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:      September, 30 1996
  
                                         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 November 11, 1996
  
       Common Stock ($2.50 par value)           (No.) 7,609,067 Shares
  
                                 Page 1 of 15 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 ...........7
  
  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 .........................14
  
  Signatures..................................................................15
  
                                         2
  <PAGE>
                           PART I - FINANCIAL INFORMATION
  
  Item 1.  Financial Statements
  
  NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
  CONSOLIDATED CONDENSED BALANCE SHEET
  <TABLE>
  <CAPTION>
                                                                                   Sept. 30             Dec. 31
  (Dollars in thousands, except per share data)                                      1996                 1995
                                                                                 (Unaudited)             (Note)
  <S>                                                                          <C>                   <C>        
  ASSETS
  Cash and due from banks                                                       $    41,679           $    39,195
  Interest bearing deposits in banks                                                  1,460                 2,014
                                                                                -----------           -----------
      Total cash and cash equivalents                                           $    43,139                41,209
  Securities available for sale at market value                                     241,814               240,902
  Loans, net of unearned discount                                                 1,011,332               939,065
    Less allowance for possible loan losses                                         (22,178)              (20,366)
                                                                                -----------           -----------
      Net Loans                                                                     989,154               918,699
  Other assets                                                                       53,671                50,568
                                                                                -----------           -----------
      Total Assets                                                              $ 1,327,778           $ 1,251,378
                                                                                ===========           ===========
  
  LIABILITIES AND SHAREHOLDERS' EQUITY
  Non-interest bearing deposits                                                 $   135,917           $   134,968
  Interest bearing deposits
    (Includes certificates of deposit in excess of $100:
    1996 - $95,803; 1995 - $89,881)                                                 835,653               779,922
                                                                                -----------           -----------
      Total Deposits                                                                971,570               914,890
  Securities sold under repurchase agreements
    and federal funds purchased                                                     187,231               138,550
  Short-term borrowings                                                               8,790                 4,370
  Long-term obligations                                                              36,110                71,589
  Accrued interest and other liabilities                                             14,840                15,364
                                                                                -----------           -----------
      Total Liabilities                                                           1,218,541             1,144,763
  Commitments and contingent liabilities                                                 --                    --
  Shareholders' equity
    Preferred stock, no stated par value;
      authorized 1,000,000 shares, none issued                                           --                    --
    Common stock, par value $2.50 per share;
      20,000,000 shares  authorized;  7,648,177 shares
      issued and 7,617,067 shares outstanding at
      September 30, 1996; 7,642,413 shares issued and
      7,594,474 shares outstanding at December 31, 1995                              19,106                19,106
    Additional paid-in-capital                                                       57,550                57,501
    Retained earnings                                                                31,787                24,646
    Valuation adjustment for securities available for sale, net of tax                1,622                 6,579
    Treasury stock (31,110 shares at cost at September 30, 1996 and
      47,939 shares at cost at December 31, 1995)                                      (828)               (1,217)
                                                                                -----------           -----------
      Total Shareholders' Equity                                                    109,237               106,615
                                                                                -----------           -----------
      Total Liabilities and Shareholders' Equity                                $ 1,327,778           $ 1,251,378
                                                                                ===========           ===========
  </TABLE>
  
