content: FORM 10-Q
  
                         SECURITIES AND EXCHANGE COMMISSION
                               WASHINGTON, D.C. 20549
  
  (Mark One)
  
             [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                          SECURITIES EXCHANGE ACT OF 1934
  
  For the quarterly period ended:   June 30, 1998
                                  ------------------
  
                                         OR
  
            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
                          SECURITIES EXCHANGE ACT OF 1934
  
  For the transition period from: _________________ to _________________
  
  
  Commission file number: 0-10957
  
                           NATIONAL PENN BANCSHARES, INC.
               (Exact name of registrant as specified in its charter)
  
              Pennsylvania                                23-2215075
   (State or other jurisdiction of                    (I.R.S. Employer
     incorporation or organization)                    Identification No.)
  
                Philadelphia and Reading Avenues, Boyertown, PA 19512
                 (Address of principal executive offices) (Zip Code)
  
                                   (610) 367-6001
                (Registrant's telephone number, including area code)
  
                                         N/A
                (Former name, former address and former fiscal year,
                            if changed since last report)
  
           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 X No .
  
           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 August 7, 1998
  
           Common Stock (no stated par value)     (No.)  13,143,086 Shares
  <PAGE>
  TABLE OF CONTENTS
  
  Part I - Financial Information.                                             Page
  
           Item 1.          Financial Statements..............................   3
  
           Item 2.          Management's Discussion and Analysis of
                            Financial Condition and Results of Operation .....   8
  
           Item 3.          Quantitative and Qualitative Disclosures about
                            Market Risk.......................................  13
  
  Part II - Other Information.
  
           Item 1.          Legal Proceedings ................................  14
  
           Item 2.          Changes in Securities.............................  14
  
           Item 3.          Defaults Upon Senior Securities...................  14
  
           Item 4.          Submission of Matters to a Vote of
                            Security Holders..................................  14
  
           Item 5.          Other Information ................................  15
  
           Item 6.          Exhibits and Reports on Form 8-K..................  15
  
  Signature...................................................................  16
  
  
                                         2
  <PAGE>
                           PART I - FINANCIAL INFORMATION
  
  Item 1.   Financial Statements
  <TABLE>
  <CAPTION>
  NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
  CONSOLIDATED CONDENSED BALANCE SHEET                              June 30            Dec. 31
   (Dollars in thousands, except per share data)                      1998               1997
                                                                  (Unaudited)           (Note)
                                                                  -----------         -----------
  ASSETS
  <S>                                                             <C>                 <C>        
  Cash and due from banks                                         $    43,218         $    40,009
  Interest bearing deposits in banks                                    1,567               1,089
  Federal funds sold                                                       --                  --
                                                                  -----------         -----------
      Total cash and cash equivalents                                  44,785              41,098
  Trading account securities                                           20,388                  --
  Investment securities available for sale at market value            406,222             321,760
  Loans, less allowance for loan losses of $27,142 and
     $25,122 in 1998 and 1997 respectively                          1,141,132           1,097,662
  Other assets                                                         87,178              73,858
                                                                  -----------         -----------
      Total Assets                                                  1,699,705           1,534,378
                                                                  ===========         ===========
  
  LIABILITIES AND SHAREHOLDERS' EQUITY
  Non-interest bearing deposits                                   $   158,692         $   146,772
  Interest bearing deposits
    (Includes certificates of deposit $100,000 or greater:
    1998 - $106,189; 1997 - $110,447)                                 970,919             968,828
                                                                  -----------         -----------
      Total Deposits                                                1,129,611           1,115,600
  Securities sold under repurchase agreements
    and federal funds purchased                                       130,857              77,225
  Short-term borrowings                                                 9,930               6,109
  Long-term obligations                                               250,460             155,460
  Guaranteed preferred beneficial interests in
      Company's subordinated debentures                                40,250              40,250
  Accrued interest and other liabilities                               15,084              16,546
                                                                  -----------         -----------
      Total Liabilities                                             1,576,192           1,411,190
  Commitments and contingent liabilities                                   --                  --
  Shareholders' equity
    Preferred stock, no stated par value;
      authorized 1,000,000 shares, none issued                             --                  --
    Common stock, no stated par value;
      authorized 50,000,000 shares; issued and outstanding
      1998 - 13,183,970; 1997 - 13,284,175, net of shares
      in Treasury: 1998 - 223,999; 1997 - 104,623                     100,198             101,748
    Retained earnings                                                  22,349              17,337
    Net unrealized gains on securities available for sale               7,928               7,531
    Treasury stock at cost                                             (6,962)             (3,428)
                                                                  -----------         -----------
      Total Shareholders' Equity                                      123,513             123,188
                                                                  -----------         -----------
      Total Liabilities and Shareholders' Equity                  $ 1,699,705         $ 1,534,378
                                                                  ===========         ===========
  </TABLE>
  
  The  accompanying  notes  are an  integral  part of  these  condensed  financial
  statements.
  
  Note: The Balance Sheet at Dec. 31, 1997 has been derived from the audited
        financial statements at that date.
  
                                          3
  <PAGE>
  NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
  UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF INCOME
  <TABLE>
  <CAPTION>
                                                              Three Months Ended          Six Months Ended
  (Dollars in thousands, except per share data)                     June 30                    June 30
                                                            -------------------------------------------------
                                                               1998         1997          1998         1997
                                                            ---------    ---------      --------     --------
  <S>                                                        <C>          <C>           <C>          <C>     
  INTEREST INCOME
  Loans including fees                                       $ 26,582     $ 25,239      $ 52,691     $ 49,623
  Deposits in banks                                                32           27            48           44
  Federal funds sold                                               13           33            24           51
  Trading Assets                                                  203           --           203            0
  Investment securities                                         5,750        3,564        10,923        7,313
                                                             --------     --------      --------     --------
      Total interest income                                    32,580       28,863        63,889       57,031
                                                             --------     --------      --------     --------
  INTEREST EXPENSE
  Deposits                                                     11,022        9,906        21,954       19,099
  Federal funds purchased, borrowed funds and
    securities sold under repurchase agreements                 5,620        2,945         9,956        6,221
                                                             --------     --------      --------     --------
      Total interest expense                                   16,642       12,851        31,910       25,320
                                                             --------     --------      --------     --------
      Net interest income                                      15,938       16,012        31,979       31,711
  Provision for loan losses                                     1,200        1,200         2,400        2,400
                                                             --------     --------      --------     --------
      Net interest income after provision
        for loan losses                                        14,738       14,812        29,579       29,311
                                                             --------     --------      --------     --------
  OTHER INCOME
  Trust and investment management income                          832          687         1,592        1,323
  Service charges on deposit accounts                           1,076        1,007         2,109        1,961
  Net gains (losses) on sale of securities and mortgages            1          (74)          444          842
  Trading revenue                                                 185           --           185           --
  Other                                                         1,847        1,014         3,372        1,803
                                                             --------     --------      --------     --------
      Total other income                                        3,941        2,634         7,702        5,929
                                                             --------     --------      --------     --------
  OTHER EXPENSES
  Salaries, wages and employee benefits                         6,825        6,481        13,611       12,887
  Net premises and equipment                                    1,827        1,786         3,710        3,726
  Other operating                                               3,912        2,807         7,088        5,679
                                                             --------     --------      --------     --------
      Total other expenses                                     12,564       11,074        24,409       22,292
                                                             --------     --------      --------     --------
      Income before income taxes                                6,115        6,372        12,872       12,948
  Applicable income tax expense                                 1,275        1,987         3,044        4,029
                                                             --------     --------      --------     --------
      Net income                                             $  4,840     $  4,385      $  9,828     $  8,919
                                                             ========     ========      ========     ========
  
  
  PER SHARE OF COMMON STOCK
  Net income per share - basic                               $   0.37     $   0.33      $   0.74     $   0.67
  Net income per share - diluted                                 0.36         0.32          0.73         0.66
  Dividends paid in cash                                         0.17         0.15          0.34         0.28
  </TABLE>
  
  The  accompanying  notes  are an  integral  part of  these  condensed  financial
  statements.
  
                                          4
  <PAGE>
  NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
  CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
  
  <TABLE>
  <CAPTION>
  SIX MONTHS ENDED JUNE 30, 1998
    (Dollars in thousands)                                                           Net Unrealized
                                                                                     Gain (Loss) on
                                           Common Stock        Additional               Securities  Compre-
                                      -----------------------   Paid-in     Retained     Available  hensive    Treasury
                                         Shares     Par Value   Capital     Earnings     for Sale   Income      Stock       Total
                                       ----------   ---------  ----------  ----------   --------- ----------   ---------  ----------
  <S>                                 <C>           <C>         <C>         <C>          <C>      <C>          <C>        <C>     
  Balance at December 31, 1997         10,606,726    $20,085     $81,663     $17,337      $7,531          --    ($3,428)   $123,188
  Comprehensive income:
    Net income                                 --         --          --       9,828          --       9,828         --      $9,828
    Unrealized gains(losses) on 
      securities available for sale, 
      net of taxes and reclass-
      ification adjustment (see 
      disclosure)                              --         --          --          --         397         889         --        $397
                                                                                                  ----------
  Comprehensive income                                                                               $10,717
                                                                                                  ==========
  Conversion to no par value stock             --     80,113     (80,113)         --          --                     --          --
  5 for 4 stock split                   2,677,449
  Cash dividends declared                      --         --          --      (4,816)         --                     --     ($4,816)
  Effect of treasury stock 
     transactions                         (100,205)       --      (1,550)         --          --                 (3,534)    ($5,084)
                                      ------------  --------  ----------  ----------  ----------              ---------  ----------
  Balance at June 30, 1998              13,183,970  $100,198          $0     $22,349      $7,928                ($6,962)   $123,513
                                      ============  ========  ==========  ==========  ==========              =========  ==========
  
  
  Disclosure of reclassification 
   amount:
    Unrealized holding loss 
     arising during period                                                                              $889
    Less: reclassification adjustment 
      for gains included in net income                                                                  (492)
                                                                                                  ----------
    Net unrealized loss on securities                                                                   $397
                                                                                                  ==========
  
  
  
  SIX MONTHS ENDED JUNE 30, 1997
    (Dollars in thousands)                                                          Net Unrealized
                                                                                     Gain (Loss) on
                                           Common Stock        Additional               Securities  Compre-
                                      -----------------------   Paid-in     Retained     Available  hensive    Treasury
                                         Shares     Par Value   Capital     Earnings     for Sale   Income      Stock       Total
                                       ----------   ---------  ----------  ----------   --------- ----------   ---------  ----------
  
  Balance at December 31, 1996          8,002,648    $20,085     $83,707      $7,357      $4,398          --      ($826)   $114,721
  Comprehensive income:
    Net income                                 --         --          --       8,919          --       8,919         --      $8,919
    Unrealized gains(losses) on 
      securities available for sale, 
      net of taxes and reclass-
      ification adjustment (see 
      disclosure)                              --         --          --          --      (1,497)       (847)        --     ($1,497)
                                                                                                  ----------
  Comprehensive income                                                                                $8,072
                                                                                                  ==========
  Conversion to no par value stock             --     83,268     (83,268)         --                                 --          --
  4 for 3 stock split                   2,677,497
  Cash dividends declared                      --         --          --      (4,164)         --                     --     ($4,164)
  Effect of treasury stock 
     transactions                          17,529         --        (439)         --          --                    385        ($54)
                                      -----------  ---------  ----------  ----------  ----------              ---------  ----------
  Balance at June 30, 1997             10,697,674   $103,353          $0     $12,112      $2,901                  ($441)   $117,925
                                      ===========  =========  ==========  ==========  ==========              =========  ==========
  
  
  Disclosure of reclassification 
   amount:
    Unrealized holding loss 
     arising during period                                                                             ($847)
    Less: reclassification adjustment 
     for gains included in net income                                                                   (650)
                                                                                                  ----------
    Net unrealized loss on securities                                                                ($1,497)
                                                                                                  ==========
  </TABLE>
  
  The accompanying notes are an integral part of these statements.
  
