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:      March  31, 1998
  
                                         OR
  
           [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                           SECURITIES EXCHANGE ACT OF 1934
  
  For the transition period from:                  to
  
  Commission file number: 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 May  8, 1998
  
    Common Stock ($1.875 par value)                      (No.) 10,522,402 Shares
  
                                 Page 1 of 14 pages
  <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 Operations .... 8
  
           Item 3.           Quantitative and Qualitative Disclosures about
                             Market Risk.......................................12
  
  Part II - Other Information.
  
           Item 1.           Legal Proceedings ................................13
  
           Item 2.           Changes in Securities ............................13
  
           Item 3.           Defaults Upon Senior Securities ..................13
  
           Item 4.           Submission of Matters to a Vote of
                             Security Holders .................................13
  
           Item 5.           Other Information ................................13
  
           Item 6.           Exhibits and Reports on Form 8-K .................13
  
  Signatures ..................................................................14
  
  <PAGE>
                           PART I - FINANCIAL INFORMATION
  
  Item 1.  Financial Statements
  <TABLE>
  <CAPTION>
  NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
  CONSOLIDATED CONDENSED BALANCE SHEET                            March 31         Dec. 31
   (Dollars in thousands, except per share data)                    1998             1997
                                                                (Unaudited)         (Note)
  <S>                                                              <C>              <C>    
  ASSETS
  Cash and due from banks                                          $42,903          $40,009
  Interest bearing deposits in banks                                 1,680            1,089
                                                               -----------      -----------
      Total cash and cash equivalents                               44,583           41,098
  Investment securities available for sale at market value         361,719          321,760
  Loans, less allowance for loan losses of $26,169 and
    $25,122 in 1998 and 1997 respectively                        1,104,242        1,097,662
  Other assets                                                      86,264           73,858
                                                               -----------      -----------
      Total Assets                                              $1,596,808       $1,534,378
                                                               ===========      ===========
  
  LIABILITIES AND SHAREHOLDERS' EQUITY
  Non-interest bearing deposits                                   $154,983         $146,772
  Interest bearing deposits
    (Includes certificates of deposit $100,000 or greater:
    1998 - $109,036; 1997- $110,447)                               976,217          968,828
                                                               -----------      -----------
      Total deposits                                             1,131,200        1,115,600
  Securities sold under repurchase agreements
    and federal funds purchased                                     69,278           77,225
  Short-term borrowings                                              6,005            6,109
  Long-term obligations                                            210,460          155,460
  Guaranteed preferred beneficial interests in
    Company's subordinated debentures                               40,250           40,250
  Accrued interest and other liabilities                            18,873           16,546
                                                               -----------      -----------
      Total Liabilities                                          1,476,066        1,411,190
  Commitments and contingent liabilities                                --               --
  Shareholders' equity
    Preferred stock, no stated par value;
      authorized 1,000,000 shares; none issued                          --               --
    Common stock, par value $1.875 per share;
      authorized 26,666,667 shares; issued and outstanding
      1998 - 10,506,629; 1997 - 10,606,726, net of shares
      in Treasury: 1998 - 202,720; 1997 - 104,623                   20,085           20,085
    Additional paid-in-capital                                      80,722           81,663
    Retained earnings                                               20,017           17,337
    Net unrealized gains on securities available for sale            6,189            7,531
    Treasury stock, at cost                                         (6,271)          (3,428)
                                                               -----------      -----------
      Total Shareholders' Equity                                   120,742          123,188
                                                               -----------      -----------
      Total Liabilities and Shareholders' Equity                $1,596,808       $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
  (Dollars in thousands, except per share data)                    March 31
                                                               1998       1997
  <S>                                                        <C>         <C>    
  INTEREST INCOME
  Loans, including fees                                      $26,109     $24,384
  Deposits in banks                                               16          17
  Federal funds sold                                              11          18
  Investment securities                                        5,173       3,749
                                                             -------     -------
      Total interest income                                   31,309      28,168
                                                             -------     -------
  INTEREST EXPENSE
  Deposits                                                    10,932       9,193
  Federal funds purchased, borrowed funds and
    securities sold under repurchase agreements                4,336       3,276
                                                             -------     -------
      Total interest expense                                  15,268      12,469
                                                             -------     -------
      Net interest income                                     16,041      15,699
  Provision for loan losses                                    1,200       1,200
                                                             -------     -------
      Net interest income after provision
        for loan losses                                       14,841      14,499
                                                             -------     -------
  OTHER INCOME
  Trust and investment management income                         760         636
  Service charges on deposit accounts                          1,033         954
  Net gains (losses) on sale of securities and mortgages         443         916
  Other                                                        1,525         789
                                                             -------     -------
      Total other income                                       3,761       3,295
                                                             -------     -------
  OTHER EXPENSES
  Salaries, wages and employee benefits                        6,786       6,406
  Net premises and equipment                                   1,883       1,940
  Other operating                                              3,176       2,872
                                                             -------     -------
      Total other expenses                                    11,845      11,218
                                                             -------     -------
      Income before income taxes                               6,757       6,576
  Applicable income tax expense                                1,769       2,042
                                                             -------     -------
      Net income                                              $4,988      $4,534
                                                             =======     =======
  