  
  The  accompanying  notes  are an  integral  part of  these  condensed  financial
  statements.
  Note: The Balance Sheet at Dec. 31, 1995 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                     Nine Months Ended
  (Dollars in thousands, except per share data)                          September 30                          September 30
                                                                   1996                1995              1996               1995
  <S>                                                             <C>                <C>               <C>                <C>     
  INTEREST INCOME
  Loans including fees                                            $ 23,196           $ 21,214          $ 67,123           $ 60,917
  Deposits in banks                                                     15                 21                44                 51
  Federal funds sold                                                    47                105               160                110
  Investment securities                                              3,893              4,096            11,410             12,062
                                                                  --------           --------          --------           --------
      Total interest income                                         27,151             25,436            78,737             73,140
                                                                  --------           --------          --------           --------
  INTEREST EXPENSE
  Deposits                                                           8,675              8,381            25,400             24,254
  Federal funds purchased, borrowed funds and
    securities sold under repurchase agreements                      3,052              3,156             8,750              7,978
                                                                  --------           --------          --------           --------
      Total interest expense                                        11,727             11,537            34,150             32,232
                                                                  --------           --------          --------           --------
      Net interest income                                           15,424             13,899            44,587             40,908
  Provision for loan losses                                            975                750             2,925              2,250
                                                                  --------           --------          --------           --------
      Net interest income after provision
        for loan losses                                             14,449             13,149            41,662             38,658
                                                                  --------           --------          --------           --------
  OTHER INCOME
  Trust Services                                                       548                481             1,752              1,329
  Service charges on deposit accounts                                  885                685             2,478              1,982
  Net gains (losses) on sale of securities and mortgages               (57)               125               (72)               428
  Other                                                                978                855             2,227              2,100
                                                                  --------           --------          --------           --------
      Total other income                                             2,354              2,146             6,385              5,839
                                                                  --------           --------          --------           --------
  OTHER EXPENSES
  Salaries, wages and employee benefits                              5,703              5,015            16,161             14,865
  Net premises and equipment                                         1,726              1,617             5,123              4,336
  Other operating                                                    3,216              3,084             8,858              9,012
                                                                  --------           --------          --------           --------
      Total other expenses                                          10,645              9,716            30,142             28,213
                                                                  --------           --------          --------           --------
      Income before income taxes                                     6,158              5,579            17,905             16,284
  Applicable income tax expense                                      1,872              1,684             5,511              4,914
                                                                  --------           --------          --------           --------
      Net income                                                  $  4,286           $  3,895          $ 12,394           $ 11,370
                                                                  ========           ========          ========           ========
  
  
  PER SHARE OF COMMON STOCK
  Net income                                                      $   0.57           $   0.52          $   1.63           $   1.51
  Dividends paid in cash                                              0.23               0.21              0.68               0.61
  </TABLE>
  
  The accompanying notes are an integral part of these condensed financial
  statements.
  
                                          4
  <PAGE>
  NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
  UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
  
  <TABLE>
  <CAPTION>
                                                                                  Nine Months Ended September 30,
  (Dollars in thousands)
                                                                                      1996               1995
  <S>                                                                               <C>                <C>     
  CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                                      $ 12,394           $ 11,370
    Adjustments to reconcile net income to net
        cash provided by (used in) operating activities
      Provision for loan and lease losses                                              2,925              2,250
      Depreciation and amortization                                                    2,406              2,166
      Net gains  (losses) on sale of securities and mortgages                            (72)               428
      Mortgage loans originated for resale                                           (16,045)            (7,046)
      Sale of mortgage loans originated for resale                                    16,045              7,046
      Other                                                                           (3,892)             7,235
                                                                                    --------           --------
  
        Net cash provided by operating activities                                     13,761             23,449
  
  CASH FLOWS FROM INVESTING ACTIVITIES
    Proceeds from sales of investment securities - available for sale                 30,034              6,578
    Proceeds from maturities of investment securities - held to maturity                  --              8,375
    Proceeds from maturities of investment securities - available for sale            18,873                740
    Purchase of investment securities available for sale                             (54,776)           (14,905)
    Proceeds from sales of loans                                                          --                 --
    Net increase in loans                                                            (73,380)           (86,441)
    Purchases of premises & equipment                                                 (2,070)            (3,731)
                                                                                    --------           --------
  
        Net cash (used in) investing activities                                      (81,319)           (89,384)
  
  CASH FLOWS FROM FINANCING ACTIVITIES
    Increase (decrease) in:
      Deposits                                                                        56,680             40,830
      Repurchase agreements, fed funds & short-term borrowings                        53,101             37,758
      Long-term borrowings & subordinated capital note                               (35,479)            (5,999)
    Decrease in treasury stock                                                           389              1,336
    Issuance of common stock under dividend reinvestment plan                             49                110
    Cash dividends                                                                    (5,252)            (4,670)
                                                                                    --------           --------
  
        Net cash provided by financing activities                                     69,488             69,365
  
  Net increase in cash and cash equivalents                                            1,930              3,430
  
  Cash and cash equivalents at January 1                                              41,209             34,159
                                                                                    --------           --------
  
  Cash and cash equivalents at September 30                                         $ 43,139           $ 37,589
                                                                                    ========           ========
  </TABLE>
  
  
  
  The accompanying notes are an integral part of these condensed financial
  statements.
  