                                          5
  <PAGE>
  NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
  UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
  <TABLE>
  <CAPTION>
                                                                                   Six Months Ended June 30,
  (Dollars in thousands)
                                                                                    1998              1997
                                                                                  ---------         ---------
  <S>                                                                             <C>               <C>      
  CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                                    $   9,828         $   8,919
    Adjustments to reconcile net income to net
        cash provided by (used in) operating activities
      Provision for loan losses                                                       2,400             2,400
      Depreciation and amortization                                                   1,782             1,696
      Net gains (losses) on sale of securities and mortgages                            444               842
      Trading-related assets                                                        (20,388)               --
      Mortgage loans originated for resale                                          (31,864)           (8,068)
      Sale of mortgage loans originated for resale                                   31,864             8,068
      Other                                                                         (15,787)           (2,333)
                                                                                  ---------         ---------
  
        Net cash provided by (used in) operating activities                         (21,721)           11,524
  
  CASH FLOWS FROM INVESTING ACTIVITIES
    Proceeds from sales of investment securities - available for sale                48,500            11,655
    Proceeds from maturities of investment securities - available for sale            9,242            14,629
    Purchase of investment securities - available for sale                         (142,022)          (41,488)
    Proceeds from sales of loans                                                         --                --
    Net increase in loans                                                           (45,869)          (45,859)
    Purchases of premises & equipment                                                (1,007)           (1,475)
                                                                                  ---------         ---------
  
        Net cash provided by (used in) investing activities                        (131,156)          (62,538)
  
  CASH FLOWS FROM FINANCING ACTIVITIES
    Increase (decrease) in:
      Deposits                                                                       14,011            88,702
      Repurchase agreements, fed funds & short-term borrowings                       57,453           (85,602)
      Long-term borrowings                                                           95,000            25,000
      Proceeds from issuance of preferred securities                                     --            40,250
      (Increase) decrease in treasury stock                                          (3,534)              385
      Issuance of common stock under dividend reinvestment plan                      (1,550)             (439)
      Cash dividends                                                                 (4,815)           (4,166)
                                                                                  ---------         ---------
  
        Net cash provided by (used in) financing activities                         156,565            64,130
  
  Net increase (decrease) in cash and cash equivalents                                3,688            13,116
  
  Cash and cash equivalents at January 1                                             41,098            41,996
                                                                                  ---------         ---------
  
  Cash and cash equivalents at June 30                                            $  44,786         $  55,112
                                                                                  =========         =========
  </TABLE>
  
  The  accompanying  notes  are an  integral  part of  these  condensed  financial
  statements.
  
                                          6
  <PAGE>
  
  NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
  (UNAUDITED)
  
  
  1. The accompanying  unaudited condensed financial statements have been prepared
  in  accordance  with  generally  accepted  accounting   principles  for  interim
  financial  information.  The financial information included herein is unaudited;
  however, such information reflects all adjustments  (consisting solely of normal
  recurring  adjustments) which are, in the opinion of management,  necessary to a
  fair statement of the results for the interim periods.  For further information,
  refer to the consolidated financial statements and footnotes thereto included in
  the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
  
  2. The results of operations  for the  six-month  period ended June 30, 1998 are
  not necessarily indicative of the results to be expected for the full year.
  
  3. Per share data are based on the weighted average number of shares outstanding
  of  13,199,215  and  13,358,435  for 1998  and  1997,  respectively,  and on the
  weighted  average  number  of  diluted  shares  outstanding  of  13,530,708  and
  13,569,804  for 1998 and  1997,  respectively,  and are  computed  after  giving
  retroactive effect to a 5-for-4 stock split paid July 31, 1998.
  
  4. On June 24, 1998, the Company's  Board of Directors  declared a five-for-four
  stock split payable on July 31, 1998 to  shareholders of record on July 15, 1998
  and a  cash  dividend  of  $.19  per  share  payable  on  August  17,  1998,  to
  shareholders of record on July 31, 1998.
  
  5.  In June  1998,  the  Financial  Accounting  Standards  Board  (FASB)  issued
  Statement of Financial  Accounting  Standards  (SFAS) No. 133,  "Accounting  for
  Derivative   Instruments  and  Hedging   Activity."  SFAS  No.  133  establishes
  accounting and reporting standards for derivative instruments, including certain
  derivative instruments imbedded in other contracts,  and for hedging activities.
  It  requires  that an entity  recognize  all  derivatives  as  either  assets or
  liabilities in the statement of financial position and measure those instruments
  at fair value.  If certain  conditions are met, a derivative may be specifically
  designated  as a hedge.  The  accounting  for  changes  in the  fair  value of a
  derivative  (gains and losses) depends on the intended use of the derivative and
  resulting  designation.  SFAS No. 133 is  effective  for all fiscal  quarters of
  fiscal years  beginning  after June 15, 1999.  Earlier  application is permitted
  only as of the  beginning  of any  fiscal  quarter.  The  Company  is  currently
  reviewing the provisions of SFAS No. 133.
  
  6. The Company  identifies a loan as impaired  when it is probable that interest
  and principal will not be collected  according to the  contractual  terms of the
  loan  agreement.  The balance of impaired loans was $5,518,000 at June 30, 1998,
  all of which are non-accrual  loans. The allowance for loan loss associated with
  these  impaired  loans was  $793,000 at June 30,  1998.  The Company  recognizes
  income on impaired  loans  under the cash basis when the loans are both  current
  and the collateral on the loan is sufficient to cover the outstanding obligation
  to the Company.  If these  factors do not exist,  the Company will not recognize
  income on such loans.
  
  
                                         7
  <PAGE>
  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 financial  condition and
  earnings  performance  of the  Company  with a primary  focus on an  analysis of
  operating results.
  
                                 FINANCIAL CONDITION
  
           Total assets increased to $1.699 billion, an increase of $165.3 million
  or 10.8%  over the  $1.534  billion at  December  31,  1997.  This  increase  is
  reflected primarily in the investment category,  the result of the investment of
  deposits,  the Company's  primary  source of funds,  short-term  borrowings  and
  long-term borrowings.
  
           Total cash and cash equivalents  increased $3.7 million or 8.9% at June
  30, 1998 when compared to December 31, 1997. This increase was primarily in cash
  and due from banks.
  
           Loans  increased to $1.141  billion at June 30,  1998.  The increase of
  $43.5  million or 4.0% compared to December 31, 1997 was primarily the result of
  the  investment  of deposits and  long-term  borrowings.  Loans  originated  for
  immediate  resale during the first six months of 1998 amounted to $31.9 million.
  The  Company's  credit  quality  is  reflected  by the  annualized  ratio of net
  charge-offs  to total loans of .06%  through  the second  quarter of 1998 versus
   .20% for the year 1997, and the ratio of non-performing assets to total loans of
   .69% at June 30,  1998  compared  to .89% at  December  31 1997.  Non-performing
  assets,  including non-accruals,  loans 90 days past due, restructured loans and
  other real estate  owned,  were $8.1 million at June 30, 1998  compared to $10.0
  million at December 31, 1997. Of these amounts,  non-accrual  loans  represented
  $5.5  million  and  $6.8  million  at June  30,  1998  and  December  31,  1997,
  respectively.  Loans 90 days  past due and  still  accruing  interest  were $2.3
  million and $2.8 million at June 30, 1998 and  December 31, 1997,  respectively.
  Other real estate  owned was $270,000 and $375,000 at June 30, 1998 and December
  31, 1997,  respectively.  The Company had no restructured loans at June 30, 1998
  or December 31, 1997. The allowance for loan losses to non-performing assets was
  336.4% and 251.6% at June 30, 1998 and December 31,  1997,  respectively.  As is
  evident from the above amounts  relative to  non-performing  assets,  there have
  been no  significant  changes  between  December 31, 1997 and June 30, 1998. The
  Company has no significant exposure to energy and agricultural-related loans.
  
           Investments,  the  Company's  secondary use of funds,  increased  $84.5
  million or 26.3% to $406.2  million at June 30,  1998 when  compared to December
  31,  1997.  The  increase  is due to  investment  purchases  of $142.0  million,
  primarily in municipal  securities,  which was  partially  offset by  investment
  sales and maturities and the amortization of mortgage-backed securities.
  
           A new line item on the  consolidated  balance sheet is "Trading account
  securities"  of $20.4  million  at June 30,  1998.  This  represents  investment
  securities  that are actively  traded by the Company with the goal of generating
  higher total  returns.  Investors  Trust  Company,  a subsidiary of the Company,
  manages this  portfolio.  Interest income from these  securities  appears on the
  consolidated  statements  of income on the line item "Trading  assets."  Trading
  gains and losses, both realized and unrealized, appear on the line item "Trading
  revenue" in the "Other Income" category.
  