  PER SHARE OF COMMON STOCK
  Net income per share - basic                                 $0.47       $0.42
  Net income per share - diluted                                0.46        0.42
  Dividends paid in cash                                        0.21        0.18
  </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>
  <S>                             <C>            <C>         <C>          <C>           <C>                    <C>         <C>     
  THREE MONTHS ENDED MARCH 31, 1998
    (Dollars in thousands)                                                         Net Unrealized
                                                                                   Gain (Loss) on
                                                             Additional              Securities
                                        Common Stock          Paid-in     Retained   Available  Comprehensive   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                               --          --          --        4,988           --      4,988           --       $4,988
   Unrealized gains(losses) on
    securities available for sale,
    net of taxes and reclass-
    ification adjustment
   (see disclosure)                         --          --          --           --       (1,342)      (948)          --      ($1,342)
                                                                                                    -------
  Comprehensive income                                                                               $4,040
                                                                                                    =======
  Cash dividends declared                   --          --          --       (2,308)          --                      --      ($2,308)
  Effect of treasury stock
    transactions                      (100,097)         --        (941)          --           --                  (2,843)     ($3,784)
                                    ----------     -------     -------      -------       ------                 -------     --------
  Balance at March 31, 1998         10,506,629     $20,085     $80,722      $20,017       $6,189                 ($6,271)    $120,742
  
                                    ==========     =======     =======      =======       ======                 =======     ========
  
  Disclosure of reclassification
        amount:
   Unrealized holding loss arising
     during period                                                                                    ($948)
   Less: reclassification adjustment
     for gains included in net income                                                                  (394)
                                                                                                    -------
   Net unrealized loss on securities                                                                ($1,342)
                                                                                                    =======
  
  
  THREE MONTHS ENDED MARCH 31, 1997
    (Dollars in thousands)                                                         Net Unrealized
                                                                                   Gain (Loss) on
                                                             Additional              Securities
                                        Common Stock          Paid-in     Retained   Available  Comprehensive   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                               --          --          --        4,534           --      4,534           --       $4,534
   Unrealized gains(losses) on
    securities available for sale,
    net of taxes and reclass-
    ification adjustment
    (see disclosure)                        --          --          --           --       (2,586)    (1,936)          --      ($2,586)
                                                                                                    -------
  Comprehensive income                                                                               $2,598
                                                                                                    =======
  Cash dividends declared                   --          --          --       (1,916)          --                      --      ($1,916)
  Effect of treasury stock
    transactions                        (7,058)         --          11           --           --                    (311)       ($300)
                                    ----------     -------     -------      -------       ------                 -------     --------
  Balance at March 31, 1997          7,995,590     $20,085     $83,718       $9,975       $1,812                 ($1,137)    $114,453
                                    ==========     =======     =======      =======       ======                 =======     ========
  
  
  Disclosure of reclassification
        amount:
   Unrealized holding loss arising
     during period                                                                                  ($1,936)
   Less: reclassification adjustment
     for gains included in net income                                                                  (650)
                                                                                                    -------
    Net unrealized loss on securities                                                               ($2,586)
                                                                                                    =======
  </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>
                                                                             Three Months Ended March 31,
  (Dollars in thousands)
                                                                                  1998          1997
  <S>                                                                            <C>           <C>   
  CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                                   $4,988        $4,534
    Adjustments to reconcile net income to net
        cash provided by (used in) operating activities
      Provision for loan losses                                                   1,200         1,200
      Depreciation and amortization                                                 867           827
      Net gains (losses) on sale of securities and mortgages                        443           916
      Mortgage loans originated for resale                                      (16,854)       (4,249)
      Sale of mortgage loans originated for resale                               16,854         4,249
      Other                                                                     (11,625)          (71)
                                                                               --------      --------
  
        Net cash provided by (used in) operating activities                      (4,127)        7,406
  
  CASH FLOWS FROM INVESTING ACTIVITIES
    Proceeds from sales of investment securities - available for sale            16,594        11,655
    Proceeds from maturities of investment securities - available for sale        5,278        10,830
    Purchase of investment securities - available for sale                      (62,452)      (12,610)
    Proceeds from sales of loans                                                     --            --
    Net increase in loans                                                        (7,780)      (21,946)
    Purchases of premises & equipment                                              (485)         (690)
                                                                               --------      --------
  
        Net cash provided by (used in) investing activities                     (48,845)      (12,761)
  
  CASH FLOWS FROM FINANCING ACTIVITIES
    Increase (decrease) in:
      Deposits                                                                   15,600        50,938
      Repurchase agreements, fed funds & short-term borrowings                   (8,051)      (51,263)
      Long-term borrowings                                                       55,000        25,000
    (Increase) decrease in treasury stock                                        (2,843)         (311)
    Issuance of common stock under dividend reinvestment plan                      (941)          (11)
    Cash dividends                                                               (2,308)       (1,917)
                                                                               --------      --------
  
        Net cash provided by (used in) financing activities                      56,457        22,436
  
  Net increase (decrease) in cash and cash equivalents                            3,485        17,081
  
  Cash and cash equivalents at January 1                                         41,098        41,996
                                                                               --------      --------
  
  Cash and cash equivalents at March 31                                         $44,583       $59,077
                                                                               ========      ========
  </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  three-month  period ended March 31, 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 basic  shares
  outstanding of 10,519,102 and 10,664,445 for 1998 and 1997, respectively, and on
  the weighted  average  number of diluted  shares  outstanding  of 10,786,359 and
  10,809,173  for 1998 and  1997,  respectively,  and are  computed  after  giving
  retroactive effect to a 4-for-3 stock split paid July 31, 1997.
  
  4. On March 25, 1998, the Company's Board of Directors  declared a cash dividend
  of .22 per share payable on May 17, 1998, to shareholders of record on April 30,
  1998.
  
  5. 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 $7,788,000 at March 31, 1998,
  all of which are nonaccrual  loans.  The allowance for loan loss associated with
  these  impaired  loans was  $778,000 at March 31, 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 $1.597 billion, an increase of $62.4 million,
  or 4.1% over the $1.534 billion at December 31, 1997. This increase is reflected
  primarily  in the  investment  and other  asset  categories,  the  result of the
  investment of deposits,  the Company's  primary  source of funds,  and long-term
  borrowings.
  
