, 2012, compared to $67.0 million with a specific reserve of $8.9 million at December 31, 2011. Fair value for impaired loans is primarily measured based on the value of the collateral securing these loans, less estimated costs to sell, or the present value of estimated cash flows discounted at the loan’s original effective interest rate. Appraised values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business.

Fair value for OREO and other repossessed assets is estimated based upon its appraised value less costs to sell. There were no write-downs recorded on OREO and other repossessed assets for the three months ended March 31, 2012 and for the same period in 2011.

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

The estimation methodologies, resulting fair values and recorded carrying amounts at March 31, 2012 and December 31, 2011 were as follows:

(dollars in thousands)	March 31, 2012					December 31, 2011
	Carrying					Carrying
	Amount			Fair Value		Amount			Fair Value
ASSETS
Cash and cash equivalents	$	453,179		$	453,179	$	451,522		$	451,522
Investment securities available-for-sale		1,779,613			1,779,613		1,747,019			1,747,019
Investment securities held-to-maturity		487,507			521,521		496,574			528,598
Loans held-for-sale		16,909			16,909		12,216			12,482

Loans and leases		5,184,747			5,090,369		5,175,885			5,021,895
Allowance for loan and lease losses		(121,452	)		-		(126,640	)		-
Loans and leases, net	$	5,063,295		$	5,090,369	$	5,049,245		$	5,021,895

OREO and other repossessed assets	$	7,647		$	7,647	$	7,716		$	7,716
Forward sale commitments		448			448		-			-
Interest rate locks		-			-		587			587
Interest rate swap agreements		21,705			21,705		22,598			22,598

LIABILITIES
Non-interest bearing deposits	$	884,025		$	884,025	$	863,703		$	863,703
Interest bearing deposits, non-maturity		3,488,209			3,488,209		3,434,060			3,434,060
Deposits with stated maturities		1,516,149			1,524,533		1,577,056			1,575,222
Customer repurchase agreements		542,706			542,706		523,978			523,978
Structured repurchase agreements		85,000			90,564		85,000			90,820
Federal Home Loan Bank advances		615,863			699,945		616,111			705,493
Subordinated debentures		143,666			143,666		145,310			145,310
Forward sale commitments		-			-		852			852
Interest rate locks		189			189		-			-
Interest rate swap agreements		21,705			21,705		22,598			22,598

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

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

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

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

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

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

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

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

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

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

12. RETIREMENT PLANS

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

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

Net periodic benefit costs for the three months ended March 31, 2012 and 2011 included the following components:

(dollars in thousands)	Three Months Ended March 31,
	2012			2011
Service cost	$	31		$	30
Interest cost		574			583
Expected return on plan assets		(693	)		(686	)
Amortization of unrecognized net actual loss		139			73
Net periodic benefit cost	$	51		$	-

13. SHARE-BASED COMPENSATION

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

A total of 5.3 million shares of common stock have been made available for awards to be granted under these Plans through November 30, 2014. As of March 31, 2012, 1.4 million of these shares remain available for issuance. The Company has 1.0 million awards expiring during the next twelve months ending March 31, 2013.

As of March 31, 2012, there was approximately $2.1 million of total unrecognized compensation cost related to unvested stock options and approximately $4.6 million of unrecognized compensation cost for other share-based awards that is expected to be recognized within five years.

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

(dollars in thousands)	Three Months Ended
	March 31, 2012		March 31, 2011
Share-based compensation expense	$	943	$	1,528
Cash received		359		678
Intrinsic value of options exercised		1,350		2,633

14. SEGMENT REPORTING

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

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

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

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

	As of and for the
	Three Months Ended March 31, 2012
(dollars in thousands)	Community
	Banking		Other			Consolidated
Total assets	$	8,470,050	$	53,985		$	8,524,035
Total deposits		5,888,383		-			5,888,383
Net interest income (expense)		65,583		(1,765	)		63,818
Total non-interest income		12,087		12,154			24,241
Total non-interest expense		44,624		7,816			52,440
Net income available to common shareholders		25,039		263			25,302

	As of and for the
	Three Months Ended March 31, 2011
(dollars in thousands)	Community
	Banking		Other			Consolidated
Total assets	$	8,483,313	$	59,954		$	8,543,267
Total deposits		5,933,016		-			5,933,016
Net interest income (expense)		68,052		(2,082	)		65,970
Total non-interest income		13,765		10,419			24,184
Total non-interest expense		48,471		8,366			56,837
Net income (loss) available to common shareholders		20,370		(4,733	)		15,637

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 March 31, 2012, with a primary focus on an analysis of operating results. Current performance does not guarantee, and may not be indicative of similar performance in the future. The Company’s consolidated financial statements included in this Report are unaudited, and as such, are subject to year-end examination.

Statement Regarding Non-GAAP Financial Measures:

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

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

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

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

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

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

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

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

·	allowance for loan and lease losses;
·	goodwill and other intangible assets;
·	income taxes; and
·	other-than-temporary impairment.

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

FINANCIAL HIGHLIGHTS

Business and Industry

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

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

At March 31, 2012, National Penn operated 121 retail branch offices. It has 120 retail branch offices in Pennsylvania and one retail branch office in Maryland through National Penn Bank and its KNBT and Nittany Bank divisions.