           As the primary source of funds, aggregate deposits of $1.130 billion at
  June 30, 1998 increased $14.0 million or 1.3% compared to December 31, 1997. The
  increase  in  deposits  during  the  first six  month of 1998 was  primarily  in
  non-interest  bearing  deposits  which  increased  $11.9 million while  interest
  bearing  deposits  increased $2.1 million.  Certificates of deposit in excess of
  $100,000  decreased  $4.3 million.  In addition to deposits,  earning assets are
  funded to some extent  through  purchased  funds and  borrowings.  These include
  securities sold under repurchase agreements, federal funds purchased, short-term
  borrowings and long-term  debt  obligations.  In aggregate,  these funds totaled
  $431.5  million at June 30, 1998,  and $279.0  million at December 31, 1997. The
  increase of $152.5  million  represents an increase in long-term  obligations of
  $95.0 million and an increase in  short-term  borrowings,  primarily  securities
  sold under repurchase agreements and federal funds purchased of $53.6 million.
  
  
                                         8
  <PAGE>
  
           Shareholders'  equity  increased  slightly  through June 30, 1998. This
  increase was due to an increase in earnings  retained  and a slight  increase in
  the change in valuation  adjustment  for  securities  available for sale,  which
  represents  the  accounting  treatment  required  under  Statement  of Financial
  Accounting Standards 115, "Accounting for Certain Investments in Debt and Equity
  Securities," applied to the increase in market value of the Company's investment
  portfolio.  Cash  dividends  paid during the first six months of 1998  increased
  $701,000  or 18.2%  compared  to the cash  dividends  paid  during the first six
  months of 1997. Earnings retained during the first six months of 1998 were 53.8%
  compared to 56.9% during the first six months of 1997.
  
                                RESULTS OF OPERATIONS
  
           Net income for the quarter ended June 30, 1998 was $4.8 million,  10.4%
  more than the $4.4 million  reported for the same period in 1997.  For the first
  six months, net income reached $9.8 million, or 10.1% more than the $8.9 million
  reported for the first six months of 1997.  The Company's  performance  has been
  and will  continue to be in part  influenced  by the strength of the economy and
  conditions in the real estate market.
  
           Net interest income is the difference between interest income on assets
  and interest expense on liabilities.  Net interest income  decreased  $74,000 or
   .5% to $15.9 million during the second quarter of 1998 from $16.0 million in the
  second quarter 1997. For the comparative  six month period,  net interest income
  increased  $268,000  or .8% to $31.9  million  from $31.7  million in 1997.  The
  increase  in  interest  income is a result of  growth in loan  outstandings  and
  higher rates on loans that was partially offset by growth in deposits and higher
  rates on  deposits  and  borrowings.  Interest  rate risk is a major  concern in
  forecasting  earnings  potential.  On March 26, 1997,  the prime rate changed to
  8.50%.  Interest  expense  during  the first six months of 1998  increased  $6.6
  million or 26.0%  compared to the prior  year's  first six  months.  Despite the
  current rate environment,  the cost of attracting and holding deposited funds is
  an ever-increasing expense in the banking industry. These increases are the real
  costs of deposit accumulation and retention,  including FDIC insurance costs and
  branch overhead  expenses.  Such costs are necessary for continued growth and to
  maintain and increase market share of available deposits.
  
           The  provision  for loan and lease  losses is  determined  by  periodic
  reviews of loan quality,  current economic conditions,  loss experience and loan
  growth. Based on these factors, the provision for loan and lease losses remained
  the same for the six month  period  ended  June 30,  1998  compared  to the same
  period in 1997. The allowance for loan and lease losses of $27.1 million at June
  30, 1998 and $25.1  million at December 31, 1997 as a percentage  of total loans
  was 2.3% and 2.2%,  respectively.  The Company's net charge-offs of $379,000 and
  $1,140,000 during the first six months of 1998 and 1997, respectively,  continue
  to be  comparable  to those of the  Company's  peers,  as  reported  in the Bank
  Holding Company Performance Report.
  
           "Total other income"  increased $1.3 million or 49.6% during the second
  quarter of 1998,  as a result of increased  other  income of  $833,000,  trading
  revenue  of  $185,000,  increased  trust  and  investment  management  income of
  $145,000,  and increased service charges on deposit accounts of $69,000. Year to
  date,  other income  increased  $1.8 million or 29.9% when compared to the first
  six  months  of 1997 as a result of  increased  other  income  of $1.6  million,
  increased trust and investment management income of $269,000, trading revenue of
  $185,000,  and increased services charges on deposit accounts of $148,000.  This
  was partially  offset by a decrease in net gains  (losses) on sale of securities
  and  mortgages of $398,000.  "Total other  expenses"  increased  $1.5 million or
  13.5% during the quarter ended June 30, 1998 and increased  $2.1 million or 9.5%
  for  the six  month  period.  Of this  year-to-date  increase,  other  operating
  expenses increased $1.4 million or 24.8%, salaries, wages and benefits increased
  $724,000 or 5.6%, and net premises and equipment decreased $16,000 or .4%.
  
           Income  before  income taxes  decreased by $257,000 or 4.0% compared to
  the second  quarter of 1997.  In comparing the first six months of 1998 to 1997,
  income  before income taxes  increased  $76,000 or .6%.  Income taxes  decreased
  $712,000 for the quarter and decreased $985,000 the six month period.
  
                                         9
  <PAGE>
  
                       LIQUIDITY AND INTEREST RATE SENSITIVITY
  
           The  primary  functions  of  asset/liability  management  are to assure
  adequate liquidity and maintain an appropriate balance between  interest-earning
  assets and  interest-bearing  liabilities.  Liquidity  management  involves  the
  ability  to meet the cash  flow  requirements  of  customers  who may be  either
  depositors  wanting  to  withdraw  funds or  borrowers  needing  assurance  that
  sufficient funds will be available to meet their credit needs. Funding affecting
  short-term  liquidity,  including  deposits,  repurchase  agreements,  fed funds
  purchased,  and  short-term  borrowings,  increased  $71.5 million from year end
  1997.  Long-term  borrowings increased $95.0 million during the first six months
  of 1998.
  
           The  goal  of  interest  rate   sensitivity   management  is  to  avoid
  fluctuating  net  interest  margins,  and to  enhance  consistent  growth of net
  interest income through periods of changing  interest rates. Such sensitivity is
  measured  as the  difference  in the  volume of assets  and  liabilities  in the
  existing portfolio that are subject to repricing in a future time period.
  
           The following table shows  separately the interest rate  sensitivity of
  each category of  interest-earning  assets and  interest-bearing  liabilities at
  June 30, 1998:
  <TABLE>
  <CAPTION>
                                                           Repricing Periods  (1)
                                                       Three Months     One Year
                                        Within Three    Through One   Through Five       Over
                                           Months          Year           Years       Five Years
                                                              (In Thousands)
  <S>                                       <C>            <C>           <C>            <C>    
  Assets
        Interest-bearing deposits
           at banks                         $1,567      $      --      $      --      $      --
        Investment securities               45,845         45,664        111,984        202,729
        Trading account securities          20,388             --             --             --
        Loans and leases                   335,353        159,631        464,823        181,325
        Other assets                         4,560             --             --        125,836
                                         ---------      ---------      ---------      ---------
                                           407,713        205,295        576,807        509,890
                                         ---------      ---------      ---------      ---------
  Liabilities and equity
        Noninterest-bearing deposits       158,692             --             --             --
        Interest-bearing deposits          297,173        243,456        178,075        252,215
        Borrowed funds                     134,011            631        222,500         34,105
        Preferred securities                    --             --             --         40,250
        Other liabilities                       --             --             --         15,084
        Hedging instruments                 60,000             --        (60,000)            --
        Shareholders' equity                    --             --             --        123,513
                                         ---------      ---------      ---------      ---------
                                           649,876        244,087        340,575        465,167
                                         ---------      ---------      ---------      ---------
  Interest sensitivity gap                (242,163)       (38,792)       236,232         44,723
                                         ---------      ---------      ---------      ---------
  
  Cumulative interest rate
          sensitivity gap                ($242,163)     ($280,955)      $(47,723)     $      --
                                         =========      =========      =========      =========
  </TABLE>
  
  (1) Adjustable rate loans are included in the period in which interest rates are
  next  scheduled to adjust rather than in the period in which they are due. Fixed
  rate loans are  included in the period in which they are  scheduled to be repaid
  and  are  adjusted  to  take  into  account  estimated  prepayments  based  upon
  assumptions  estimating  prepayments in the interest rate environment prevailing
  during the second  calendar  quarter of 1998. The table assumes  prepayments and
  scheduled  principal   amortization  of  fixed-rate  loans  and  mortgage-backed
  securities  and  assumes  that   adjustable   rate  mortgages  will  reprice  at
  contractual repricing intervals.  There has been no adjustment for the impact of
  future commitments and loans in process.
  
                                         10
  <PAGE>
  
  (2) Savings and NOW deposits are  scheduled  for  repricing  based on historical
  deposit decay rate analyses,  as well as historical  moving  averages of run-off
  for the  Company's  deposits in these  categories.  While  generally  subject to
  immediate  withdrawal,  management  considers a portion of these  accounts to be
  core deposits having  significantly  longer effective  maturities based upon the
  Company's  historical  retention  of such  deposits  in changing  interest  rate
  environments.  Specifically,  30.2% of these deposits are considered repriceable
  within three months and 69.8% are considered  repriceable in the over five years
  category.
  
           Interest   rate   sensitivity   is  a   function   of   the   repricing
  characteristics of the Company's assets and liabilities.  These  characteristics
  include  the  volume of assets  and  liabilities  repricing,  the  timing of the
  repricing,  and the relative  levels of  repricing.  Attempting  to minimize the
  interest  rate  sensitivity  gaps is a continual  challenge  in a changing  rate
  environment.  Based on the  Company's  gap  position as  reflected  in the above
  table,  current  accepted  theory would indicate that net interest  income would
  increase  in a falling  rate  environment  and would  decrease  in a rising rate
  environment.  An interest rate gap table does not,  however,  present a complete
  picture of the impact of interest  rate changes on net interest  income.  First,
  changes in the general level of interest  rates do not affect all  categories of
  assets and liabilities equally or simultaneously. Second, assets and liabilities
  which can contractually reprice within the same period may not, in fact, reprice
  at the same time or to the same extent.  Third,  the table  represents a one-day
  position; variations occur daily as the Company adjusts its interest sensitivity
  throughout the year. Fourth, assumptions must be made to construct such a table.
  For example,  non-interest  bearing  deposits are assigned a repricing  interval
  within  one year,  although  history  indicates  a  significant  amount of these
  deposits  will not move  into  interest  bearing  categories  regardless  of the
  general level of interest rates. Finally, the repricing distribution of interest
  sensitive assets may not be indicative of the liquidity of those assets.
  