           Total cash and cash  equivalents  increased  $3.5  million,  or 8.5% at
  March 31, 1998,  when compared to December 31, 1997. This increase was primarily
  in cash and due from banks.
  
           Loans  increased to $1.104  billion at March 31, 1998.  The increase of
  $6.6 million, or .60% 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  three  months of 1998  amounted  to $16.9
  million.  The Company's  credit quality is reflected by the annualized  ratio of
  net  chargeoffs  to total loans of .05% through the first quarter of 1998 versus
   .20% for the year 1997, and the ratio of nonperforming  assets to total loans of
   .94% at March 31, 1998,  compared to .89% at December  31,  1997.  Nonperforming
  assets,  including  nonaccruals,  loans 90 days past due, restructured loans and
  other real estate owned, were $10.6 million at March 31, 1998, compared to $10.0
  million at December 31, 1997. Of these  amounts,  nonaccrual  loans  represented
  $7.8  million  and $6.8  million  at March 31,  1998,  and  December  31,  1997,
  respectively.  Loans 90 days  past due and  still  accruing  interest  were $2.2
  million and $2.8 million at March 31, 1998, and December 31, 1997, respectively.
  Other real  estate  owned was  $663,000  and  $375,000  at March 31,  1998,  and
  December 31, 1997, respectively.  The Company had no restructured loans at March
  31, 1998, or December 31, 1997.  The allowance for loan losses to  nonperforming
  assets  was  246.3%  and  251.6% at March  31,  1998,  and  December  31,  1997,
  respectively.  As is evident from the above  amounts  relative to  nonperforming
  assets,  there have been no significant  changes between  December 31, 1997, and
  March  31,  1998.  The  Company  has  no  significant  exposure  to  energy  and
  agricultural-related loans.
  
           Investments,  the  Company's  secondary use of funds,  increased  $39.9
  million, or 12.4% to $361.7 million at March 31, 1998, when compared to December
  31,  1997.  The  increase  is due to  investment  purchases  of  $62.5  million,
  primarily in municipal  securities,  which was  partially  offset by  investment
  sales and maturities and the amortization of mortgage-backed securities.
  
           As the primary source of funds, aggregate deposits of $1.131 billion at
  March 31, 1998,  increased $15.6 million, or 1.4% compared to December 31, 1997.
  The increase in deposits  during the first three months of 1998 was primarily in
  non-interest    bearing    deposits   which   increased   $8.2   million   while
  interest-bearing  deposits  increased $7.4 million.  Certificates  of deposit in
  excess of $100,000  decreased  $1.4  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  $325.9  million at March 31, 1998,  and $279.0  million at December 31,
  1997.  The  increase  of $46.9  million  represents  an  increase  in  long-term
  obligations  of $55.0  million  which  was  partially  offset by a  decrease  in
  short-term borrowings, primarily securities sold under repurchase agreements and
  federal funds purchased.
  
           Shareholders'  equity  decreased  slightly through March 31, 1998. This
  decrease  was due to a  decrease  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 decrease in
  market value of the Company's investment  portfolio.  Cash dividends paid during
  the first three months of 1998  increased  $306,000,  or 15.9%,  compared to the
  cash  dividends  paid during the first three months of 1997.  Earnings  retained
  
                                         8
  <PAGE>
  
  during the first three  months of 1998 were 55.4%  compared to 57.7%  during the
  first three months of 1997.
  
                                RESULTS OF OPERATIONS
  
           Net income for the quarter  ended  March 31,  1998,  was $4.9  million,
  10.0% more than the $4.5 million  reported for the same period in 1997. On a per
  share basis, basic earnings were $.47 and $.42 for the first quarter of 1998 and
  1997, respectively. Diluted earnings per share were $.46 and $.42 for the period
  ended March 31, 1998 and 1997, respectively.  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  income on assets and
  interest expense on liabilities.  Net interest income increased $.3 million,  or
  2.2% to $16.0 million during the first quarter of 1998 from $15.7 million in the
  first quarter of 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 three months of 1998
  increased  $2.8  million,  or 22.4%  compared  to the prior  year's  first three
  months. Despite the current rate environment, the cost of attracting and holding
  deposited funds is an  every-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 first quarter of 1998 compared to the same period in 1997.  The
  allowance  for loan and lease  losses of $26.2  million at March 31,  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 chargeoffs of $153,000 and 606,000 during
  the first three 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  $466,000,  or 14.1% during the first
  quarter of 1998,  as a result of increased  other income of $736,000,  increased
  trust and  investment  management  income of  $124,000,  and  increased  service
  charges on deposit accounts of $79,000. Net gains (losses) on sale of securities
  and mortgages decreased $473,000.  "Total other expenses" increased $627,000, or
  5.6% during the quarter ended March 31, 1998. Of this amount,  salaries,  wages,
  and employee benefits  increased  $380,000,  other operating  expenses increased
  $304,000, and net premises and equipment decreased $57.000.
  
           Income before income taxes increased by $181,000,  or 2.8%, compared to
  the first quarter of 1997. Income taxes decreased $273,000 compared to the first
  quarter of 1997.
  
                       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 $7.5 million from year end 1997.
  Long-term  borrowings  increased  $55.0 million during the first three 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.
  