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

Overview

Three months ended March 31, 2012 compared to December 31, 2011 and March 31, 2011:

(dollars in thousands, except per share data)	Three Months Ended
	March 31, 2012			December 31, 2011			March 31, 2011
EARNINGS
Total interest income	$	81,414		$	83,681		$	89,358
Total interest expense		17,596			19,160			23,388
Net interest income		63,818			64,521			65,970
Provision for loan and lease losses		2,000			2,000			10,000
Net interest income after provision for loan and lease losses		61,818			62,521			55,970
Net gains (losses) from fair value changes of subordinated debentures		1,645			(1,543	)		(51	)
Loss on debt extinguishment		-			(1,635	)		-
Net gains on sales of investment securities		-			1,697			-
Other non-interest income		22,596			22,978			24,235
Corporate reorganization expense		-			2,200			-
Other non-interest expense		52,440			55,186			56,837
Income before income taxes		33,619			26,632			23,317
Income tax expense		8,317			5,889			4,537
Net income		25,302			20,743			18,780
Preferred dividends and accretion of preferred discount		-			-			(1,691	)
Accelerated accretion from redemption of preferred stock		-			-			(1,452	)
Net income available to common shareholders	$	25,302		$	20,743		$	15,637

Basic earnings available to common shareholders	$	0.17		$	0.14		$	0.10
Diluted earnings available to common shareholders		0.17			0.14			0.10
Dividends per common share		0.05			0.04			0.01

Net interest margin		3.55	%		3.49	%		3.58	%
Efficiency ratio (1)		57.47	%		59.73	%		59.61	%
Return on average assets		1.21	%		0.97	%		0.88	%

Asset Quality Metrics
Allowance / total loans and leases		2.33	%		2.44	%		2.73	%
Non-performing loans / total loans and leases		1.28	%		1.29	%		1.47	%
Delinquent loans / total loans and leases		0.46	%		0.48	%		0.48	%
Allowance / non-performing loans and leases		183.0	%		189.1	%		185.7	%
Annualized net charge-offs / total average loans and leases		0.56	%		0.50	%		1.31	%

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

Net income available to common shareholders increased to $25.3 million for the three months ended March 31, 2012, as compared to $15.6 million in the same period of the prior year and $20.7 million for the fourth quarter of 2011. Improvements in net income available to common shareholders resulted from the following items:

Net interest income totaled $63.8 million for the first quarter of 2012 compared to $64.5 million for the fourth quarter of 2011 and $66.0 million for the first quarter of 2011. For the three months ended March 31, 2012, net interest margin improved to 3.55%, as compared to 3.49% in the fourth quarter of 2011 and declined modestly from 3.58% for the three months ended March 31, 2011. Reductions of higher-cost deposits continue to drive improvements in deposit mix and costs. For the three months ended March 31, 2012, the cost of deposits totaled 0.51%, a five basis point improvement from the fourth quarter of 2011 and a 27 basis point improvement from the prior year quarter. Additionally, total loans and leases grew modestly during the first quarter and contributed to the six basis points of net interest margin expansion.

During the first quarter of 2012, the Company continued to benefit from improving asset quality. The level of non-performing loans remained low while classified loans declined by 6.3% since December 31, 2011 and 21% since March 31, 2011. The improvement in asset quality resulted in an $8.0 million decrease to the provision for loan and lease losses (“provision”) which totaled $2.0 million for the three months ended March 31 2012, compared to $10.0 million for the three months ended March 31, 2011. The provision for loan and lease losses was unchanged from the fourth quarter of 2011 and allowance coverage ratios remained strong and equaled 183% of non-performing loans and leases.

Other non-interest income decreased modestly on a linked-quarter basis due to seasonality and volume of deposit service charges. Other non-interest income decreased from the prior year period due to earnings from unconsolidated investments of $1.7 million for the first quarter of 2011 compared to a $0.1 million loss in the current quarter.

Other non-interest expense continued to be well controlled in the first quarter of 2012 at $52.4 million, as compared to $55.2 in the fourth quarter of 2011 and $56.8 million in the first quarter of 2011. The decrease resulted primarily from reductions to other operating expenses and a reduction in FDIC insurance expense. The efficiency ratio was stable at 57.47% for the first quarter of 2012, as management continued to effectively manage expense levels.

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

(dollars in thousands, except per share data)	Three Months Ended
	March 31, 2012			December 31, 2011			March 31, 2011
Adjusted net income reconciliation
Net income available to common shareholders	$	25,302		$	20,743		$	15,637
After tax unrealized fair market value (gain) loss on subordinated debentures		(1,069	)		1,003			-
Corporate reorganization expense		-			1,430			-
Accelerated accretion from redemption of preferred stock		-			-			1,452
Adjusted net income available to common shareholders	$	24,233		$	23,176		$	17,089

Earnings per share
Net income available to common shareholders	$	0.17		$	0.14		$	0.10
After tax unrealized fair market value (gain) loss on subordinated debentures		(0.01	)		0.01			-
Corporate reorganization expense		-			0.01			-
Accelerated accretion from redemption of preferred stock		-			-			0.01
Adjusted net income available to common shareholders	$	0.16		$	0.16		$	0.11

Average assets	$	8,397,381		$	8,525,271		$	8,701,649
Adjusted return on average assets		1.16	%		1.08	%		0.80	%

Adjusted net income increased $7.1 million to $24.2 million, or $0.16 per diluted share, for the first quarter of 2012 from $17.1 million, or $0.11 per diluted share, for the first quarter of 2011 and was consistent with $23.2 million, or $0.16 per diluted share, for the fourth quarter of 2011. Adjusted net income continues to increase due to asset quality improvement and expense controls. Adjusted net income excluded the effects of the following items during the periods presented:

Non-interest income included a gain of $1.6 million, or $1.1 million after-tax ($0.01 per diluted share) on the Company’s subordinated debentures accounted for at fair value during the first quarter of 2012 compared to a loss of $1.5 million, or $1.0 million after-tax ($0.01 per diluted share) for the fourth quarter of 2011.

·	Non-interest expense included a $2.2 million, or $1.4 million after-tax ($0.01 per diluted share), charge for corporate reorganization expense in the fourth quarter of 2011.

·	The first quarter of 2011 included accelerated accretion of $1.5 million from the repayment of TARP.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Comparison of Financial Condition as of three months ended March 31, 2012 and December 31, 2011

SUMMARY BALANCE SHEET

(dollars in thousands, except per share data)	March 31, 2012			December 31, 2011

Total cash and cash equivalents	$	453,179		$	451,522
Investment securities and other securities		2,335,421			2,314,111
Total loans and leases		5,201,656			5,188,101
Total assets		8,524,035			8,486,281
Deposits		5,888,383			5,874,819
Borrowings		1,387,235			1,370,399
Shareholders' equity		1,200,830			1,180,687
Tangible book value per common share (1)	$	6.09		$	5.97
Tangible common equity / tangible assets (1)		11.25	%		11.04	%

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

Assets

Loans and Leases

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

Federal Reserve economic data suggests the following trends:

·	Contacts in the Third District have reported improved overall business activity; sectors such as manufacturers, retailers and auto dealers reported slight growth year-over-year.