           The Company anticipates volatile interest rate levels for the remainder
  of 1998, with no clear indication of sustainable  rising or falling rates. Given
  this assumption,  the Company's asset/liability strategy for 1998 is to maintain
  a  negative  gap  (interest-bearing  liabilities  subject  to  repricing  exceed
  interest-earning  assets  subject to  repricing)  for periods up to a year.  The
  impact of a volatile  interest rate  environment  on net interest  income is not
  expected to be  significant to the Company's  results of  operations.  Effective
  monitoring of these interest  sensitivity  gaps is the priority of the Company's
  asset/liability management committee.
  
                                          CAPITAL ADEQUACY
  
           The following table sets forth certain capital performance ratios.
  
                                                       June 30,          Dec. 31,
                                                         1998             1997
  CAPITAL LEVELS
        Tier 1 leverage ratio                             9.75%            9.84%
        Tier 1 risk-based ratio                          12.68            13.49
        Total risk-based ratio                           14.03            14.91
  
  
  CAPITAL PERFORMANCE
        Return of average assets (annualized)             1.23             1.31
        Return on average equity (annualized)            16.00            15.90
        Earnings retained                                53.80            55.30
        Internal capital growth (annualized)              8.58             8.35
  
                                         11
  <PAGE>
           The Company's  capital  ratios above  compare  favorably to the minimum
  required amounts of Tier 1 and total capital to  "risk-weighted"  assets and the
  minimum Tier 1 leverage  ratio,  as defined by banking  regulators.  At June 30,
  1998,  the Company was required to have minimum Tier 1 and total capital  ratios
  of 4.0% and 8.0%, respectively,  and a minimum Tier 1 leverage ratio of 3.0%. In
  order for the Company to be considered "well capitalized", as defined by banking
  regulators,  the Company must have Tier 1 and total  capital  ratios of 6.0% and
  10.0%,  respectively,  and a minimum Tier 1 leverage  ratio of 5.0%. The Company
  currently meets the criteria for a well capitalized institution,  and management
  believes that, under current regulations,  the Company will continue to meet its
  minimum capital  requirements in the foreseeable future. At present, the Company
  has no commitments for significant capital expenditures.
  
           The Company is not under any agreement with regulatory  authorities nor
  is  the  Company  aware  of  any  current   recommendations  by  the  regulatory
  authorities  which,  if such  recommendations  were  implemented,  would  have a
  material effect on liquidity, capital resources or operations of the Company.
  
                                   FUTURE OUTLOOK
  
           As previously  reported on the Company's  Form 8-K dated July 21, 1998,
  the Company has entered into an agreement to acquire Elverson National Bank and,
  in connection therewith, has rescinded its stock repurchase program.
  
           On June 15, 1998, National Asian Bank, a division of National Penn Bank
  (the "Bank") was opened in Elkins  Park,  Pennsylvania.  The Company  expects to
  open in  1998,  a new  non-bank  subsidiary  called  Penn  Securities,  Inc.,  a
  full-service   broker/dealer  program,  offering  a  wide  range  of  investment
  products.  Start-up costs for these two operations may have a negative impact on
  1998 earnings and beyond.
  
           On July  16,  1998,  the Bank  announced  a  unique  commitment  to its
  customers.  If the Bank is  acquired  within the next five years and changes its
  name, all new qualifying Bank customers will receive a $1,000 bonus.  This offer
  is expected  to attract  new  customers  to the Bank and may  therefore  have an
  impact on earnings in 1998 and beyond.
  
           The Company expects to spend  approximately  $300,000 in 1998 to modify
  its computer  information  systems  enabling  proper  processing of transactions
  related to the year 2000 and  beyond.  The  Company  has  evaluated  appropriate
  courses of corrective  action,  including  replacement of certain  systems whose
  associated  costs would be recorded as assets and  amortized.  Accordingly,  the
  Company does not expect the amounts  required to be expensed over the next three
  years  to have a  material  effect  on its  financial  position  or  results  of
  operations. The amount expensed to date in 1998 is immaterial.
  
           The Company converted its mainframe  hardware and software to new fully
  integrated  systems in May 1998. The Company expects that these new systems will
  offer  improved  operating   efficiencies  and  enhanced  customer  service  and
  reporting.  These new  initiatives  are not  expected to start  contributing  to
  profits until 1999 and beyond, so that 1998 earnings may be somewhat  negatively
  impacted by the initial costs of these new items.
  
           First Capitol Bank,  York,  PA, has announced its intent to be acquired
  by Susquehanna  Bancshares,  Inc.,  Lititz,  PA. The Company has a 20% ownership
  interest in First  Capitol  and,  at the deal price of $50.02 per share,  has an
  unrealized gain of approximately $3 million on this  transaction.  The merger is
  expected to be  completed in 1998,  although no  assurance  can be given that it
  will be completed. The Company has one other remaining 20% ownership interest in
  a de novo bank.
  
           This report contains  forward-looking  statements  concerning earnings,
  asset quality,  and other future events.  Actual results could differ materially
  due to, among other things, the risks and uncertainties  discussed in Exhibit 99
  to the Company's Report on Form 10-K for 1997,  which is incorporated  herein by
  reference.   Readers  are  cautioned  not  to  place  undue  reliance  on  these
  statements.  The Company  undertakes no obligation to publicly release or update
  any of these statements.
  
                                         12
  <PAGE>
  
  Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
           There has been no material  change in the  Company's  assessment of its
  sensitivity to market risk since its  presentation  in the 1997 annual report on
  Form 10-K filed with the SEC.
  
  
                                         13
  
  <PAGE>
                             PART II - OTHER INFORMATION
  
  Item 1.  Legal Proceedings.
  
           None.
  
  Item 2.  Changes in Securities.
  
           None.  See also Item 4 hereof.
  
  Item 3.  Defaults Upon Senior Securities.
  
           None.
  
  Item 4.  Submission of Matters to a Vote of Security Holders.
  
           The 1998 annual meeting (the "Meeting") of the shareholders of National
  Penn Bancshares,  Inc. (the  "Registrant") was held on April 28, 1998. Notice of
  the Meeting  was mailed to  shareholders  of record on or about March 20,  1998,
  together with proxy  solicitation  materials prepared in accordance with Section
  14(a) of the Securities  Exchange Act of 1934, as amended,  and the  regulations
  promulgated thereunder.
  
           The Meeting was held for the following purposes:
  
           (1) to elect  three Class II  directors  to hold office for three years
  from the date of election and until their  successors are elected and qualified;
  and
  
           (2) to act  upon a  proposal  to amend  the  Registrant's  Articles  of
  Incorporation to increase the number of authorized  common shares to 50 million,
  to eliminate  "par value",  and to reclassify all  outstanding  common shares as
  shares without par value ("Proposal No. 2").
  
           (3) to act  upon a  proposal  to amend  the  Registrant's  Articles  of
  Incorporation  to increase the maximum  number of directors of the Registrant to
  15  persons  and to  permit a change  in the  number  of  directors  at any time
  ("Proposal No. 3").
  
           There was no solicitation in opposition to the nominees of the Board of
  Directors  for election to the Board of  Directors  and all such  nominees  were
  elected.  The  number of votes  cast for or  withheld,  as well as the number of
  abstentions and broker  non-votes,  for each of the nominees for election to the
  Board of Directors were as follows:
  <TABLE>
  <CAPTION>
  <S>                                 <C>              <C>                         <C>
                                                                         Abstentions and
           Nominee                      For           Withheld          Broker Non-votes
  Frederick H. Gaige                  8,657,094        207,293                    -0-
  
  Lawrence T. Jilk, Jr.               8,692,698        171,689                    -0-
  
  C. Robert Roth                      8,699,284        165,103                    -0-
  </TABLE>
  
           There was no solicitation in opposition to Proposal No. 2, and Proposal
  No. 2 was duly approved. The number of votes cast for or against, as well as the
  number of abstentions and broker non-votes, for the proposal were as follows:
  
      For           Against                Abstentions          Broker Non-votes
  
    6,676,852       316,837                  248,570                     -0-
  
                                         14
  <PAGE>
           There was no solicitation in opposition to Proposal No. 3, and Proposal
  No. 3 was duly approved. The number of votes cast for or against, as well as the
  number of abstentions and broker non-votes, for the proposal were as follows:
  
      For           Against                Abstentions          Broker Non-votes
  
    7,794,907       642,138                 263,570                      -0-
  
  Item 5.  Other Information.
  
           On June 24,  1998,  the  Registrant's  Board of  Directors  declared  a
  5-for-4 stock split of the Registrant's common shares,  payable July 31, 1998 to
  shareholders  of record July 15, 1998,  and declared a cash dividend of $.19 per
  share payable August 17, 1998 to shareholders of record July 31, 1998.
  
           On June 15, 1998, the Registrant's  banking  subsidiary,  National Penn
  Bank (the "Bank"),  formed a new banking  division,  National Asian Bank,  which
  opened at a temporary  location at 1349 West  Cheltenham  Avenue,  Elkins  Park,
  Pennsylvania.  The Registrant  anticipates that the National Asian Bank Division
  will be  relocated  to a  permanent  location in that  general  area in the near
  future.
  
           During second quarter 1998, the Bank's  wholly-owned  subsidiary,  Link
  Financial  Services,  Inc.,  received  authorization  from  the  Office  of  the
  Comptroller of the Currency and from the Pennsylvania Department of Insurance to
  engage in  business as a life  insurance  agency.  John J. Mikus,  Jr. was named
  Senior Vice President of the Bank and the Bank's Insurance Manager.
  
           During  second  quarter  1998,  the  Registrant  formed a new  non-bank
  subsidiary,  Penn  Securities,  Inc.  ("Penn"),  a proposed de novo full service
  securities  brokerage firm. Gene C. Levengood was named Senior Vice President of
  the Bank and  President  and Chief  Executive  Officer of Penn.  The  Registrant
  anticipates that Penn, upon receipt of all necessary regulatory approvals,  will
  open for business in fourth quarter 1998.
  
           The Registrant anticipates that the Bank will install one new automated
  teller machine in a convenience store location during third quarter 1998.
  
  Item 6.  Exhibits and Reports on Form 8-K.
  
           (a)      Exhibits.
  
                    Exhibit 3.1 -     Articles of Incorporation, as amended.
  
                    Exhibit 27 -      Financial Data Schedule.
  
                    Exhibit 99 -      Earnings Statement for 12 Months Ended 
                                      June 30, 1998.
  
           (b)  Reports on Form 8-K.  The  Registrant  did not file any Reports on
  Form 8-K during the quarterly period ended June 30, 1998. The Registrant filed a
  Report on Form 8-K dated July 21, 1998 reporting, under Item 5, the execution of
  an agreement for the acquisition of Elverson  National Bank and recission of the
  Registrant's stock repurchase program.
  