                                          5
  <PAGE>
  
                NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                     (UNAUDITED)
  
  
  1. The accompanying  unaudited  consolidated 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, 1995.
  
  2. The results of operations for the nine-month  period ended September 30, 1996
  are not necessarily indicative of the results to be expected for the full year.
  
  3. Per share data are based on the weighted average number of shares outstanding
  of 7,614,139  and 7,547,382  for 1996 and 1995,  respectively,  and are computed
  after giving retroactive effect to a 5% stock dividend paid on October 31, 1995.
  
  4. On July 24,  1996,  the  Company's  Board of  Directors  declared  a 5% stock
  dividend  payable on October 31, 1996 to shareholders of record on September 27,
  1996.
  
                                         6
  <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 $1.328 billion,  an increase of $76.4 million or
  6.1% over the $1.251  billion at December 31, 1995.  This  increase is reflected
  primarily in the loan category,  the result of the  investment of deposits,  the
  Company's primary source of funds.
  
       Total cash and cash equivalents increased $1.9 million or 4.7% at September
  30, 1996 when compared to December 31, 1995. This increase was primarily in cash
  and due from banks which was partially offset by lower interest bearing deposits
  in banks.
  
       Loans  increased to $1.011  billion at September 30, 1996.  The increase of
  $72.3  million or 7.7% compared to December 31, 1995 was primarily the result of
  the investment of deposits and securities  sold under  agreements to repurchase.
  Loans  originated for immediate  resale during the first nine months of the year
  amounted to $11.5  million.  The  Company's  credit  quality is reflected by the
  annualized  ratio of net  charge-offs  to total loans of .15%  through the third
  quarter and the level of non-accrual  loans to total loans of 1.20% at September
  30,   1996.   The   Company   has  no   significant   exposure   to  energy  and
  agricultural-related  loans. Non-accrual loans at December 31, 1995 were .77% of
  total loans.
  
       Investments, the Company's secondary use of funds, increased $.9 million or
   .38% to $241.8 million at September 30, 1996 when compared to December 31, 1995.
  The small  increase is due to investment  purchases of $54.8  million,  which is
  offset by calls and  maturities of securities and the sale and  amortization  of
  mortgage-backed securities.
  
       As the primary  source of funds,  aggregate  deposits of $971.6  million at
  September  30, 1996  increased  $56.7  million or 6.2%  compared to December 31,
  1995.  The  increase  in  deposits  during  the  first  nine  months of 1996 was
  primarily in interest  bearing  deposits  which  increased  $55.7  million while
  non-interest bearing deposits increased $.9 million.  Certificates of deposit in
  excess of $100,000  increased  $5.9  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
  
                                         7
  <PAGE>
  
  funds  totaled  $232.1  million at  September  30, 1996,  and $214.5  million at
  December 31, 1995. The increase of $17.6 million is due to the large increase in
  total loans.
  
       Shareholders'  equity increased  slightly through  September 30, 1996. This
  increase was due to an increase in earnings retained offset by 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 nine months of 1996 increased
  $582,000  or 12.5%  compared  to the cash  dividends  paid during the first nine
  months of 1995.  Earnings  retained  during the first  nine  months of 1996 were
  57.6% compared to 58.9% during the first nine months of 1995.
  
                                RESULTS OF OPERATIONS
  
       Net income for the quarter ended September 30, 1996 was $4.3 million, 10.0%
  more than the $3.9 million  reported for the same period in 1995.  For the first
  nine  months,  net income  reached  $12.4  million,  or 9.0% more than the $11.4
  million  reported for the first nine months of 1995.  The Company's  performance
  has been and will  continue  to be in part  influenced  by the  strength  of the
  economy and conditions in the real estate market.
  