·	Residential real estate reported more inquiries, showings and activity, but with little increase in sales or construction. However, the inventory of existing homes is below that of last year, and there is also an expectation for sales to increase in the spring season.

·	The outlook among Third District business contacts is positive and has strengthened slightly.

The Company’s loans are diversified by borrower, industry group, and geographical area in the Company’s markets. The following table summarizes the composition of the Company’s loan portfolio at March 31, 2012 and December 31, 2011:

(dollars in thousands)	March 31,		December 31,
	2012		2011		Increase/(decrease)
Commercial and industrial loans and leases	$	2,441,904	$	2,420,027	$	21,877		0.9	%

CRE - permanent		878,499		855,524		22,975		2.7	%
CRE - construction		151,697		156,064		(4,367	)	(2.8	) %
Commercial real estate		1,030,196		1,011,588		18,608		1.8	%

Residential mortgages		694,809		710,322		(15,513	)	(2.2	) %
Home equity lines and loans		737,316		747,558		(10,242	)	(1.4	) %
All other consumer		280,522		286,390		(5,868	)	(2.0	) %
Consumer loans		1,712,647		1,744,270		(31,623	)	(1.8	) %

Loans and leases	$	5,184,747	$	5,175,885	$	8,862		0.2	%

Allowance for loan and lease losses		121,452		126,640		(5,188	)	(4.1	) %

Loans and leases, net	$	5,063,295	$	5,049,245	$	14,050		0.3	%

Loans held-for-sale	$	16,909	$	12,216	$	4,693		38.4	%

Net loans and leases increased by $14.1 million, or 0.3%, to $5.1 billion at March 31, 2012. Emphasis on loans to commercial loan customers resulted in a $40.5 million increase during the quarter. Prepayments of consumer loans and sales of residential mortgage loans in the secondary market offset the commercial loan growth by $31.6 million during the quarter. Additionally, classified loans decreased $23.4 million, or 6.3%, and led to a decrease to the allowance for loan and lease losses to $121 million at March 31, 2012 from $127 million at December 31, 2011. Net charge-offs during the first quarter of 2012 totaled $7.2 million and the provision was $2.0 million.

The following table demonstrates select asset quality metrics for the periods presented:

(dollars in thousands)	March 31,			December 31,
	2012			2011

Non-performing loans	$	66,365		$	66,976
Non-performing loans to total loans and leases		1.28	%		1.29	%
Delinquent loans	$	24,068		$	24,801
Delinquent loans to total loans and leases		0.46	%		0.48	%
Classified loans	$	347,033		$	370,439
Classified loans to total loans and leases		6.67	%		7.14	%
Tier 1 capital and allowance	$	1,126,461		$	1,104,942
Classified loans to Tier 1 capital and allowance		30.81	%		33.53	%
Total loans and leases	$	5,201,656		$	5,188,101

The following table summarized the Company’s non-performing assets for the periods presented:

(dollars in thousands)	March 31,			December 31,
	2012			2011
Non-accrual commercial and industrial loans and leases	$	32,485		$	31,081

Non-accrual CRE-permanent		5,156			7,403
Non-accrual CRE-construction		14,336			12,218
Total non-accrual commercial real estate loans		19,492			19,621

Non-accrual residential mortgages		4,077			4,504
Non-accrual home equity lines and loans		2,110			3,046
All other non-accrual consumer loans		1,695			3,176
Total non-accrual consumer loans		7,882			10,726

Total non-accrual loans		59,859			61,428

Restructured loans	(a)	6,506			5,548
Total non-performing loans		66,365			66,976

Other real estate owned and repossessed assets		7,647			7,716
Total non-performing assets		74,012			74,692

Loans 90+ days past due & still accruing		1,588			2,010
Total non-performing assets and loans 90+ days past due	$	75,600		$	76,702


Total loans and leases	$	5,201,656		$	5,188,101
Average total loans and leases	$	5,179,220		$	5,202,255
Allowance for loan and lease losses	$	121,452		$	126,640

Allowance for loan and lease losses to:
Non-performing assets and loans 90+ days past due		161	%		165	%
Non-performing loans		183	%		189	%
Total loans and leases		2.33	%		2.44	%

(a)

Restructured loans include $3.4 million of modified commercial loans and $3.1 million of consumer loans which were modified for customers who were experiencing financial difficulty and were in jeopardy of losing their homes to foreclosure.

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

(dollars in thousands)	March 31,			December 31,
	2012			2011
Total non-accrual loans	$	59,859		$	61,428

Non-accrual loans and leases with partial charge-offs		22,887			28,919
Life-to-date partial charge-offs on non-accrual loans and leases		26,619			30,284

Charge-off rate of non-accrual loans and leases		53.8	%		51.2	%

Specific reserves on non-accrual loans		9,911			8,162

At March 31, 2012, the Company’s non-accrual loans totaled $59.9 million and included $22.9 million of non-accrual loans which have been charged-off by 53.8% or $26.6 million. Non-accrual and non-performing loan and asset levels remain low and stable compared to total loans and leases and total assets, as non-performing loans totaled 1.28% of total loans and leases at March 31, 2012. Activity within the loan categories during the first quarter was minimal as management continues to focus on sustaining the improvements in non-performers over the past two years and also maintaining strong allowance coverage trends. Additionally, non-performing loans are included in impaired loans and leases and are evaluated individually when determining the allowance. Impaired loans had a specific reserve in the allowance of $11.1 million related to $35.5 million of underlying principal balances. There is a portion of the Company’s impaired loans that have not been reserved or partially charged-off, since the collection of interest and principal is not assured but principal appears to be collectible. The Company does not believe these amounts are material for purposes of further disclosure and analysis.