                                         9
  <PAGE>
  
           The following table shows  separately the interest rate  sensitivity of
  each category of  interest-earning  assets and  interest-bearing  liabilities at
  March 31, 1998:
  <TABLE>
  <CAPTION>
  <S>                                               <C>                  <C>                <C>               <C>         
                                                                                  Repricing Periods (1)
                                                                           Three Months         One Year
                                                       Within Three         Through One       Through Five          Over
                                                          Months               Year              Years           Five Years
  Assets
    Interest-bearing deposits at banks              $       1,680        $         --       $          --     $         --
    Investment securities                                  17,012              45,411             141,280          158,016
    Loans and leases                                      331,681             150,031             447,422          175,108
    Other assets                                            5,546                  --                  --          123,621
                                                    -------------        ------------       -------------     ------------
                                                          355,919             195,442             588,702          456,745
                                                    -------------        ------------       -------------     ------------
  Liabilities and equity
    Noninterest-bearing deposits                          154,983                  --                  --               --
    Interest-bearing deposits                             249,608             254,373             231,218          241,018
    Borrowed funds                                         61,062               2,610             197,500           24,571
    Preferred securities                                       --                  --                  --           40,250
    Other liabilities                                          --                  --                  --           18,873
    Hedging instruments                                    80,000                  --            (80,000)               --
    Shareholders' equity                                        -                  --                  --          120,742
                                                    -------------        ------------       -------------     ------------
                                                           545,653            256,983             348,718          445,454
                                                    --------------       ------------       -------------     ------------
  Interest sensitivity gap                               (189,734)           (61,541)             239,984           11,291
                                                    --------------       ------------        ------------     ------------
  
  Cumulative interest rate sensitivity gap             ($189,734)          ($251,275)           $ (11,291)    $         --
                                                    =============        ============       ==============    ============
  </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 first  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.
  
  (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,  32.5% of these deposits are considered repriceable
  within three months and 67.5% 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
  
                                         10
  <PAGE>
  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,  noninterest  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.
  <TABLE>
  <CAPTION>
  <S>                                                          <C>                <C>  
                                                              March 31           Dec. 31
                                                                1998              1997
  CAPITAL LEVELS
           Tier 1 leverage ratio                                9.46%              9.84%
           Tier 1 risk-based ratio                             12.83%             13.49%
           Total risk-based ratio                              14.28%             14.91%
  
  CAPITAL PERFORMANCE
           Return of average assets (annualized)                 1.29               1.31
           Return on average equity (annualized)                16.30              15.90
           Earnings retained                                    55.40              55.30
           Internal capital growth (annualized)                  8.97               8.35
  </TABLE>
  
  
           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 March 31,
  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
  
           In  December  1997,  the  Company's  Board of  Directors  approved  the
  repurchase  of up to  530,000  shares  of its  common  stock  to be used for the
  Company's dividend reinvestment plan, stock option, employee stock purchase, and
  other  stock-based  corporate  plans.  The stock  repurchase plan authorizes the
  Company  to make  repurchases  from  time to time in open  market  or  privately
  negotiated transactions. To date, a total of 85,286 shares have been repurchased
  
                                         11
  <PAGE>
  
  at an aggregate  cost of $2.7  million.  A prior  repurchase  program of 380,000
  shares authorized in June 1996 was completed in December 1997.
  
           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.
  
           A new product at the Bank is BottomLine Partners, a unique money-saving
  program for  businesses.  This new product is not expected to have a significant
  effect 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.
  
           In  1998,  the  Company  intends  to open one new  supermarket  branch.
  Additionally,  the Company is converting 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,  if completed,  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.
  
           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.
  
  
  
  Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
  
           There has been no material  changes 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.
  
                                         12
  <PAGE>
                             PART II - OTHER INFORMATION
  
  
  Item 1.  Legal Proceedings.
  
           None.
  
  Item 2.  Changes in Securities.
  
           None.
  
  Item 3.  Defaults Upon Senior Securities.
  
           None.
  
  Item 4.  Submission of Matters to Vote of Security Holders.
  
           Not applicable.
  
  Item 5.  Other Information.
  
           In December  1997,  the  Registrant's  Board of Directors  approved the
  repurchase  of up to  530,000  shares  of its  common  stock  to be used for the
  Registrant's dividend reinvestment,  stock option,  employee stock purchase, and
  other  stock-based  corporate  plans.  The stock  repurchase plan authorizes the
  Registrant  to make  repurchases  from time to time in open market or  privately
  negotiated transactions. To date, a total of 85,286 shares have been repurchased
  at an aggregate  cost of $2.7  million.  A prior  repurchase  program of 380,000
  shares was completed in December 1997.
  
           During  first  quarter  1998,  the  Registrant's   banking  subsidiary,
  National Penn Bank (the "Bank"),  began operating a messenger  service branch in
  eight  southeastern  Pennsylvania  counties and installed a new automated teller
  machine in a convenience store location in Easton (Northampton County).
  
           During  second  quarter 1998,  the Bank closed a supermarket  branch in
  Exton (Chester County). The Bank anticipates opening a new supermarket branch in
  Sinking Spring (Berks County) also in the second quarter.
  
           In  April  1998,  the  Bank  formed  a  wholly-owned  subsidiary,  Link
  Financial Services, Inc. , which, as a limited partner in Link Abstract L.P., is
  indirectly  engaged in the title insurance  agency  business.  An application is
  currently  pending  with  the  Office  of the  Comptroller  of the  Currency  to
  authorize Link Financial Services, Inc. to engage directly in business as a life
  insurance agency.
  
           On April 29,  1998  Lawrence  T. Jilk,  Jr. was named  Chairman  of the
  Registrant, and Wayne R. Weidner was named President of the Registrant.
  
  Item 6.  Exhibits and Reports on Form 8-K.
  
           (a)      Exhibits.
  
                    Exhibit 27 - Financial Data Schedule.
  
           (b)  Reports on Form 8-K.  The  Registrant  did not file any Reports on
  Form 8-K during the quarterly period ended March 31, 1998.
  