                                         15
  <PAGE>
                                     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)
  
  Dated:   August 13, 1998                    By /s/  Wayne R. Weidner
                                                ----------------------
                                                 Wayne R. Weidner, President
  
  Dated:   August 13, 1998                    By /s/  Gary L. Rhoads
                                                --------------------
                                                   Gary L. Rhoads, Principal
                                                   Financial Officer
metadata_documents: [{"type": "10-Q", "sequence": "1", "secsgml_size_bytes": 57543}]
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text: FORM 10-Q
  
                         SECURITIES AND EXCHANGE COMMISSION
                               WASHINGTON, D.C. 20549
  
  (Mark One)
  
             [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                          SECURITIES EXCHANGE ACT OF 1934
  
  For the quarterly period ended:   June 30, 1998
                                  ------------------
  
                                         OR
  
            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
                          SECURITIES EXCHANGE ACT OF 1934
  
  For the transition period from: _________________ to _________________
  
  Commission file number: 0-10957
  
                           NATIONAL PENN BANCSHARES, INC.
               (Exact name of registrant as specified in its charter)
  
              Pennsylvania                                23-2215075
   (State or other jurisdiction of                    (I.R.S. Employer
     incorporation or organization)                    Identification No.)
  
                Philadelphia and Reading Avenues, Boyertown, PA 19512
                 (Address of principal executive offices) (Zip Code)
  
                                   (610) 367-6001
                (Registrant's telephone number, including area code)
  
                                         N/A
                (Former name, former address and former fiscal year,
                            if changed since last report)
  
           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 X No .
  
           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 August 7, 1998
  
           Common Stock (no stated par value)     (No.)  13,143,086 Shares
  TABLE OF CONTENTS
  
  Part I - Financial Information.                                             Page
  
           Item 1.          Financial Statements..............................   3
  
           Item 2.          Management's Discussion and Analysis of
                            Financial Condition and Results of Operation .....   8
  
           Item 3.          Quantitative and Qualitative Disclosures about
                            Market Risk.......................................  13
  
  Part II - Other Information.
  
           Item 1.          Legal Proceedings ................................  14
  
           Item 2.          Changes in Securities.............................  14
  
           Item 3.          Defaults Upon Senior Securities...................  14
  
           Item 4.          Submission of Matters to a Vote of
                            Security Holders..................................  14
  
           Item 5.          Other Information ................................  15
  
           Item 6.          Exhibits and Reports on Form 8-K..................  15
  
  Signature...................................................................  16
  
                                         2
  PART I - FINANCIAL INFORMATION
  
  Item 1.   Financial Statements
  NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
  CONSOLIDATED CONDENSED BALANCE SHEET                              June 30            Dec. 31
   (Dollars in thousands, except per share data)                      1998               1997
                                                                  (Unaudited)           (Note)
                                                                  -----------         -----------
  ASSETS
  Cash and due from banks                                         $    43,218         $    40,009
  Interest bearing deposits in banks                                    1,567               1,089
  Federal funds sold                                                       --                  --
                                                                  -----------         -----------
      Total cash and cash equivalents                                  44,785              41,098
  Trading account securities                                           20,388                  --
  Investment securities available for sale at market value            406,222             321,760
  Loans, less allowance for loan losses of $27,142 and
     $25,122 in 1998 and 1997 respectively                          1,141,132           1,097,662
  Other assets                                                         87,178              73,858
                                                                  -----------         -----------
      Total Assets                                                  1,699,705           1,534,378
                                                                  ===========         ===========
  
  LIABILITIES AND SHAREHOLDERS' EQUITY
  Non-interest bearing deposits                                   $   158,692         $   146,772
  Interest bearing deposits
    (Includes certificates of deposit $100,000 or greater:
    1998 - $106,189; 1997 - $110,447)                                 970,919             968,828
                                                                  -----------         -----------
      Total Deposits                                                1,129,611           1,115,600
  Securities sold under repurchase agreements
    and federal funds purchased                                       130,857              77,225
  Short-term borrowings                                                 9,930               6,109
  Long-term obligations                                               250,460             155,460
  Guaranteed preferred beneficial interests in
      Company's subordinated debentures                                40,250              40,250
  Accrued interest and other liabilities                               15,084              16,546
                                                                  -----------         -----------
      Total Liabilities                                             1,576,192           1,411,190
  Commitments and contingent liabilities                                   --                  --
  Shareholders' equity
    Preferred stock, no stated par value;
      authorized 1,000,000 shares, none issued                             --                  --
    Common stock, no stated par value;
      authorized 50,000,000 shares; issued and outstanding
      1998 - 13,183,970; 1997 - 13,284,175, net of shares
      in Treasury: 1998 - 223,999; 1997 - 104,623                     100,198             101,748
    Retained earnings                                                  22,349              17,337
    Net unrealized gains on securities available for sale               7,928               7,531
    Treasury stock at cost                                             (6,962)             (3,428)
                                                                  -----------         -----------
      Total Shareholders' Equity                                      123,513             123,188
                                                                  -----------         -----------
      Total Liabilities and Shareholders' Equity                  $ 1,699,705         $ 1,534,378
                                                                  ===========         ===========
  The  accompanying  notes  are an  integral  part of  these  condensed  financial
  statements.
  
  Note: The Balance Sheet at Dec. 31, 1997 has been derived from the audited
        financial statements at that date.
  
                                          3
  NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
  UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF INCOME
  Three Months Ended          Six Months Ended
  (Dollars in thousands, except per share data)                     June 30                    June 30
                                                            -------------------------------------------------
                                                               1998         1997          1998         1997
                                                            ---------    ---------      --------     --------
  INTEREST INCOME
  Loans including fees                                       $ 26,582     $ 25,239      $ 52,691     $ 49,623
  Deposits in banks                                                32           27            48           44
  Federal funds sold                                               13           33            24           51
  Trading Assets                                                  203           --           203            0
  Investment securities                                         5,750        3,564        10,923        7,313
                                                             --------     --------      --------     --------
      Total interest income                                    32,580       28,863        63,889       57,031
                                                             --------     --------      --------     --------
  INTEREST EXPENSE
  Deposits                                                     11,022        9,906        21,954       19,099
  Federal funds purchased, borrowed funds and
    securities sold under repurchase agreements                 5,620        2,945         9,956        6,221
                                                             --------     --------      --------     --------
      Total interest expense                                   16,642       12,851        31,910       25,320
                                                             --------     --------      --------     --------
      Net interest income                                      15,938       16,012        31,979       31,711
  Provision for loan losses                                     1,200        1,200         2,400        2,400
                                                             --------     --------      --------     --------
      Net interest income after provision
        for loan losses                                        14,738       14,812        29,579       29,311
                                                             --------     --------      --------     --------
  OTHER INCOME
  Trust and investment management income                          832          687         1,592        1,323
  Service charges on deposit accounts                           1,076        1,007         2,109        1,961
  Net gains (losses) on sale of securities and mortgages            1          (74)          444          842
  Trading revenue                                                 185           --           185           --
  Other                                                         1,847        1,014         3,372        1,803
                                                             --------     --------      --------     --------
      Total other income                                        3,941        2,634         7,702        5,929
                                                             --------     --------      --------     --------
  OTHER EXPENSES
  Salaries, wages and employee benefits                         6,825        6,481        13,611       12,887
  Net premises and equipment                                    1,827        1,786         3,710        3,726
  Other operating                                               3,912        2,807         7,088        5,679
                                                             --------     --------      --------     --------
      Total other expenses                                     12,564       11,074        24,409       22,292
                                                             --------     --------      --------     --------
      Income before income taxes                                6,115        6,372        12,872       12,948
  Applicable income tax expense                                 1,275        1,987         3,044        4,029
                                                             --------     --------      --------     --------
      Net income                                             $  4,840     $  4,385      $  9,828     $  8,919
                                                             ========     ========      ========     ========
  
  PER SHARE OF COMMON STOCK
  Net income per share - basic                               $   0.37     $   0.33      $   0.74     $   0.67
  Net income per share - diluted                                 0.36         0.32          0.73         0.66
  Dividends paid in cash                                         0.17         0.15          0.34         0.28
  The  accompanying  notes  are an  integral  part of  these  condensed  financial
  statements.
  
                                          4
  NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
  CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
  SIX MONTHS ENDED JUNE 30, 1998
    (Dollars in thousands)                                                           Net Unrealized
                                                                                     Gain (Loss) on
                                           Common Stock        Additional               Securities  Compre-
                                      -----------------------   Paid-in     Retained     Available  hensive    Treasury
                                         Shares     Par Value   Capital     Earnings     for Sale   Income      Stock       Total
                                       ----------   ---------  ----------  ----------   --------- ----------   ---------  ----------
  Balance at December 31, 1997         10,606,726    $20,085     $81,663     $17,337      $7,531          --    ($3,428)   $123,188
  Comprehensive income:
    Net income                                 --         --          --       9,828          --       9,828         --      $9,828
    Unrealized gains(losses) on 
      securities available for sale, 
      net of taxes and reclass-
      ification adjustment (see 
      disclosure)                              --         --          --          --         397         889         --        $397
                                                                                                  ----------
  Comprehensive income                                                                               $10,717
                                                                                                  ==========
  Conversion to no par value stock             --     80,113     (80,113)         --          --                     --          --
  5 for 4 stock split                   2,677,449
  Cash dividends declared                      --         --          --      (4,816)         --                     --     ($4,816)
  Effect of treasury stock 
     transactions                         (100,205)       --      (1,550)         --          --                 (3,534)    ($5,084)
                                      ------------  --------  ----------  ----------  ----------              ---------  ----------
  Balance at June 30, 1998              13,183,970  $100,198          $0     $22,349      $7,928                ($6,962)   $123,513
                                      ============  ========  ==========  ==========  ==========              =========  ==========
  
  Disclosure of reclassification 
   amount:
    Unrealized holding loss 
     arising during period                                                                              $889
    Less: reclassification adjustment 
      for gains included in net income                                                                  (492)
                                                                                                  ----------
    Net unrealized loss on securities                                                                   $397
                                                                                                  ==========
  
  SIX MONTHS ENDED JUNE 30, 1997
    (Dollars in thousands)                                                          Net Unrealized
                                                                                     Gain (Loss) on
                                           Common Stock        Additional               Securities  Compre-
                                      -----------------------   Paid-in     Retained     Available  hensive    Treasury
                                         Shares     Par Value   Capital     Earnings     for Sale   Income      Stock       Total
                                       ----------   ---------  ----------  ----------   --------- ----------   ---------  ----------
  