An analysis of net loan and lease charge-offs for the three months ended March 31, 2012, December 31, 2011, and March 31, 2011 is as follows:

	Three Months Ended
	March 31,			December 31,			March 31,
(dollars in thousands)	2012			2011			2011

Commercial and industrial loans and leases	$	1,925		$	2,648		$	9,319

CRE - permanent		1,933			517			3,946
CRE - construction		673			(1,337	)		873
Total commercial real estate loans		2,606			(820	)		4,819

Residential mortgages		560			993			1,643
Home equity lines and loans		1,855			2,429			1,158
All other consumer loans		242			1,183			155
Total consumer loans		2,657			4,605			2,956

Net loans and leases charged-off	$	7,188		$	6,433		$	17,094

Net charge-offs (annualized) to:
Total loans and leases		0.56	%		0.49	%		1.32	%
Average total loans and leases		0.56	%		0.50	%		1.31	%
Allowance for loan and lease losses		23.80	%		20.15	%		48.49	%

Net loan charge-offs have been relatively stable since the second quarter of 2011 and totaled $7.2 million, for the first three months of 2012. The fourth quarter of 2011 included higher recoveries on commercial real estate construction loans and resulted in the modest linked-quarter increase in net charge-offs. The overall improvement in net charge-offs performance is evidenced by the 58%, or $9.9 million, reduction when the first quarter of 2012 is compared to the prior year quarter. During that period, annualized net charge-offs as a percentage of average loans and leases totaled 1.31% compared to 0.56% for the first quarter of 2012.

The following table shows a roll-forward of the allowance for loan and lease losses:

	Three Months Ended
(dollars in thousands)	March 31,
	2012		2011
Balance at beginning of period	$	126,640	$	150,054
Charge-offs:
Commercial and industrial loans and leases		2,692		9,569
Commercial real estate		2,785		5,313
Consumer loans		3,245		3,871
Total charge-offs		8,722		18,753

Recoveries:
Commercial and industrial loans and leases		767		250
Commercial real estate		179		494
Consumer loans		588		915
Total recoveries		1,534		1,659
Net charge-offs		7,188		17,094
Provision charged to expense		2,000		10,000
Balance at end of period	$	121,452	$	142,960

The following table demonstrates the components of the allowance:

(dollars in thousands)	March 31,		December 31,
	2012		2011
Specific reserves	$	11,122	$	8,909
Allocated reserves		102,214		107,288
Unallocated reserves		8,116		10,443
Total allowance for loan and lease losses	$	121,452	$	126,640

Overall, the allowance decreased to $121 million at March 31, 2012 and represented 2.33% of total loans and leases and 183% of non-performing loans, compared to $127 million at December 31, 2011, or 2.44% of total loans and leases and 189% of non-performing loans. The decrease of the allowance was due primarily to the reduction in classified loans and continued improvement in asset quality. These improvements resulted in a provision of $2.0 million for the three months ended December 31, 2011 and March 31, 2012. Compared to the three months ended March 31, 2011, the provision decreased $8.0 million from $10.0 million.

Liabilities

At March 31, 2012, liabilities were unchanged from $7.3 billion at December 31, 2011. Total deposits, the Company’s primary source of funding, increased $13.6 million during the first three months of 2012. Non-interest bearing deposits increased as a result of the Company’s continued efforts to improve deposit mix, and manage high-cost, non-relationship based wholesale and time deposit customers. These efforts increased transaction, savings, and money market accounts to 74% of deposits at March 31, 2012 and helped to reduce the cost of deposits by five basis points to 0.51% for the three months ended March 31, 2012 compared to December 31, 2011.

(dollars in thousands)	March 31,			December 31,
	2012			2011			Increase/(decrease)
Non-interest bearing deposits	$	884,025		$	863,703		$	20,322		2.35	%
NOW accounts		1,294,591			1,293,148			1,443		0.11	%
Money market accounts		1,698,427			1,686,909			11,518		0.68	%
Savings		495,191			454,003			41,188		9.07	%
CDs less than $100		1,089,601			1,138,908			(49,307	)	(4.33	) %
CDs $100 or greater		426,548			438,148			(11,600	)	(2.65	) %
Total deposits	$	5,888,383		$	5,874,819		$	13,564		0.23	%

Non-time deposits / total deposits		74	%		73	%

Deposit funding is supplemented by additional sources of borrowings which include customer and structured repurchase agreements, Federal Home Loan Bank (“FHLB”) advances, and subordinated debentures. In the aggregate, these funding sources totaled $1.4 billion at March 31, 2012, which was an increase of $16.8 million or 1.2% from December 31, 2011.

During the first quarter of 2012 borrowings changed due to the following:

·	Customer repurchase agreements totaled $543 million at March 31, 2012, an increase of $19 million from December 31, 2011.

·	The Company’s subordinated debentures accounted for at fair value decreased by $1.6 million.

Shareholders’ Equity

Shareholders’ equity totaled $1.2 billion at March 31, 2012, an increase of $20.1 million from December 31, 2011. Significant activity during the three months ended March 31, 2012 included:

·	Net income of $25.3 million,

·	Cash dividends paid to common shareholders of $7.6 million.

Results of operations for the three months ended March 31, 2012 and March 31, 2011

Net Interest Income

The following table presents average balances, average yields, and net interest margin information for the three months ended March 31, 2012 as compared to the same period in 2011. Interest income and yields are presented on a fully taxable equivalent (“FTE”) basis using an effective tax rate of 35%. Net interest margin is expressed as net interest income (FTE) as a percentage of average total interest earning assets.