                                         13
  <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:  May 13, 1998                             By /s/ Wayne R. Weidner
                                                   Wayne R. Weidner, President
  
  
  Dated:  May 13, 1998                             By /s/ Gary L. Rhoads
                                                   Gary L. Rhoads, Principal
                                                   Financial Officer
metadata_documents: [{"type": "10-Q", "sequence": "1", "secsgml_size_bytes": 48836}]
metadata_filer: {"company-data": {"conformed-name": "NATIONAL PENN BANCSHARES INC", "cik": "0000700733", "assigned-sic": "6021", "irs-number": "232215075", "state-of-incorporation": "PA", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "10-Q", "act": "34", "file-number": "000-10957", "film-number": "98618348"}, "business-address": {"street1": "PHILADELPHIA AND READING AVE", "street2": "PO 547", "city": "BOYERTOWN", "state": "PA", "zip": "19512", "phone": "6103696341"}, "mail-address": {"street1": "POST OFFICE BOX 547", "street2": "POST OFFICE BOX 547", "city": "BOYERTOWN", "state": "PA", "zip": "19512"}}
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:      March  31, 1998
  
                                         OR
  
           [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                           SECURITIES EXCHANGE ACT OF 1934
  
  For the transition period from:                  to
  
  Commission file number: 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 May  8, 1998
  
    Common Stock ($1.875 par value)                      (No.) 10,522,402 Shares
  
                                 Page 1 of 14 pages
  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 Operations .... 8
  
           Item 3.           Quantitative and Qualitative Disclosures about
                             Market Risk.......................................12
  
  Part II - Other Information.
  
           Item 1.           Legal Proceedings ................................13
  
           Item 2.           Changes in Securities ............................13
  
           Item 3.           Defaults Upon Senior Securities ..................13
  
           Item 4.           Submission of Matters to a Vote of
                             Security Holders .................................13
  
           Item 5.           Other Information ................................13
  
           Item 6.           Exhibits and Reports on Form 8-K .................13
  
  Signatures ..................................................................14
  PART I - FINANCIAL INFORMATION
  
  Item 1.  Financial Statements
  NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
  CONSOLIDATED CONDENSED BALANCE SHEET                            March 31         Dec. 31
   (Dollars in thousands, except per share data)                    1998             1997
                                                                (Unaudited)         (Note)
  ASSETS
  Cash and due from banks                                          $42,903          $40,009
  Interest bearing deposits in banks                                 1,680            1,089
                                                               -----------      -----------
      Total cash and cash equivalents                               44,583           41,098
  Investment securities available for sale at market value         361,719          321,760
  Loans, less allowance for loan losses of $26,169 and
    $25,122 in 1998 and 1997 respectively                        1,104,242        1,097,662
  Other assets                                                      86,264           73,858
                                                               -----------      -----------
      Total Assets                                              $1,596,808       $1,534,378
                                                               ===========      ===========
  
  LIABILITIES AND SHAREHOLDERS' EQUITY
  Non-interest bearing deposits                                   $154,983         $146,772
  Interest bearing deposits
    (Includes certificates of deposit $100,000 or greater:
    1998 - $109,036; 1997- $110,447)                               976,217          968,828
                                                               -----------      -----------
      Total deposits                                             1,131,200        1,115,600
  Securities sold under repurchase agreements
    and federal funds purchased                                     69,278           77,225
  Short-term borrowings                                              6,005            6,109
  Long-term obligations                                            210,460          155,460
  Guaranteed preferred beneficial interests in
    Company's subordinated debentures                               40,250           40,250
  Accrued interest and other liabilities                            18,873           16,546
                                                               -----------      -----------
      Total Liabilities                                          1,476,066        1,411,190
  Commitments and contingent liabilities                                --               --
  Shareholders' equity
    Preferred stock, no stated par value;
      authorized 1,000,000 shares; none issued                          --               --
    Common stock, par value $1.875 per share;
      authorized 26,666,667 shares; issued and outstanding
      1998 - 10,506,629; 1997 - 10,606,726, net of shares
      in Treasury: 1998 - 202,720; 1997 - 104,623                   20,085           20,085
    Additional paid-in-capital                                      80,722           81,663
    Retained earnings                                               20,017           17,337
    Net unrealized gains on securities available for sale            6,189            7,531
    Treasury stock, at cost                                         (6,271)          (3,428)
                                                               -----------      -----------
      Total Shareholders' Equity                                   120,742          123,188
                                                               -----------      -----------
      Total Liabilities and Shareholders' Equity                $1,596,808       $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
  (Dollars in thousands, except per share data)                    March 31
                                                               1998       1997
  INTEREST INCOME
  Loans, including fees                                      $26,109     $24,384
  Deposits in banks                                               16          17
  Federal funds sold                                              11          18
  Investment securities                                        5,173       3,749
                                                             -------     -------
      Total interest income                                   31,309      28,168
                                                             -------     -------
  INTEREST EXPENSE
  Deposits                                                    10,932       9,193
  Federal funds purchased, borrowed funds and
    securities sold under repurchase agreements                4,336       3,276
                                                             -------     -------
      Total interest expense                                  15,268      12,469
                                                             -------     -------
      Net interest income                                     16,041      15,699
  Provision for loan losses                                    1,200       1,200
                                                             -------     -------
      Net interest income after provision
        for loan losses                                       14,841      14,499
                                                             -------     -------
  OTHER INCOME
  Trust and investment management income                         760         636
  Service charges on deposit accounts                          1,033         954
  Net gains (losses) on sale of securities and mortgages         443         916
  Other                                                        1,525         789
                                                             -------     -------
      Total other income                                       3,761       3,295
                                                             -------     -------
  OTHER EXPENSES
  Salaries, wages and employee benefits                        6,786       6,406
  Net premises and equipment                                   1,883       1,940
  Other operating                                              3,176       2,872
                                                             -------     -------
      Total other expenses                                    11,845      11,218
                                                             -------     -------
      Income before income taxes                               6,757       6,576
  Applicable income tax expense                                1,769       2,042
                                                             -------     -------
      Net income                                              $4,988      $4,534
                                                             =======     =======
  