  Balance at December 31, 1996          8,002,648    $20,085     $83,707      $7,357      $4,398          --      ($826)   $114,721
  Comprehensive income:
    Net income                                 --         --          --       8,919          --       8,919         --      $8,919
    Unrealized gains(losses) on 
      securities available for sale, 
      net of taxes and reclass-
      ification adjustment (see 
      disclosure)                              --         --          --          --      (1,497)       (847)        --     ($1,497)
                                                                                                  ----------
  Comprehensive income                                                                                $8,072
                                                                                                  ==========
  Conversion to no par value stock             --     83,268     (83,268)         --                                 --          --
  4 for 3 stock split                   2,677,497
  Cash dividends declared                      --         --          --      (4,164)         --                     --     ($4,164)
  Effect of treasury stock 
     transactions                          17,529         --        (439)         --          --                    385        ($54)
                                      -----------  ---------  ----------  ----------  ----------              ---------  ----------
  Balance at June 30, 1997             10,697,674   $103,353          $0     $12,112      $2,901                  ($441)   $117,925
                                      ===========  =========  ==========  ==========  ==========              =========  ==========
  
  Disclosure of reclassification 
   amount:
    Unrealized holding loss 
     arising during period                                                                             ($847)
    Less: reclassification adjustment 
     for gains included in net income                                                                   (650)
                                                                                                  ----------
    Net unrealized loss on securities                                                                ($1,497)
                                                                                                  ==========
  The accompanying notes are an integral part of these statements.
  
                                          5
  NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
  UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
  Six Months Ended June 30,
  (Dollars in thousands)
                                                                                    1998              1997
                                                                                  ---------         ---------
  CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                                    $   9,828         $   8,919
    Adjustments to reconcile net income to net
        cash provided by (used in) operating activities
      Provision for loan losses                                                       2,400             2,400
      Depreciation and amortization                                                   1,782             1,696
      Net gains (losses) on sale of securities and mortgages                            444               842
      Trading-related assets                                                        (20,388)               --
      Mortgage loans originated for resale                                          (31,864)           (8,068)
      Sale of mortgage loans originated for resale                                   31,864             8,068
      Other                                                                         (15,787)           (2,333)
                                                                                  ---------         ---------
  
        Net cash provided by (used in) operating activities                         (21,721)           11,524
  
  CASH FLOWS FROM INVESTING ACTIVITIES
    Proceeds from sales of investment securities - available for sale                48,500            11,655
    Proceeds from maturities of investment securities - available for sale            9,242            14,629
    Purchase of investment securities - available for sale                         (142,022)          (41,488)
    Proceeds from sales of loans                                                         --                --
    Net increase in loans                                                           (45,869)          (45,859)
    Purchases of premises & equipment                                                (1,007)           (1,475)
                                                                                  ---------         ---------
  
        Net cash provided by (used in) investing activities                        (131,156)          (62,538)
  
  CASH FLOWS FROM FINANCING ACTIVITIES
    Increase (decrease) in:
      Deposits                                                                       14,011            88,702
      Repurchase agreements, fed funds & short-term borrowings                       57,453           (85,602)
      Long-term borrowings                                                           95,000            25,000
      Proceeds from issuance of preferred securities                                     --            40,250
      (Increase) decrease in treasury stock                                          (3,534)              385
      Issuance of common stock under dividend reinvestment plan                      (1,550)             (439)
      Cash dividends                                                                 (4,815)           (4,166)
                                                                                  ---------         ---------
  
        Net cash provided by (used in) financing activities                         156,565            64,130
  
  Net increase (decrease) in cash and cash equivalents                                3,688            13,116
  
  Cash and cash equivalents at January 1                                             41,098            41,996
                                                                                  ---------         ---------
  
  Cash and cash equivalents at June 30                                            $  44,786         $  55,112
                                                                                  =========         =========
  The  accompanying  notes  are an  integral  part of  these  condensed  financial
  statements.
  
                                          6
  NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
  (UNAUDITED)
  
  1. The accompanying  unaudited condensed financial statements have been prepared
  in  accordance  with  generally  accepted  accounting   principles  for  interim
  financial  information.  The financial information included herein is unaudited;
  however, such information reflects all adjustments  (consisting solely of normal
  recurring  adjustments) which are, in the opinion of management,  necessary to a
  fair statement of the results for the interim periods.  For further information,
  refer to the consolidated financial statements and footnotes thereto included in
  the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
  
  2. The results of operations  for the  six-month  period ended June 30, 1998 are
  not necessarily indicative of the results to be expected for the full year.
  
  3. Per share data are based on the weighted average number of shares outstanding
  of  13,199,215  and  13,358,435  for 1998  and  1997,  respectively,  and on the
  weighted  average  number  of  diluted  shares  outstanding  of  13,530,708  and
  13,569,804  for 1998 and  1997,  respectively,  and are  computed  after  giving
  retroactive effect to a 5-for-4 stock split paid July 31, 1998.
  
  4. On June 24, 1998, the Company's  Board of Directors  declared a five-for-four
  stock split payable on July 31, 1998 to  shareholders of record on July 15, 1998
  and a  cash  dividend  of  $.19  per  share  payable  on  August  17,  1998,  to
  shareholders of record on July 31, 1998.
  
  5.  In June  1998,  the  Financial  Accounting  Standards  Board  (FASB)  issued
  Statement of Financial  Accounting  Standards  (SFAS) No. 133,  "Accounting  for
  Derivative   Instruments  and  Hedging   Activity."  SFAS  No.  133  establishes
  accounting and reporting standards for derivative instruments, including certain
  derivative instruments imbedded in other contracts,  and for hedging activities.
  It  requires  that an entity  recognize  all  derivatives  as  either  assets or
  liabilities in the statement of financial position and measure those instruments
  at fair value.  If certain  conditions are met, a derivative may be specifically
  designated  as a hedge.  The  accounting  for  changes  in the  fair  value of a
  derivative  (gains and losses) depends on the intended use of the derivative and
  resulting  designation.  SFAS No. 133 is  effective  for all fiscal  quarters of
  fiscal years  beginning  after June 15, 1999.  Earlier  application is permitted
  only as of the  beginning  of any  fiscal  quarter.  The  Company  is  currently
  reviewing the provisions of SFAS No. 133.
  
  6. The Company  identifies a loan as impaired  when it is probable that interest
  and principal will not be collected  according to the  contractual  terms of the
  loan  agreement.  The balance of impaired loans was $5,518,000 at June 30, 1998,
  all of which are non-accrual  loans. The allowance for loan loss associated with
  these  impaired  loans was  $793,000 at June 30,  1998.  The Company  recognizes
  income on impaired  loans  under the cash basis when the loans are both  current
  and the collateral on the loan is sufficient to cover the outstanding obligation
  to the Company.  If these  factors do not exist,  the Company will not recognize
  income on such loans.
  
                                         7
  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 financial  condition and
  earnings  performance  of the  Company  with a primary  focus on an  analysis of
  operating results.
  
                                 FINANCIAL CONDITION
  
           Total assets increased to $1.699 billion, an increase of $165.3 million
  or 10.8%  over the  $1.534  billion at  December  31,  1997.  This  increase  is
  reflected primarily in the investment category,  the result of the investment of
  deposits,  the Company's  primary  source of funds,  short-term  borrowings  and
  long-term borrowings.
  
           Total cash and cash equivalents  increased $3.7 million or 8.9% at June
  30, 1998 when compared to December 31, 1997. This increase was primarily in cash
  and due from banks.
  
           Loans  increased to $1.141  billion at June 30,  1998.  The increase of
  $43.5  million or 4.0% compared to December 31, 1997 was primarily the result of
  the  investment  of deposits and  long-term  borrowings.  Loans  originated  for
  immediate  resale during the first six months of 1998 amounted to $31.9 million.
  The  Company's  credit  quality  is  reflected  by the  annualized  ratio of net
  charge-offs  to total loans of .06%  through  the second  quarter of 1998 versus
   .20% for the year 1997, and the ratio of non-performing assets to total loans of
   .69% at June 30,  1998  compared  to .89% at  December  31 1997.  Non-performing
  assets,  including non-accruals,  loans 90 days past due, restructured loans and
  other real estate  owned,  were $8.1 million at June 30, 1998  compared to $10.0
  million at December 31, 1997. Of these amounts,  non-accrual  loans  represented
  $5.5  million  and  $6.8  million  at June  30,  1998  and  December  31,  1997,
  respectively.  Loans 90 days  past due and  still  accruing  interest  were $2.3
  million and $2.8 million at June 30, 1998 and  December 31, 1997,  respectively.
  Other real estate  owned was $270,000 and $375,000 at June 30, 1998 and December
  31, 1997,  respectively.  The Company had no restructured loans at June 30, 1998
  or December 31, 1997. The allowance for loan losses to non-performing assets was
  336.4% and 251.6% at June 30, 1998 and December 31,  1997,  respectively.  As is
  evident from the above amounts  relative to  non-performing  assets,  there have
  been no  significant  changes  between  December 31, 1997 and June 30, 1998. The
  Company has no significant exposure to energy and agricultural-related loans.
  
           Investments,  the  Company's  secondary use of funds,  increased  $84.5
  million or 26.3% to $406.2  million at June 30,  1998 when  compared to December
  31,  1997.  The  increase  is due to  investment  purchases  of $142.0  million,
  primarily in municipal  securities,  which was  partially  offset by  investment
  sales and maturities and the amortization of mortgage-backed securities.
  
           A new line item on the  consolidated  balance sheet is "Trading account
  securities"  of $20.4  million  at June 30,  1998.  This  represents  investment
  securities  that are actively  traded by the Company with the goal of generating
  higher total  returns.  Investors  Trust  Company,  a subsidiary of the Company,
  manages this  portfolio.  Interest income from these  securities  appears on the
  consolidated  statements  of income on the line item "Trading  assets."  Trading
  gains and losses, both realized and unrealized, appear on the line item "Trading
  revenue" in the "Other Income" category.
  