Average Balances, Average Rates, and Net Interest Margin*

	For the Three Months Ended March 31,
(dollars in thousands)	2012								2011
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
INTEREST EARNING ASSETS:
Interest earning deposits at banks	$	278,140		$	133		0.19	%	$	508,684		$	280		0.22	%
U.S. Treasury		-			-		0.00	%		19,963			13		0.27	%
U.S. Government agencies		3,068			17		2.23	%		5,097			26		2.07	%
Mortgage-backed securities/collateralized mortgage obligations		1,483,300			10,277		2.79	%		1,361,041			10,647		3.17	%
State and municipal*		745,488			12,221		6.59	%		762,305			12,926		6.88	%
Other bonds and securities		86,253			665		3.10	%		97,010			671		2.80	%
Total investments		2,318,109			23,180		4.02	%		2,245,416			24,283		4.39	%

Commercial loans and leases*		3,442,272			41,872		4.89	%		3,481,370			45,625		5.31	%
Installment loans		1,023,543			11,728		4.61	%		919,015			11,586		5.11	%
Mortgage loans		713,405			9,329		5.26	%		910,819			12,726		5.67	%
Total loans and leases		5,179,220			62,929		4.89	%		5,311,204			69,937		5.34	%
Total earning assets		7,775,469			86,242		4.46	%		8,065,304			94,500		4.75	%
Allowance for loan and lease losses		(127,677	)							(156,582	)
Non-interest earning assets		749,589								792,927
Total assets	$	8,397,381							$	8,701,649

INTEREST BEARING LIABILITIES:
Interest bearing deposits	$	4,932,037		$	7,294		0.59	%	$	5,136,953		$	11,407		0.90	%
Customer repurchase agreements		524,575			550		0.42	%		546,100			712		0.53	%
Structured repurchase agreements		85,000			915		4.33	%		165,000			1,683		4.14	%
Short-term borrowings		-			-		0.00	%		6,850			-		0.00	%
Federal Home Loan Bank advances		615,983			6,967		4.55	%		651,208			7,217		4.49	%
Subordinated debentures		145,274			1,870		5.18	%		142,781			2,369		6.73	%
Total interest bearing liabilities		6,302,869			17,596		1.12	%		6,648,892			23,388		1.43	%
Non-interest bearing deposits		852,730								813,704
Other non-interest bearing liabilities		53,398								47,973
Total liabilities		7,208,997								7,510,569
Equity		1,188,384								1,191,080
Total liabilities and equity	$	8,397,381							$	8,701,649
NET INTEREST INCOME/MARGIN (FTE)					68,646		3.55	%					71,112		3.58	%
Tax equivalent interest					4,828								5,142
Net interest income				$	63,818							$	65,970

*Fully taxable equivalent basis, using a 35% effective tax rate.
Average loan balances include non-accruing loans and average net fees and costs.

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

(dollars in thousands)	Three Months Ended March 31,
	2012 compared to 2011
Increase (decrease) in:	Volume			Rate			Total
Interest Income:
Interest earning deposits at banks	$	(114	)	$	(33	)	$	(147	)

U.S. Treasury		(7	)		(6	)		(13	)
U.S. Government agencies		(11	)		2			(9	)
Mortgage-backed securities/collateralized mortgage obligations		908			(1,278	)		(370	)
State and municipal		(281	)		(424	)		(705	)
Other bonds and securities		(78	)		72			(6	)
Total investments		531			(1,634	)		(1,103	)

Commercial loans and leases		(507	)		(3,246	)		(3,753	)
Installment loans		1,251			(1,109	)		142
Mortgage loans		(2,622	)		(775	)		(3,397	)
Total loans and leases		(1,878	)		(5,130	)		(7,008	)
Total interest income	$	(1,461	)	$	(6,797	)	$	(8,258	)

Interest Expense:
Interest bearing deposits	$	(439	)	$	(3,674	)	$	(4,113	)
Customer repurchase agreements		(27	)		(135	)		(162	)
Structured repurchase agreements		(857	)		89			(768	)
Short-term borrowings		-			-			-
Federal Home Loan Bank advances		(396	)		146			(250	)
Subordinated debentures		41			(540	)		(499	)
Total borrowed funds		(1,239	)		(440	)		(1,679	)
Total interest expense		(1,678	)		(4,114	)		(5,792	)
Increase (decrease) in net interest income	$	217		$	(2,683	)	$	(2,466	)

Interest rates remain at historically low levels and continue to pressure asset yields as investments and loans mature and are replaced. Management initiatives to maintain net interest income and margin have resulted in reductions to average earning assets. However, purchases of additional investment securities during 2011 increased average security balances, while modest loan growth for the first quarter of 2012 stabilized the average loan trends experienced during 2011. The reduction of average earning assets to $7.8 billion was primarily due to reduced cash and equivalents resulting from management’s focus on improving deposit mix by managing high-cost, non-relationship based wholesale and time deposit customers. At March 31, 2012, transaction, savings and money market accounts comprised 74% of deposits compared to 69% at March 31, 2011, and time deposits declined $341 million to $1.5 billion at March 31, 2012 from the same period of 2011. The improvement in mix combined with disciplined deposit pricing reduced the cost of deposits by 27 basis points to 0.51% for the three months ended March 31, 2012 compared to the three months ended March 31, 2011.

Interest expense decreased by 24.8%, or $5.8 million, and totaled $17.6 million for the three months ended March 31, 2012. The reduction in interest expense mitigated the effect of decreasing asset yields. However, managed reductions to earning assets resulted in a 8.9%, or $7.9 million, decrease to interest income ($8.3 million on a FTE basis), which totaled $81.4 million for the three months ended March 31, 2012. Net interest income for the three months ended March 31, 2012, was $63.8 million, a decrease of $2.2 million, or 3.3%, compared to $66.0 million for the three months ended March 31, 2011. The net interest margin for the three months ended March 31, 2012 declined modestly by 3 basis points to 3.55% from 3.58% in the prior year period.

Provision for Loan and Lease Losses

The provision for loan and lease losses totaled $2.0 million for the three months ended March 31, 2012, compared to $10.0 million for the same period in 2011. The reduction to the provision was due to a $9.9 million reduction of net charge-offs which totaled $7.2 million, or 0.56% of average loans, compared to $17.1 million, or 1.31% of average loans in the prior year quarter. Continued declines of classified loans reduced the allowance to $121 million at March 31, 2012. Despite the reduction to the allowance and provision, the allowance as a percentage of non-performing loans remained strong at 183% at March 31, 2012, and the allowance to total loans and leases totaled 2.33%. For additional analysis of the allowance refer to “Loans and Leases.”