  PER SHARE OF COMMON STOCK
  Net income per share - basic                                 $0.47       $0.42
  Net income per share - diluted                                0.46        0.42
  Dividends paid in cash                                        0.21        0.18
  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
  THREE MONTHS ENDED MARCH 31, 1998
    (Dollars in thousands)                                                         Net Unrealized
                                                                                   Gain (Loss) on
                                                             Additional              Securities
                                        Common Stock          Paid-in     Retained   Available  Comprehensive   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                               --          --          --        4,988           --      4,988           --       $4,988
   Unrealized gains(losses) on
    securities available for sale,
    net of taxes and reclass-
    ification adjustment
   (see disclosure)                         --          --          --           --       (1,342)      (948)          --      ($1,342)
                                                                                                    -------
  Comprehensive income                                                                               $4,040
                                                                                                    =======
  Cash dividends declared                   --          --          --       (2,308)          --                      --      ($2,308)
  Effect of treasury stock
    transactions                      (100,097)         --        (941)          --           --                  (2,843)     ($3,784)
                                    ----------     -------     -------      -------       ------                 -------     --------
  Balance at March 31, 1998         10,506,629     $20,085     $80,722      $20,017       $6,189                 ($6,271)    $120,742
  
                                    ==========     =======     =======      =======       ======                 =======     ========
  
  Disclosure of reclassification
        amount:
   Unrealized holding loss arising
     during period                                                                                    ($948)
   Less: reclassification adjustment
     for gains included in net income                                                                  (394)
                                                                                                    -------
   Net unrealized loss on securities                                                                ($1,342)
                                                                                                    =======
  
  THREE MONTHS ENDED MARCH 31, 1997
    (Dollars in thousands)                                                         Net Unrealized
                                                                                   Gain (Loss) on
                                                             Additional              Securities
                                        Common Stock          Paid-in     Retained   Available  Comprehensive   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                               --          --          --        4,534           --      4,534           --       $4,534
   Unrealized gains(losses) on
    securities available for sale,
    net of taxes and reclass-
    ification adjustment
    (see disclosure)                        --          --          --           --       (2,586)    (1,936)          --      ($2,586)
                                                                                                    -------
  Comprehensive income                                                                               $2,598
                                                                                                    =======
  Cash dividends declared                   --          --          --       (1,916)          --                      --      ($1,916)
  Effect of treasury stock
    transactions                        (7,058)         --          11           --           --                    (311)       ($300)
                                    ----------     -------     -------      -------       ------                 -------     --------
  Balance at March 31, 1997          7,995,590     $20,085     $83,718       $9,975       $1,812                 ($1,137)    $114,453
                                    ==========     =======     =======      =======       ======                 =======     ========
  
  Disclosure of reclassification
        amount:
   Unrealized holding loss arising
     during period                                                                                  ($1,936)
   Less: reclassification adjustment
     for gains included in net income                                                                  (650)
                                                                                                    -------
    Net unrealized loss on securities                                                               ($2,586)
                                                                                                    =======
  The accompanying notes are an integral part of these statements.
  
                                          5
  NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
  UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
  Three Months Ended March 31,
  (Dollars in thousands)
                                                                                  1998          1997
  CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                                   $4,988        $4,534
    Adjustments to reconcile net income to net
        cash provided by (used in) operating activities
      Provision for loan losses                                                   1,200         1,200
      Depreciation and amortization                                                 867           827
      Net gains (losses) on sale of securities and mortgages                        443           916
      Mortgage loans originated for resale                                      (16,854)       (4,249)
      Sale of mortgage loans originated for resale                               16,854         4,249
      Other                                                                     (11,625)          (71)
                                                                               --------      --------
  
        Net cash provided by (used in) operating activities                      (4,127)        7,406
  
  CASH FLOWS FROM INVESTING ACTIVITIES
    Proceeds from sales of investment securities - available for sale            16,594        11,655
    Proceeds from maturities of investment securities - available for sale        5,278        10,830
    Purchase of investment securities - available for sale                      (62,452)      (12,610)
    Proceeds from sales of loans                                                     --            --
    Net increase in loans                                                        (7,780)      (21,946)
    Purchases of premises & equipment                                              (485)         (690)
                                                                               --------      --------
  
        Net cash provided by (used in) investing activities                     (48,845)      (12,761)
  
  CASH FLOWS FROM FINANCING ACTIVITIES
    Increase (decrease) in:
      Deposits                                                                   15,600        50,938
      Repurchase agreements, fed funds & short-term borrowings                   (8,051)      (51,263)
      Long-term borrowings                                                       55,000        25,000
    (Increase) decrease in treasury stock                                        (2,843)         (311)
    Issuance of common stock under dividend reinvestment plan                      (941)          (11)
    Cash dividends                                                               (2,308)       (1,917)
                                                                               --------      --------
  
        Net cash provided by (used in) financing activities                      56,457        22,436
  
  Net increase (decrease) in cash and cash equivalents                            3,485        17,081
  
  Cash and cash equivalents at January 1                                         41,098        41,996
                                                                               --------      --------
  
  Cash and cash equivalents at March 31                                         $44,583       $59,077
                                                                               ========      ========
  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  three-month  period ended March 31, 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 basic  shares
  outstanding of 10,519,102 and 10,664,445 for 1998 and 1997, respectively, and on
  the weighted  average  number of diluted  shares  outstanding  of 10,786,359 and
  10,809,173  for 1998 and  1997,  respectively,  and are  computed  after  giving
  retroactive effect to a 4-for-3 stock split paid July 31, 1997.
  
  4. On March 25, 1998, the Company's Board of Directors  declared a cash dividend
  of .22 per share payable on May 17, 1998, to shareholders of record on April 30,
  1998.
  