           As the primary source of funds, aggregate deposits of $1.130 billion at
  June 30, 1998 increased $14.0 million or 1.3% compared to December 31, 1997. The
  increase  in  deposits  during  the  first six  month of 1998 was  primarily  in
  non-interest  bearing  deposits  which  increased  $11.9 million while  interest
  bearing  deposits  increased $2.1 million.  Certificates of deposit in excess of
  $100,000  decreased  $4.3 million.  In addition to deposits,  earning assets are
  funded to some extent  through  purchased  funds and  borrowings.  These include
  securities sold under repurchase agreements, federal funds purchased, short-term
  borrowings and long-term  debt  obligations.  In aggregate,  these funds totaled
  $431.5  million at June 30, 1998,  and $279.0  million at December 31, 1997. The
  increase of $152.5  million  represents an increase in long-term  obligations of
  $95.0 million and an increase in  short-term  borrowings,  primarily  securities
  sold under repurchase agreements and federal funds purchased of $53.6 million.
  
                                         8
  Shareholders'  equity  increased  slightly  through June 30, 1998. This
  increase was due to an increase in earnings  retained  and a slight  increase in
  the change in valuation  adjustment  for  securities  available for sale,  which
  represents  the  accounting  treatment  required  under  Statement  of Financial
  Accounting Standards 115, "Accounting for Certain Investments in Debt and Equity
  Securities," applied to the increase in market value of the Company's investment
  portfolio.  Cash  dividends  paid during the first six months of 1998  increased
  $701,000  or 18.2%  compared  to the cash  dividends  paid  during the first six
  months of 1997. Earnings retained during the first six months of 1998 were 53.8%
  compared to 56.9% during the first six months of 1997.
  
                                RESULTS OF OPERATIONS
  
           Net income for the quarter ended June 30, 1998 was $4.8 million,  10.4%
  more than the $4.4 million  reported for the same period in 1997.  For the first
  six months, net income reached $9.8 million, or 10.1% more than the $8.9 million
  reported for the first six months of 1997.  The Company's  performance  has been
  and will  continue to be in part  influenced  by the strength of the economy and
  conditions in the real estate market.
  
           Net interest income is the difference between interest income on assets
  and interest expense on liabilities.  Net interest income  decreased  $74,000 or
   .5% to $15.9 million during the second quarter of 1998 from $16.0 million in the
  second quarter 1997. For the comparative  six month period,  net interest income
  increased  $268,000  or .8% to $31.9  million  from $31.7  million in 1997.  The
  increase  in  interest  income is a result of  growth in loan  outstandings  and
  higher rates on loans that was partially offset by growth in deposits and higher
  rates on  deposits  and  borrowings.  Interest  rate risk is a major  concern in
  forecasting  earnings  potential.  On March 26, 1997,  the prime rate changed to
  8.50%.  Interest  expense  during  the first six months of 1998  increased  $6.6
  million or 26.0%  compared to the prior  year's  first six  months.  Despite the
  current rate environment,  the cost of attracting and holding deposited funds is
  an ever-increasing expense in the banking industry. These increases are the real
  costs of deposit accumulation and retention,  including FDIC insurance costs and
  branch overhead  expenses.  Such costs are necessary for continued growth and to
  maintain and increase market share of available deposits.
  
           The  provision  for loan and lease  losses is  determined  by  periodic
  reviews of loan quality,  current economic conditions,  loss experience and loan
  growth. Based on these factors, the provision for loan and lease losses remained
  the same for the six month  period  ended  June 30,  1998  compared  to the same
  period in 1997. The allowance for loan and lease losses of $27.1 million at June
  30, 1998 and $25.1  million at December 31, 1997 as a percentage  of total loans
  was 2.3% and 2.2%,  respectively.  The Company's net charge-offs of $379,000 and
  $1,140,000 during the first six months of 1998 and 1997, respectively,  continue
  to be  comparable  to those of the  Company's  peers,  as  reported  in the Bank
  Holding Company Performance Report.
  
           "Total other income"  increased $1.3 million or 49.6% during the second
  quarter of 1998,  as a result of increased  other  income of  $833,000,  trading
  revenue  of  $185,000,  increased  trust  and  investment  management  income of
  $145,000,  and increased service charges on deposit accounts of $69,000. Year to
  date,  other income  increased  $1.8 million or 29.9% when compared to the first
  six  months  of 1997 as a result of  increased  other  income  of $1.6  million,
  increased trust and investment management income of $269,000, trading revenue of
  $185,000,  and increased services charges on deposit accounts of $148,000.  This
  was partially  offset by a decrease in net gains  (losses) on sale of securities
  and  mortgages of $398,000.  "Total other  expenses"  increased  $1.5 million or
  13.5% during the quarter ended June 30, 1998 and increased  $2.1 million or 9.5%
  for  the six  month  period.  Of this  year-to-date  increase,  other  operating
  expenses increased $1.4 million or 24.8%, salaries, wages and benefits increased
  $724,000 or 5.6%, and net premises and equipment decreased $16,000 or .4%.
  
           Income  before  income taxes  decreased by $257,000 or 4.0% compared to
  the second  quarter of 1997.  In comparing the first six months of 1998 to 1997,
  income  before income taxes  increased  $76,000 or .6%.  Income taxes  decreased
  $712,000 for the quarter and decreased $985,000 the six month period.
  
                                         9
  LIQUIDITY AND INTEREST RATE SENSITIVITY
  
           The  primary  functions  of  asset/liability  management  are to assure
  adequate liquidity and maintain an appropriate balance between  interest-earning
  assets and  interest-bearing  liabilities.  Liquidity  management  involves  the
  ability  to meet the cash  flow  requirements  of  customers  who may be  either
  depositors  wanting  to  withdraw  funds or  borrowers  needing  assurance  that
  sufficient funds will be available to meet their credit needs. Funding affecting
  short-term  liquidity,  including  deposits,  repurchase  agreements,  fed funds
  purchased,  and  short-term  borrowings,  increased  $71.5 million from year end
  1997.  Long-term  borrowings increased $95.0 million during the first six months
  of 1998.
  
           The  goal  of  interest  rate   sensitivity   management  is  to  avoid
  fluctuating  net  interest  margins,  and to  enhance  consistent  growth of net
  interest income through periods of changing  interest rates. Such sensitivity is
  measured  as the  difference  in the  volume of assets  and  liabilities  in the
  existing portfolio that are subject to repricing in a future time period.
  
           The following table shows  separately the interest rate  sensitivity of
  each category of  interest-earning  assets and  interest-bearing  liabilities at
  June 30, 1998:
  Repricing Periods  (1)
                                                       Three Months     One Year
                                        Within Three    Through One   Through Five       Over
                                           Months          Year           Years       Five Years
                                                              (In Thousands)
  Assets
        Interest-bearing deposits
           at banks                         $1,567      $      --      $      --      $      --
        Investment securities               45,845         45,664        111,984        202,729
        Trading account securities          20,388             --             --             --
        Loans and leases                   335,353        159,631        464,823        181,325
        Other assets                         4,560             --             --        125,836
                                         ---------      ---------      ---------      ---------
                                           407,713        205,295        576,807        509,890
                                         ---------      ---------      ---------      ---------
  Liabilities and equity
        Noninterest-bearing deposits       158,692             --             --             --
        Interest-bearing deposits          297,173        243,456        178,075        252,215
        Borrowed funds                     134,011            631        222,500         34,105
        Preferred securities                    --             --             --         40,250
        Other liabilities                       --             --             --         15,084
        Hedging instruments                 60,000             --        (60,000)            --
        Shareholders' equity                    --             --             --        123,513
                                         ---------      ---------      ---------      ---------
                                           649,876        244,087        340,575        465,167
                                         ---------      ---------      ---------      ---------
  Interest sensitivity gap                (242,163)       (38,792)       236,232         44,723
                                         ---------      ---------      ---------      ---------
  
  Cumulative interest rate
          sensitivity gap                ($242,163)     ($280,955)      $(47,723)     $      --
                                         =========      =========      =========      =========
  (1) Adjustable rate loans are included in the period in which interest rates are
  next  scheduled to adjust rather than in the period in which they are due. Fixed
  rate loans are  included in the period in which they are  scheduled to be repaid
  and  are  adjusted  to  take  into  account  estimated  prepayments  based  upon
  assumptions  estimating  prepayments in the interest rate environment prevailing
  during the second  calendar  quarter of 1998. The table assumes  prepayments and
  scheduled  principal   amortization  of  fixed-rate  loans  and  mortgage-backed
  securities  and  assumes  that   adjustable   rate  mortgages  will  reprice  at
  contractual repricing intervals.  There has been no adjustment for the impact of
  future commitments and loans in process.
  
                                         10
  (2) Savings and NOW deposits are  scheduled  for  repricing  based on historical
  deposit decay rate analyses,  as well as historical  moving  averages of run-off
  for the  Company's  deposits in these  categories.  While  generally  subject to
  immediate  withdrawal,  management  considers a portion of these  accounts to be
  core deposits having  significantly  longer effective  maturities based upon the
  Company's  historical  retention  of such  deposits  in changing  interest  rate
  environments.  Specifically,  30.2% of these deposits are considered repriceable
  within three months and 69.8% are considered  repriceable in the over five years
  category.
  
           Interest   rate   sensitivity   is  a   function   of   the   repricing
  characteristics of the Company's assets and liabilities.  These  characteristics
  include  the  volume of assets  and  liabilities  repricing,  the  timing of the
  repricing,  and the relative  levels of  repricing.  Attempting  to minimize the
  interest  rate  sensitivity  gaps is a continual  challenge  in a changing  rate
  environment.  Based on the  Company's  gap  position as  reflected  in the above
  table,  current  accepted  theory would indicate that net interest  income would
  increase  in a falling  rate  environment  and would  decrease  in a rising rate
  environment.  An interest rate gap table does not,  however,  present a complete
  picture of the impact of interest  rate changes on net interest  income.  First,
  changes in the general level of interest  rates do not affect all  categories of
  assets and liabilities equally or simultaneously. Second, assets and liabilities
  which can contractually reprice within the same period may not, in fact, reprice
  at the same time or to the same extent.  Third,  the table  represents a one-day
  position; variations occur daily as the Company adjusts its interest sensitivity
  throughout the year. Fourth, assumptions must be made to construct such a table.
  For example,  non-interest  bearing  deposits are assigned a repricing  interval
  within  one year,  although  history  indicates  a  significant  amount of these
  deposits  will not move  into  interest  bearing  categories  regardless  of the
  general level of interest rates. Finally, the repricing distribution of interest
  sensitive assets may not be indicative of the liquidity of those assets.
  
           The Company anticipates volatile interest rate levels for the remainder
  of 1998, with no clear indication of sustainable  rising or falling rates. Given
  this assumption,  the Company's asset/liability strategy for 1998 is to maintain
  a  negative  gap  (interest-bearing  liabilities  subject  to  repricing  exceed
  interest-earning  assets  subject to  repricing)  for periods up to a year.  The
  impact of a volatile  interest rate  environment  on net interest  income is not
  expected to be  significant to the Company's  results of  operations.  Effective
  monitoring of these interest  sensitivity  gaps is the priority of the Company's
  asset/liability management committee.
  