       Net interest income is the difference between interest income on assets and
  interest  expense on liabilities.  Net interest income increased $1.5 million or
  11.0% to $15.4  million  during the third  quarter of 1996 from $13.9 million in
  the third  quarter 1995.  For the  comparative  nine month period,  net interest
  income  increased  $3.7 million or 9.0% to $44.6  million from $40.9  million in
  1995. 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. The Company's prime rate from January 1, 1996
  to January 31, 1996 was 8.50%.  On February 1, 1996,  the prime rate  changed to
  8.25%.  Interest  expense  during the first nine months of 1996  increased  $1.9
  million or 6.0%  compared to the prior year's nine  months.  Despite the current
  rate  environment,  the cost of  attracting  and holding  deposited  funds is an
  ever-increasing  expense in the banking  industry.  These increases are the real
  costs of deposit accumulation and retention,  including FDIC insurance costs and
  branch overhead  expenses.  Such costs are necessary for continued growth and to
  maintain and increase market share of available deposits.
  
       The provision  for loan and lease losses is determined by periodic  reviews
  of loan quality,  current economic conditions,  loss experience and loan growth.
  Based on these  factors,  the  provision  for loan and  lease  losses  increased
  $225,000 for the third quarter
  
                                         8
  <PAGE>
  
  and $657,000 first nine months of 1996 compared to the same periods in 1995. The
  allowance  for the loan and lease losses of $22.2  million at September 30, 1996
  and $20.4  December  31,  1995 as a  percentage  of total loans was 2.2% at both
  dates.  The Company's net  charge-offs of $1,113,000  and $1,867,000  during the
  first nine months of 1996 and 1995,  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 $208,000 or 9.7% during the third quarter of
  1996,  as a result of service  charges on deposit  accounts of  $200,000,  trust
  income  of  $67,000,  and other  income of  $123,000  offset by  securities  and
  mortgage losses of $182,000.  Year to date, other income  increased  $546,000 or
  9.4% when  compared  to the  first  nine  months of 1995 as a result of  service
  charges on deposit  accounts of $423,000 and trust income of $496,000 which were
  partially  offset by losses on sale of  securities  and  mortgages  of $500,000.
  "Total  other  expenses"  increased  $929,000 or 9.6%  during the quarter  ended
  September 30, 1996 and  increased  $1,929,000 or 6.8% for the nine month period.
  Of this  year-to-date  increase,  premises and equipment  increased  $787,000 or
  18.2% and salaries, wages and employee benefits increased $1,296,000 or 8.7% due
  primarily to higher staffing levels.  Other operating  expenses were affected in
  the third  quarter of 1996 by the one-time  pre-tax  assessment of $1,175,000 to
  help recapitalize the Savings Association Insurance Fund ("SAIF") segment of the
  FDIC. As a result,  FDIC insurance premiums on SAIF deposits will now be reduced
  in future quarters.
  
       Income before income taxes  increased by $579,000 or 10.4%  compared to the
  third  quarter of 1995.  In  comparing  the first  nine  months of 1996 to 1995,
  income before income taxes increased $1,621,000 or 9.95%. Income taxes increased
  $188,000 for the quarter and increased $597,000 the nine month period.
  
                       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 $109.8 million from year end 1995.  Long-term
  borrowings decreased $35.5 million during the first nine months of 1996.
  
       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
  
                                         9
  <PAGE>
  
  
  assets and  liabilities in the existing  portfolio that are subject to repricing
  in a future time period.
  
       The following table shows  separately the interest rate sensitivity of each
  category  of  interest-earning   assets  and  interest-bearing   liabilities  at
  September 30, 1996:
  
  <TABLE>
  <CAPTION>
                                                          Repricing Periods (1)
                                                            One Year Through
                                         Within one Year       five Years         Over Five Years
                                                             (in thousands)
  <S>                                       <C>                 <C>                 <C>      
  Assets  
      Interest-bearing deposits at
         banks                              $   1,460           $     ---           $     ---
      Investment securities                    25,428             107,416             108,970
      Loans and leases                        431,514             414,691             165,127
      Other assets                              3,693                  --              91,657
                                            ---------           ---------           ---------
                                              462,095             522,107             365,754
                                            ---------           ---------           ---------
  Liabilities and equity
      Noninterest-bearing deposits            135,917                  --                  --
      Interest-bearing deposits               420,633             181,619             233,401
      Borrowed funds                          194,349              15,110              22,672
      Other liabilities                            --                  --              37,018
      Hedging instruments                     100,000            (100,000)                 --
      Shareholder's equity                         --                  --             109,237
                                            ---------           ---------           ---------
                                              850,899              96,729             402,328
                                            ---------           ---------           ---------
  