Non-Interest Income

(dollars in thousands)	Three Months Ended
	March 31,
NON-INTEREST INCOME	2012			2011			Increase (Decrease)
Wealth management income	$	6,161		$	5,924		$	237			4.00	%
Service charges on deposit accounts		3,823			4,664			(841	)		(18.03	) %
Insurance commissions and fees		3,296			3,221			75			2.33	%
Cash management and electronic banking fees		4,420			4,371			49			1.12	%
Mortgage banking income		1,335			1,080			255			23.61	%
Bank owned life insurance income		1,209			1,220			(11	)		(0.90	) %
(Losses) earnings of unconsolidated investments		(74	)		1,700			(1,774	)	NM
Other operating income		2,426			2,055			371			18.05	%
Net gains (losses) from fair value changes of subordinated debentures		1,645			(51	)		1,696		NM
Total non-interest income	$	24,241		$	24,184		$	57			0.24	%

"NM" - Denotes a value displayed as a percentage change is not meaningful

Non-interest income for the three months ended March 31, 2012 and 2011 totaled $24.2 million and its components changed primarily due to the following items:

Increases:

·	The gain on the Company’s subordinated debentures (Nasdaq: “NPBCO”) accounted for at fair value increased non-interest income by $1.6 million in 2012 compared to a loss of $0.1 million in 2011.

Decreases:

·	Service charges on deposit accounts decreased $0.8 million due to declines in overdraft volume and the impact of regulatory changes affecting electronic customer transactions.

·	The three months ended March 31, 2011 included $1.7 million of earnings from unconsolidated mezzanine debt fund investments compared to a loss of $0.1 million for the three months ended March 31, 2012, as the timing of the fund activities and “exits” vary.

Non-Interest Expense

(dollars in thousands)		Three Months Ended
		March 31,
NON-INTEREST EXPENSE		2012			2011			Increase (Decrease)
	Salaries, wages and employee benefits	$	31,381		$	31,449		$	(68	)	(0.22	) %
	Premises and equipment		6,853			7,272			(419	)	(5.76	) %
	FDIC insurance		1,264			3,457			(2,193	)	(63.44	) %
	Other operating expenses		12,942			14,659			(1,717	)	(11.71	) %
	Total non-interest expense	$	52,440		$	56,837		$	(4,397	)	(7.74	) %

RECONCILIATION TABLE FOR NON-GAAP FINANCIAL MEASURES - EFFICIENCY RATIO (1)

		Three Months Ended
		March 31,
Efficiency Ratio Calculation			2012			2011
	Non-interest expense	$	52,440		$	56,837

	Net interest income (taxable equivalent)	$	68,645		$	71,112

	Non-interest income		24,241			24,184
	Less:
	Net gains (losses) from fair value changes on subordinated debentures		1,645			(51	)
	Adjusted revenue	$	91,241		$	95,347

Efficiency Ratio			57.47	%		59.61	%

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

Continued focus on expense controls reduced expenses overall as demonstrated by the efficiency ratio of 57.47% for the first quarter of 2012. Non-interest expense totaled $52.4 million, a $4.4 million decrease for the three months ended March 31, 2012 when compared to the same period in the prior year. FDIC insurance decreased $2.2 million compared to the three months ended March 31, 2011, due to a change to the assessment framework and the improving risk profile of the Company, and other operating expenses remain well controlled and benefitted from unseasonably mild weather.

Income Tax Expense

Income tax expense for the three months ended March 31, 2012 was $8.3 million compared to $4.5 million for the three months ended March 31, 2011. During the first three months of 2012, pre-tax income increased while tax-free income and other permanent items remained stable resulting in an effective tax rate of 24.7%. The Company’s net deferred tax asset (“DTA”) decreased to $58.3 million at March 31, 2012, primarily from the reduction of the allowance for loan and lease losses, fair value changes and seasonal changes in accrued expenses.

Each quarter, the Company evaluates the realizability of the DTA. As of March 31, 2012, the Company concluded that the DTA was realizable, and a valuation allowance was not required. In reaching this conclusion the Company carefully weighed both positive and negative evidence present. Since December 31, 2011, the Company has continued to demonstrate increased profitability and performance in line with management projections. Therefore, management believes that the DTA continues to be realizable and will be fully utilized as planned.

LIQUIDITY, COMMITMENTS, CAPITAL AND INTEREST RATE SENSITIVITY

Analysis of Liquidity and Capital Resources

Liquidity

The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of March 31, 2012:

			Payments Due by Period:
					After one		After three
(dollars in thousands)			One Year		year to		years to		More than
	Total		or less		three years		five years		5 Years
Maturities of time deposits	$	1,516,149	$	876,504	$	475,008	$	164,095	$	542
Structured repurchase agreements		85,000		35,000		50,000		-		-
Federal Home Loan Bank advances		615,863		95,000		59,500		54,750		406,613
Subordinated debentures		143,666		-		-		-		143,666
Minimum annual rentals on non-cancelable operating leases		41,811		6,584		10,664		8,278		16,285
Total	$	2,402,489	$	1,013,088	$	595,172	$	227,123	$	567,106

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

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

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

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

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

As measured using the consolidated statement of cash flows, the Company generated $1.7 million of net cash and equivalents for the three months ended March 31, 2012, compared to $197 million of net cash used for the three months ended March 31, 2011. Operating activities also generated $14.9 million of net cash for the three months ended March 31, 2012 compared to $27.7 million for the three months ended March 31, 2011. During the three months ended March 31, 2012, cash was generated from the following additional sources:

Investing activities

·	$94.3 million of proceeds from maturities and repayments of investment securities

Financing activities

·	$84.4 million increase in core deposits

·	$18.7 million increase in customer repurchase agreements

Cash was deployed during the first three months of 2012, in the following ways:

Financing activities

·	$70.8 million reduction in certificates of deposit

·	$7.6 million of cash dividends paid to common shareholders

Investing activities

·	$117 million of investment security purchases

·	$17.5 million net increase in loans and leases

Capital

At March 31, 2012, National Penn and National Penn Bank’s capital ratios met the criteria to be considered a “well-capitalized” institution. Management believes that, under current regulations, the Company and National Penn Bank will each continue to exceed the minimum capital requirements in the foreseeable future.