                                          CAPITAL ADEQUACY
  
           The following table sets forth certain capital performance ratios.
  
                                                       June 30,          Dec. 31,
                                                         1998             1997
  CAPITAL LEVELS
        Tier 1 leverage ratio                             9.75%            9.84%
        Tier 1 risk-based ratio                          12.68            13.49
        Total risk-based ratio                           14.03            14.91
  
  CAPITAL PERFORMANCE
        Return of average assets (annualized)             1.23             1.31
        Return on average equity (annualized)            16.00            15.90
        Earnings retained                                53.80            55.30
        Internal capital growth (annualized)              8.58             8.35
  
                                         11
  The Company's  capital  ratios above  compare  favorably to the minimum
  required amounts of Tier 1 and total capital to  "risk-weighted"  assets and the
  minimum Tier 1 leverage  ratio,  as defined by banking  regulators.  At June 30,
  1998,  the Company was required to have minimum Tier 1 and total capital  ratios
  of 4.0% and 8.0%, respectively,  and a minimum Tier 1 leverage ratio of 3.0%. In
  order for the Company to be considered "well capitalized", as defined by banking
  regulators,  the Company must have Tier 1 and total  capital  ratios of 6.0% and
  10.0%,  respectively,  and a minimum Tier 1 leverage  ratio of 5.0%. The Company
  currently meets the criteria for a well capitalized institution,  and management
  believes that, under current regulations,  the Company will continue to meet its
  minimum capital  requirements in the foreseeable future. At present, the Company
  has no commitments for significant capital expenditures.
  
           The Company is not under any agreement with regulatory  authorities nor
  is  the  Company  aware  of  any  current   recommendations  by  the  regulatory
  authorities  which,  if such  recommendations  were  implemented,  would  have a
  material effect on liquidity, capital resources or operations of the Company.
  
                                   FUTURE OUTLOOK
  
           As previously  reported on the Company's  Form 8-K dated July 21, 1998,
  the Company has entered into an agreement to acquire Elverson National Bank and,
  in connection therewith, has rescinded its stock repurchase program.
  
           On June 15, 1998, National Asian Bank, a division of National Penn Bank
  (the "Bank") was opened in Elkins  Park,  Pennsylvania.  The Company  expects to
  open in  1998,  a new  non-bank  subsidiary  called  Penn  Securities,  Inc.,  a
  full-service   broker/dealer  program,  offering  a  wide  range  of  investment
  products.  Start-up costs for these two operations may have a negative impact on
  1998 earnings and beyond.
  
           On July  16,  1998,  the Bank  announced  a  unique  commitment  to its
  customers.  If the Bank is  acquired  within the next five years and changes its
  name, all new qualifying Bank customers will receive a $1,000 bonus.  This offer
  is expected  to attract  new  customers  to the Bank and may  therefore  have an
  impact on earnings in 1998 and beyond.
  
           The Company expects to spend  approximately  $300,000 in 1998 to modify
  its computer  information  systems  enabling  proper  processing of transactions
  related to the year 2000 and  beyond.  The  Company  has  evaluated  appropriate
  courses of corrective  action,  including  replacement of certain  systems whose
  associated  costs would be recorded as assets and  amortized.  Accordingly,  the
  Company does not expect the amounts  required to be expensed over the next three
  years  to have a  material  effect  on its  financial  position  or  results  of
  operations. The amount expensed to date in 1998 is immaterial.
  
           The Company converted its mainframe  hardware and software to new fully
  integrated  systems in May 1998. The Company expects that these new systems will
  offer  improved  operating   efficiencies  and  enhanced  customer  service  and
  reporting.  These new  initiatives  are not  expected to start  contributing  to
  profits until 1999 and beyond, so that 1998 earnings may be somewhat  negatively
  impacted by the initial costs of these new items.
  
           First Capitol Bank,  York,  PA, has announced its intent to be acquired
  by Susquehanna  Bancshares,  Inc.,  Lititz,  PA. The Company has a 20% ownership
  interest in First  Capitol  and,  at the deal price of $50.02 per share,  has an
  unrealized gain of approximately $3 million on this  transaction.  The merger is
  expected to be  completed in 1998,  although no  assurance  can be given that it
  will be completed. The Company has one other remaining 20% ownership interest in
  a de novo bank.
  
           This report contains  forward-looking  statements  concerning earnings,
  asset quality,  and other future events.  Actual results could differ materially
  due to, among other things, the risks and uncertainties  discussed in Exhibit 99
  to the Company's Report on Form 10-K for 1997,  which is incorporated  herein by
  reference.   Readers  are  cautioned  not  to  place  undue  reliance  on  these
  statements.  The Company  undertakes no obligation to publicly release or update
  any of these statements.
  
                                         12
  Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
           There has been no material  change in the  Company's  assessment of its
  sensitivity to market risk since its  presentation  in the 1997 annual report on
  Form 10-K filed with the SEC.
  
                                         13
  PART II - OTHER INFORMATION
  
  Item 1.  Legal Proceedings.
  
           None.
  
  Item 2.  Changes in Securities.
  
           None.  See also Item 4 hereof.
  
  Item 3.  Defaults Upon Senior Securities.
  
           None.
  
  Item 4.  Submission of Matters to a Vote of Security Holders.
  
           The 1998 annual meeting (the "Meeting") of the shareholders of National
  Penn Bancshares,  Inc. (the  "Registrant") was held on April 28, 1998. Notice of
  the Meeting  was mailed to  shareholders  of record on or about March 20,  1998,
  together with proxy  solicitation  materials prepared in accordance with Section
  14(a) of the Securities  Exchange Act of 1934, as amended,  and the  regulations
  promulgated thereunder.
  
           The Meeting was held for the following purposes:
  
           (1) to elect  three Class II  directors  to hold office for three years
  from the date of election and until their  successors are elected and qualified;
  and
  
           (2) to act  upon a  proposal  to amend  the  Registrant's  Articles  of
  Incorporation to increase the number of authorized  common shares to 50 million,
  to eliminate  "par value",  and to reclassify all  outstanding  common shares as
  shares without par value ("Proposal No. 2").
  
           (3) to act  upon a  proposal  to amend  the  Registrant's  Articles  of
  Incorporation  to increase the maximum  number of directors of the Registrant to
  15  persons  and to  permit a change  in the  number  of  directors  at any time
  ("Proposal No. 3").
  
           There was no solicitation in opposition to the nominees of the Board of
  Directors  for election to the Board of  Directors  and all such  nominees  were
  elected.  The  number of votes  cast for or  withheld,  as well as the number of
  abstentions and broker  non-votes,  for each of the nominees for election to the
  Board of Directors were as follows:
  Abstentions and
           Nominee                      For           Withheld          Broker Non-votes
  Frederick H. Gaige                  8,657,094        207,293                    -0-
  
  Lawrence T. Jilk, Jr.               8,692,698        171,689                    -0-
  
  C. Robert Roth                      8,699,284        165,103                    -0-
  There was no solicitation in opposition to Proposal No. 2, and Proposal
  No. 2 was duly approved. The number of votes cast for or against, as well as the
  number of abstentions and broker non-votes, for the proposal were as follows:
  
      For           Against                Abstentions          Broker Non-votes
  
    6,676,852       316,837                  248,570                     -0-
  
                                         14
  There was no solicitation in opposition to Proposal No. 3, and Proposal
  No. 3 was duly approved. The number of votes cast for or against, as well as the
  number of abstentions and broker non-votes, for the proposal were as follows:
  
      For           Against                Abstentions          Broker Non-votes
  
    7,794,907       642,138                 263,570                      -0-
  
  Item 5.  Other Information.
  
           On June 24,  1998,  the  Registrant's  Board of  Directors  declared  a
  5-for-4 stock split of the Registrant's common shares,  payable July 31, 1998 to
  shareholders  of record July 15, 1998,  and declared a cash dividend of $.19 per
  share payable August 17, 1998 to shareholders of record July 31, 1998.
  
           On June 15, 1998, the Registrant's  banking  subsidiary,  National Penn
  Bank (the "Bank"),  formed a new banking  division,  National Asian Bank,  which
  opened at a temporary  location at 1349 West  Cheltenham  Avenue,  Elkins  Park,
  Pennsylvania.  The Registrant  anticipates that the National Asian Bank Division
  will be  relocated  to a  permanent  location in that  general  area in the near
  future.
  
           During second quarter 1998, the Bank's  wholly-owned  subsidiary,  Link
  Financial  Services,  Inc.,  received  authorization  from  the  Office  of  the
  Comptroller of the Currency and from the Pennsylvania Department of Insurance to
  engage in  business as a life  insurance  agency.  John J. Mikus,  Jr. was named
  Senior Vice President of the Bank and the Bank's Insurance Manager.
  
           During  second  quarter  1998,  the  Registrant  formed a new  non-bank
  subsidiary,  Penn  Securities,  Inc.  ("Penn"),  a proposed de novo full service
  securities  brokerage firm. Gene C. Levengood was named Senior Vice President of
  the Bank and  President  and Chief  Executive  Officer of Penn.  The  Registrant
  anticipates that Penn, upon receipt of all necessary regulatory approvals,  will
  open for business in fourth quarter 1998.
  
           The Registrant anticipates that the Bank will install one new automated
  teller machine in a convenience store location during third quarter 1998.
  
  Item 6.  Exhibits and Reports on Form 8-K.
  
           (a)      Exhibits.
  
                    Exhibit 3.1 -     Articles of Incorporation, as amended.
  
                    Exhibit 27 -      Financial Data Schedule.
  
                    Exhibit 99 -      Earnings Statement for 12 Months Ended 
                                      June 30, 1998.
  
           (b)  Reports on Form 8-K.  The  Registrant  did not file any Reports on
  Form 8-K during the quarterly period ended June 30, 1998. The Registrant filed a
  Report on Form 8-K dated July 21, 1998 reporting, under Item 5, the execution of
  an agreement for the acquisition of Elverson  National Bank and recission of the
  Registrant's stock repurchase program.
  
                                         15
  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)
  
  Dated:   August 13, 1998                    By /s/  Wayne R. Weidner
                                                ----------------------
                                                 Wayne R. Weidner, President
  
  Dated:   August 13, 1998                    By /s/  Gary L. Rhoads
                                                --------------------
                                                   Gary L. Rhoads, Principal
                                                   Financial Officer