  Interest sensitivity gap                   (388,804)            425,378             (36,574)
                                            ---------           ---------           ---------
  
  Cumulative interest rate
      sensitivity gap                       ($388,804)          $  36,574           $     ---
                                            =========           =========           =========
  <FN>
   (1)     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.
  </FN>
  </TABLE>
  
       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
  
                                         10
  <PAGE>
  
  increase  in a falling  rate  environment  and would  decrease  in a rising rate
  environment.  An interest rate gap table does not,  however,  present a complete
  picture of the impact of interest  rate changes on net interest  income.  First,
  changes in the general level of interest  rates do not affect all  categories of
  assets and liabilities equally or simultaneously. Second, assets and liabilities
  which can contractually reprice within the same period may not, in fact, reprice
  at the same time or to the same extent.  Third,  the table  represents a one-day
  position; variations occur daily as the Company adjusts its interest sensitivity
  throughout the year. Fourth, assumptions must be made to construct such a table.
  For example,  non-interest  bearing  deposits are assigned a repricing  interval
  within  one year,  although  history  indicates  a  significant  amount of these
  deposits  will not move  into  interest  bearing  categories  regardless  of the
  general level of interest rates. Finally, the repricing distribution of interest
  sensitive assets may not be indicative of the liquidity of those assets.
  
       The Company anticipates  volatile interest rate levels for the remainder of
  1996,  with no clear  indication of sustainable  rising or falling rates.  Given
  this assumption,  the Company's asset/liability strategy for 1996 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>
                                                     September 30,     December 31,
                                                         1996              1996
  <S>                                                  <C>             <C>  
  CAPITAL LEVELS
       Tier 1 leverage ratio                              8.02%           7.59%
       Tier 1 risked-based ratio                         11.29           10.97
       Total risked-based ratio                          12.55           12.23
  
  
  CAPITAL PERFORMANCE
       Return on average assets (annualized)              1.30            1.30
       Return on average equity (annualized)             15.32           16.30
       Earnings retained                                 57.62           59.30
       Internal capital growth                            8.93           25.60
  </TABLE>
  
                                         11
  <PAGE>
  
       The  Company's  capital  ratios  above  compare  favorably  to the  minimum
  required amounts of Tier 1 and total capital to  "risk-weighted"  assets and the
  minimum Tier 1 leverage  ratio, as defined by banking  regulators.  At September
  30, 1996,  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 June 1996, the Company's  Board of Directors  approved the repurchase of
  up to  380,000  shares of its common  stock from time to time in open  market or
  negotiated  transactions.  Repurchased shares will be used for general corporate
  purposes,  including the Company's  dividend  reinvestment plan and stock option
  plans.  To date, a total of 30,000 shares have been  repurchased at an aggregate
  cost of $799,000.
  
       The Company  anticipates  that in the  remainder of 1996 the Bank will open
  three new supermarket  branches.  The Company does not expect these new branches
  to start  contributing  to profits  until 1997 or beyond;  1996  earnings may be
  somewhat negatively impacted by the initial costs of these new operations.
  
       Prior to November 30, 1996 the Company will be required to remit $1,175,000
  to the  FDIC  as its  one-time  assessment  to  help  recapitalize  the  Savings
  Association  Insurance Fund ("SAIF")  segment of the FDIC.  This amount has been
  fully  expensed and accrued as of September 30, 1996 and will  therefore have no
  additional impact on the Company's  earnings.  As a result of this assessment on
  approximately  $225 million of deposits at branches  acquired from  Sellersville
  Savings and Loan  Association  and  Central  Pennsylvania  Savings  Association,
  future FDIC  insurance  premiums on these  deposits will be reduced to an annual
  rate comparable to the rate on commercial bank deposits.
  