	Tier 1 Capital to						Tier 1 Capital to Risk-						Total Capital to Risk-
	Average Assets Ratio						Weighted Assets Ratio						Weighted Assets Ratio
	March 31,			December 31,			March 31,			December 31,			March 31,			December 31,
	2012			2011			2012			2011			2012			2011
The Company		12.53	%		12.00	%		17.46	%		17.12	%		18.72	%		18.38	%
National Penn Bank		10.39	%		11.03	%		14.61	%		15.91	%		15.87	%		17.17	%
"Well Capitalized" institution under banking regulations		5.00	%		5.00	%		6.00	%		6.00	%		10.00	%		10.00	%

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

Other Commitments

The following table sets forth the notional amounts of other commitments as of March 31, 2012:

					After one		After three
(dollars in thousands)			Less than		year to		years to		More than
	Total		one year		three years		five years		five years
Loan commitments	$	1,484,073	$	691,496	$	217,073	$	90,094	$	485,410
Letters of credit		148,834		133,297		15,451		86		-
Total	$	1,632,907	$	824,793	$	232,524	$	90,180	$	485,410

The Company evaluates and establishes an estimated reserve for credit and other risks associated with off-balance sheet positions based upon historical losses, expected performance under these arrangements and current trends in the economy. The reserve totaled $1.5 million at March 31, 2012.

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

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

Interest Rate Risk Management

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

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

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

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

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

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

·	Changes to interest rates offered on products,

·	Changes to maturity terms offered on products,

·	Changes to types of products offered, and/or

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

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

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

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

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

	Change in Net Interest Income
Change in Interest Rates	March 31,
(in basis points)	2012	2011
+ 300	6.23%	6.88%
+ 200	4.06%	4.42%
+ 100	1.82%	1.93%
- 100	N/A*	N/A*

* Certain short-term interest rates are currently below 1.00%. Therefore, in a scenario where interest rates decline by 100 basis points, short-term interest rates decline to zero, resulting in a non-parallel downward shift. In this interest rate scenario, net interest income is estimated to decline for the subsequent twelve months by 3.82% and 0.31% based upon net interest income for March 31, 2012 and 2011, respectively.

As measured by the net interest income analysis, the Company reflects an asset sensitive risk profile and would benefit over the next twelve months by an increase in interest rates.

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, Commitments, Capital and Interest Rate Sensitivity section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Report is incorporated herein by reference.

Item 4. Controls and Procedures

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

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

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

As of March 31, 2012, National Penn’s management, under the supervision of and with the participation of National Penn’s Chief Executive Officer and Chief Financial Officer, evaluated National Penn’s disclosure controls and procedures. Based on that evaluation, National Penn’s management concluded that National Penn’s disclosure controls and procedures were effective as of March 31, 2012.

There were no changes in National Penn’s internal control over financial reporting during the quarter ended March 31, 2012 that materially affected, or are reasonably likely to materially affect, National Penn’s internal control over financial reporting.

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

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.

During the first quarter of 2012, all claims against National Penn were dismissed in the case filed against multiple defendants by Reynaldo Reyes, a putative class action lawsuit alleging the defendants were part of a fraudulent telemarketing scheme, in the United States District Court for the Eastern District of Pennsylvania (Case No. 2:10-cv-00345).

Item 1A. Risk Factors

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

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

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

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

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

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

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

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

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

·	A provision that broadens the base for FDIC insurance assessments

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

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

While a few of the Dodd-Frank Act’s provisions became effective immediately, many have yet to be implemented because the issuance of some rules has been delayed and the deadlines for adoption of other rules have not yet been reached. In addition to the regulatory requirements of the Dodd-Frank Act, National Penn is subject to changes in accounting rules and interpretations. National Penn cannot predict what effect any presently contemplated or future changes in financial market regulation or accounting rules and interpretations will have on National Penn. National Penn will have to devote a substantial amount of management and financial resources to ensure compliance with such regulatory changes, including all applicable provisions of the Dodd-Frank Act and its implementing rules as they are finalized and released. Doing so may increase National Penn’s costs of operations. In addition, in some cases, National Penn’s ability to comply with regulatory changes may be dependent on third party vendors taking timely action to achieve compliance. Any such changes may also negatively affect National Penn’s financial performance, its ability to expand its products and services and/or to increase the value of its business and, as a result, could be materially adverse to National Penn’s shareholders.

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

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

National Penn’s credit quality may remain challenging throughout 2012. Deterioration in the quality of National Penn's credit portfolio could significantly increase non-performing loans, require additional increases in loan loss reserves, elevate charge-off levels and have a material adverse effect on National Penn's capital, financial condition and results of operations.

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

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

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

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

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

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

National Penn's investment portfolio includes approximately $42 million in capital stock of the Federal Home Loan Bank of Pittsburgh as of March 31, 2012. This stock ownership is required of all Home Loan Bank members as part of the overall Home Loan Bank capitalization. The Home Loan Bank is experiencing a potential capital shortfall, has suspended its quarterly cash dividend, and could possibly require its members, including National Penn, to make additional capital investments in the Home Loan Bank. If the Home Loan Bank were to cease operations, or if National Penn were required to write-off its investment in the Home Loan Bank, National Penn's business, financial condition, liquidity, capital and results of operations may be materially and adversely affected.

National Penn may incur impairments to goodwill.

At March 31, 2012, National Penn had approximately $258 million recorded as goodwill. National Penn tests its goodwill for impairment at least annually as of June 30th. Significant negative industry or economic trends, including the lack of recovery in the market price of National Penn's common stock, or reduced estimates of future cash flows or disruptions to National Penn's business could result in impairments to goodwill. National Penn's valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely on projections of future operating performance. National Penn operates in competitive environments and projections of future operating results and cash flows may vary significantly from actual results. If National Penn's analysis results in additional impairment to its goodwill, National Penn would be required to record an impairment charge to earnings in its financial statements during the period in which such impairment is determined to exist. Any such change could have a material adverse effect on National Penn's results of operations and stock price.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Variations in interest rates may negatively affect National Penn's financial performance.