  5. 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 $7,788,000 at March 31, 1998,
  all of which are nonaccrual  loans.  The allowance for loan loss associated with
  these  impaired  loans was  $778,000 at March 31, 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 $1.597 billion, an increase of $62.4 million,
  or 4.1% over the $1.534 billion at December 31, 1997. This increase is reflected
  primarily  in the  investment  and other  asset  categories,  the  result of the
  investment of deposits,  the Company's  primary  source of funds,  and long-term
  borrowings.
  
           Total cash and cash  equivalents  increased  $3.5  million,  or 8.5% at
  March 31, 1998,  when compared to December 31, 1997. This increase was primarily
  in cash and due from banks.
  
           Loans  increased to $1.104  billion at March 31, 1998.  The increase of
  $6.6 million, or .60% 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  three  months of 1998  amounted  to $16.9
  million.  The Company's  credit quality is reflected by the annualized  ratio of
  net  chargeoffs  to total loans of .05% through the first quarter of 1998 versus
   .20% for the year 1997, and the ratio of nonperforming  assets to total loans of
   .94% at March 31, 1998,  compared to .89% at December  31,  1997.  Nonperforming
  assets,  including  nonaccruals,  loans 90 days past due, restructured loans and
  other real estate owned, were $10.6 million at March 31, 1998, compared to $10.0
  million at December 31, 1997. Of these  amounts,  nonaccrual  loans  represented
  $7.8  million  and $6.8  million  at March 31,  1998,  and  December  31,  1997,
  respectively.  Loans 90 days  past due and  still  accruing  interest  were $2.2
  million and $2.8 million at March 31, 1998, and December 31, 1997, respectively.
  Other real  estate  owned was  $663,000  and  $375,000  at March 31,  1998,  and
  December 31, 1997, respectively.  The Company had no restructured loans at March
  31, 1998, or December 31, 1997.  The allowance for loan losses to  nonperforming
  assets  was  246.3%  and  251.6% at March  31,  1998,  and  December  31,  1997,
  respectively.  As is evident from the above  amounts  relative to  nonperforming
  assets,  there have been no significant  changes between  December 31, 1997, and
  March  31,  1998.  The  Company  has  no  significant  exposure  to  energy  and
  agricultural-related loans.
  
           Investments,  the  Company's  secondary use of funds,  increased  $39.9
  million, or 12.4% to $361.7 million at March 31, 1998, when compared to December
  31,  1997.  The  increase  is due to  investment  purchases  of  $62.5  million,
  primarily in municipal  securities,  which was  partially  offset by  investment
  sales and maturities and the amortization of mortgage-backed securities.
  
           As the primary source of funds, aggregate deposits of $1.131 billion at
  March 31, 1998,  increased $15.6 million, or 1.4% compared to December 31, 1997.
  The increase in deposits  during the first three months of 1998 was primarily in
  non-interest    bearing    deposits   which   increased   $8.2   million   while
  interest-bearing  deposits  increased $7.4 million.  Certificates  of deposit in
  excess of $100,000  decreased  $1.4  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  $325.9  million at March 31, 1998,  and $279.0  million at December 31,
  1997.  The  increase  of $46.9  million  represents  an  increase  in  long-term
  obligations  of $55.0  million  which  was  partially  offset by a  decrease  in
  short-term borrowings, primarily securities sold under repurchase agreements and
  federal funds purchased.
  
           Shareholders'  equity  decreased  slightly through March 31, 1998. This
  decrease  was due to a  decrease  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 decrease in
  market value of the Company's investment  portfolio.  Cash dividends paid during
  the first three months of 1998  increased  $306,000,  or 15.9%,  compared to the
  cash  dividends  paid during the first three months of 1997.  Earnings  retained
  
                                         8
  during the first three  months of 1998 were 55.4%  compared to 57.7%  during the
  first three months of 1997.
  
                                RESULTS OF OPERATIONS
  
           Net income for the quarter  ended  March 31,  1998,  was $4.9  million,
  10.0% more than the $4.5 million  reported for the same period in 1997. On a per
  share basis, basic earnings were $.47 and $.42 for the first quarter of 1998 and
  1997, respectively. Diluted earnings per share were $.46 and $.42 for the period
  ended March 31, 1998 and 1997, respectively.  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  income on assets and
  interest expense on liabilities.  Net interest income increased $.3 million,  or
  2.2% to $16.0 million during the first quarter of 1998 from $15.7 million in the
  first quarter of 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 three months of 1998
  increased  $2.8  million,  or 22.4%  compared  to the prior  year's  first three
  months. Despite the current rate environment, the cost of attracting and holding
  deposited funds is an  every-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 first quarter of 1998 compared to the same period in 1997.  The
  allowance  for loan and lease  losses of $26.2  million at March 31,  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 chargeoffs of $153,000 and 606,000 during
  the first three 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  $466,000,  or 14.1% during the first
  quarter of 1998,  as a result of increased  other income of $736,000,  increased
  trust and  investment  management  income of  $124,000,  and  increased  service
  charges on deposit accounts of $79,000. Net gains (losses) on sale of securities
  and mortgages decreased $473,000.  "Total other expenses" increased $627,000, or
  5.6% during the quarter ended March 31, 1998. Of this amount,  salaries,  wages,
  and employee benefits  increased  $380,000,  other operating  expenses increased
  $304,000, and net premises and equipment decreased $57.000.
  
           Income before income taxes increased by $181,000,  or 2.8%, compared to
  the first quarter of 1997. Income taxes decreased $273,000 compared to the first
  quarter of 1997.
  
                       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 $7.5 million from year end 1997.
  Long-term  borrowings  increased  $55.0 million during the first three 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.
  
                                         9
  The following table shows  separately the interest rate  sensitivity of
  each category of  interest-earning  assets and  interest-bearing  liabilities at
  March 31, 1998:
  Repricing Periods (1)
                                                                           Three Months         One Year
                                                       Within Three         Through One       Through Five          Over
                                                          Months               Year              Years           Five Years
  Assets
    Interest-bearing deposits at banks              $       1,680        $         --       $          --     $         --
    Investment securities                                  17,012              45,411             141,280          158,016
    Loans and leases                                      331,681             150,031             447,422          175,108
    Other assets                                            5,546                  --                  --          123,621
                                                    -------------        ------------       -------------     ------------
                                                          355,919             195,442             588,702          456,745
                                                    -------------        ------------       -------------     ------------
  Liabilities and equity
    Noninterest-bearing deposits                          154,983                  --                  --               --
    Interest-bearing deposits                             249,608             254,373             231,218          241,018
    Borrowed funds                                         61,062               2,610             197,500           24,571
    Preferred securities                                       --                  --                  --           40,250
    Other liabilities                                          --                  --                  --           18,873
    Hedging instruments                                    80,000                  --            (80,000)               --
    Shareholders' equity                                        -                  --                  --          120,742
                                                    -------------        ------------       -------------     ------------
                                                           545,653            256,983             348,718          445,454
                                                    --------------       ------------       -------------     ------------
  Interest sensitivity gap                               (189,734)           (61,541)             239,984           11,291
                                                    --------------       ------------        ------------     ------------
  
  Cumulative interest rate sensitivity gap             ($189,734)          ($251,275)           $ (11,291)    $         --
                                                    =============        ============       ==============    ============
  (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 first  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.
  
  (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,  32.5% of these deposits are considered repriceable
  within three months and 67.5% 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
  
                                         10
  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,  noninterest  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.
  March 31           Dec. 31
                                                                1998              1997
  CAPITAL LEVELS
           Tier 1 leverage ratio                                9.46%              9.84%
           Tier 1 risk-based ratio                             12.83%             13.49%
           Total risk-based ratio                              14.28%             14.91%
  
  CAPITAL PERFORMANCE
           Return of average assets (annualized)                 1.29               1.31
           Return on average equity (annualized)                16.30              15.90
           Earnings retained                                    55.40              55.30
           Internal capital growth (annualized)                  8.97               8.35
  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 March 31,
  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
  
           In  December  1997,  the  Company's  Board of  Directors  approved  the
  repurchase  of up to  530,000  shares  of its  common  stock  to be used for the
  Company's dividend reinvestment plan, stock option, employee stock purchase, and
  other  stock-based  corporate  plans.  The stock  repurchase plan authorizes the
  Company  to make  repurchases  from  time to time in open  market  or  privately
  negotiated transactions. To date, a total of 85,286 shares have been repurchased
  
                                         11
  at an aggregate  cost of $2.7  million.  A prior  repurchase  program of 380,000
  shares authorized in June 1996 was completed in December 1997.
  
           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.
  
           A new product at the Bank is BottomLine Partners, a unique money-saving
  program for  businesses.  This new product is not expected to have a significant
  effect 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.
  
           In  1998,  the  Company  intends  to open one new  supermarket  branch.
  Additionally,  the Company is converting 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,  if completed,  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.
  
           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.
  
  Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
  
           There has been no material  changes 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.
  
                                         12
  PART II - OTHER INFORMATION
  
  Item 1.  Legal Proceedings.
  
           None.
  
  Item 2.  Changes in Securities.
  
           None.
  
  Item 3.  Defaults Upon Senior Securities.
  
           None.
  
  Item 4.  Submission of Matters to Vote of Security Holders.
  
           Not applicable.
  
  Item 5.  Other Information.
  
           In December  1997,  the  Registrant's  Board of Directors  approved the
  repurchase  of up to  530,000  shares  of its  common  stock  to be used for the
  Registrant's dividend reinvestment,  stock option,  employee stock purchase, and
  other  stock-based  corporate  plans.  The stock  repurchase plan authorizes the
  Registrant  to make  repurchases  from time to time in open market or  privately
  negotiated transactions. To date, a total of 85,286 shares have been repurchased
  at an aggregate  cost of $2.7  million.  A prior  repurchase  program of 380,000
  shares was completed in December 1997.
  
           During  first  quarter  1998,  the  Registrant's   banking  subsidiary,
  National Penn Bank (the "Bank"),  began operating a messenger  service branch in
  eight  southeastern  Pennsylvania  counties and installed a new automated teller
  machine in a convenience store location in Easton (Northampton County).
  
           During  second  quarter 1998,  the Bank closed a supermarket  branch in
  Exton (Chester County). The Bank anticipates opening a new supermarket branch in
  Sinking Spring (Berks County) also in the second quarter.
  
           In  April  1998,  the  Bank  formed  a  wholly-owned  subsidiary,  Link
  Financial Services, Inc. , which, as a limited partner in Link Abstract L.P., is
  indirectly  engaged in the title insurance  agency  business.  An application is
  currently  pending  with  the  Office  of the  Comptroller  of the  Currency  to
  authorize Link Financial Services, Inc. to engage directly in business as a life
  insurance agency.
  
           On April 29,  1998  Lawrence  T. Jilk,  Jr. was named  Chairman  of the
  Registrant, and Wayne R. Weidner was named President of the Registrant.
  
  Item 6.  Exhibits and Reports on Form 8-K.
  
           (a)      Exhibits.
  
                    Exhibit 27 - Financial Data Schedule.
  
           (b)  Reports on Form 8-K.  The  Registrant  did not file any Reports on
  Form 8-K during the quarterly period ended March 31, 1998.
  
                                         13
  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:  May 13, 1998                             By /s/ Wayne R. Weidner
                                                   Wayne R. Weidner, President
  
  Dated:  May 13, 1998                             By /s/ Gary L. Rhoads
                                                   Gary L. Rhoads, Principal
                                                   Financial Officer