Changes in interest rates may reduce profits. The primary source of income for National Penn currently is the differential, or the net interest spread, between the interest earned on loans, securities and other interest-earning assets, and the interest paid on deposits, borrowings and other interest-bearing liabilities. As prevailing interest rates change, net interest spreads are affected by the difference between the maturities and re-pricing characteristics of interest-earning assets and interest-bearing liabilities. In addition, loan volume and yields are affected by market interest rates on loans, and rising interest rates generally are associated with a lower volume of loan originations. An increase in the general level of interest rates may also adversely affect the ability of certain borrowers to repay their obligations. In a declining interest rate environment, National Penn may be unable to re-price deposits downward in the same magnitude and/or with the same timing as the movement in its interest-sensitive assets. Accordingly, changes in levels of market interest rates, whether upward or downward, could materially adversely affect National Penn's net interest spread, loan origination volume, asset quality and overall profitability.

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

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

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

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

National Penn's internal control systems are inherently limited.

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

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

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

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

National Penn is not restricted from issuing additional common shares, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common shares. National Penn is currently authorized to issue up to 250 million common shares, of which 152 million shares were outstanding as of March 31, 2012, and up to one million shares of preferred stock, none of which are outstanding. In addition, National Penn’s Board of Directors has made shares available for compensation purposes, including under its Employee Stock Purchase Plan, as well as for compensation including shares available for purchase under National Penn's Dividend Reinvestment and Stock Purchase Plan. The Employee Stock Purchase Plan allows employee shareholders to purchase shares of National Penn common shares at a 10% discount from market value. In addition, shares are issuable upon the vesting of restricted stock units and/or exercise of stock options that have been, or stock options, stock appreciation rights, stock awards and restricted stock that may be, issued under National Penn's equity compensation plans. Should National Penn experience strong participation in the Employee Stock Purchase Plan or the Dividend Reinvestment and Stock Purchase Plan, the issuance of the required shares of common stock may significantly dilute the ownership of National Penn's shareholders. National Penn's board of directors has authority, without action or vote of the shareholders, to issue all or part of its authorized but unissued shares. Authorized but unissued shares could be issued on terms or in circumstances that could dilute the interests of other shareholders.

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

As a bank holding company, National Penn's ability to pay dividends depends primarily on its receipt of dividends from its direct and indirect subsidiaries. Its bank subsidiary, National Penn Bank, is National Penn's primary source of dividends. Dividend payments from National Penn Bank are subject to legal and regulatory limitations, generally based on net profits and retained earnings, imposed by bank regulatory agencies. The ability of National Penn Bank to pay dividends is also subject to profitability, financial condition, regulatory capital requirements, capital expenditures and other cash flow requirements. As of March 31, 2012, National Penn Bank had the ability to pay dividends to National Penn without prior regulatory approval. However, there is no assurance that National Penn Bank, and/or National Penn's other subsidiaries, will be able to pay dividends in the future.

In April 2012, National Penn’s Board of Directors approved a second quarter 2012 cash dividend of $0.07 per share. There can be no assurance that National Penn will pay dividends to its shareholders in the future, or if dividends are paid, that National Penn will increase its dividend to historical levels or otherwise. National Penn's ability to pay dividends to its shareholders is subject to limitations and guidance issued by the Board of Governors of the Federal Reserve System, or the Federal Reserve. For example, under Federal Reserve guidance, bank holding companies generally are advised to consult in advance with the Federal Reserve before declaring dividends, and to strongly consider reducing, deferring or eliminating dividends, in certain situations, such as when declaring or paying a dividend that would exceed earnings for the fiscal quarter for which the dividend is being paid, or when declaring or paying a dividend that could result in a material adverse change to the organization's capital structure. National Penn's failure to pay dividends on its common stock could have a material adverse effect on its business, operations, financial condition, access to funding and the market price of its common stock.

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

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

A Warning About Forward-Looking Information

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

There were no repurchases by National Penn of its common stock at any time during the quarter ended March 31, 2012.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

3.1	Articles of Incorporation, as amended, of National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 3.1 to National Penn’s Report on Form 8-K dated April 24, 2009 as filed on April 24, 2009.)

3.2	Bylaws, as amended and restated, of National Penn Bancshares, Inc. (Incorporated by reference to Exhibit 3.1 to National Penn’s Report on Form 8-K dated September 28, 2011, as filed on October 3, 2011.)

10.1	Form of Restricted Stock Agreement (Incorporated by reference to Exhibit 10.1 to National Penn’s Report on Form 8-K dated January 23, 2012, as filed on January 27, 2012.)

10.2	Amendatory Agreement dated as of May 7, 2012, between National Penn Bank and Donald P. Worthington./*

31.1	Certification of President and Chief Executive Officer of National Penn Bancshares, Inc., pursuant to Commission Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Chief Financial Officer of National Penn Bancshares, Inc., pursuant to Commission Rule 13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of President and Chief Executive Officer of National Penn Bancshares, Inc., pursuant to Commission Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Furnished, not filed.)

32.2	Certification of Chief Financial Officer of National Penn Bancshares, Inc., pursuant to Commission Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Furnished, not filed.)

99.1	Executive Incentive Plan – 2012 Performance Goals and Award Schedule (Incorporated by reference to National Penn’s Report on Form 8-K dated January 23,2012, as filed on January 27, 2012.)

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 **

* Denotes a compensatory plan or arrangement.

** Furnished herewith.

SIGNATURES

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

		NATIONAL PENN BANCSHARES, INC.
		(Registrant)

Date:	May 9, 2012	By:	/s/ Scott V. Fainor
			Name:	Scott V. Fainor
			Title:	President and Chief Executive Officer

Date:	May 9, 2012	By:	/s/ Michael J. Hughes
			Name:	Michael J. Hughes
			Title:	Chief Financial Officer

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Bad

National Penn Bancshares (NPBC) Inactive 10-Q2012 Q1 Quarterly report

Content analysis