                                         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.
  
           None.
  
  
  Item 5.  Other Information.
  
           In August 1996, the Registrant's banking subsidiary, National Penn Bank
  (the "Bank"), opened its seventh full-service supermarket branch in the Clemen's
  Market, Perkasie(Bucks County) Pennsylvania.  The Registrant anticipates that in
  the  remainder  of 1996 the Bank  will open  three  more  supermarket  branches,
  Dorneyville  (Lehigh County),  Coopersburg  (Lehigh  County),  and Emaus Avenue,
  Allentown (Lehigh County). The Bank intends to close its branch at Emaus Avenue,
  Allentown, following the opening of the new supermarket branch on Emaus Avenue.
  
           In September  1996,  the Bank opened a full service  branch in Lansdale
  (Montgomery  County).  The Bank  intends  to close its  branches  in  Kulpsville
  (Montgomery County) and West Point ( Montgomery County) in November 1996.
  
           In September  1996,  the Bank relocated its Reading Loan Center from 45
  Park  Road  North,   Wyomissing,   Pennsylvania  to  1100  Berkshire  Boulevard,
  Wyomissing, Pennsylvania. In December 1996 the Bank will close its office at 951
  Rohrerstown Road, Lancaster, Pennsylvania.
  
           On June 26, 1996,  The  Registrant's  Board of  Directors  approved the
  repurchase  of up to 380,000  shares of its common  stock to be used for general
  corporate purposes,  including the Registrant's  dividend  reinvestment plan and
  stock option plans.  The stock repurchase plan authorizes the Registrant to make
  repurchases   from  time  to  time  in  open  market  or  privately   negotiated
  transactions.  At September 30, 1996,  30,000 shares have been repurchased under
  this  repurchase  program at an aggregate cost of $799,000.  A prior  repurchase
  program of 200,000 shares authorized in February 1994 was completed June 1996.
  
           On  October  31,  1996,  the  Registrant  paid a 5% stock  dividend  to
  shareholders of record as of the close of business on September 27, 1996.
  
  
  <PAGE>
  
  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 September 30, 1996.
  
                                         14
  <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:  November 12, 1996                 By /s/ Wayne R. Weidner
                                               ---------------------
                                               Wayne R. Weidner, Executive
                                                            Vice President
  
  Dated:  November 12, 1996                 By /s/ Gary L. Rhoads
                                               -------------------
                                               Gary L. Rhoads, Principal
                                                       Financial Officer
  
                                         15
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text: FORM 10-Q
  
                         SECURITIES AND EXCHANGE COMMISSION
                               WASHINGTON, D.C. 20549
  
  (Mark One)
  
             [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                           SECURITIES EXCHANGE ACT OF 1934
  
  For the quarterly period ended:      September, 30 1996
  
                                         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 November 11, 1996
  
       Common Stock ($2.50 par value)           (No.) 7,609,067 Shares
  
                                 Page 1 of 15 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 ...........7
  
  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 .........................14
  
  Signatures..................................................................15
  
                                         2
  PART I - FINANCIAL INFORMATION
  
  Item 1.  Financial Statements
  
  NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
  CONSOLIDATED CONDENSED BALANCE SHEET
  Sept. 30             Dec. 31
  (Dollars in thousands, except per share data)                                      1996                 1995
                                                                                 (Unaudited)             (Note)
  ASSETS
  Cash and due from banks                                                       $    41,679           $    39,195
  Interest bearing deposits in banks                                                  1,460                 2,014
                                                                                -----------           -----------
      Total cash and cash equivalents                                           $    43,139                41,209
  Securities available for sale at market value                                     241,814               240,902
  Loans, net of unearned discount                                                 1,011,332               939,065
    Less allowance for possible loan losses                                         (22,178)              (20,366)
                                                                                -----------           -----------
      Net Loans                                                                     989,154               918,699
  Other assets                                                                       53,671                50,568
                                                                                -----------           -----------
      Total Assets                                                              $ 1,327,778           $ 1,251,378
                                                                                ===========           ===========
  
  LIABILITIES AND SHAREHOLDERS' EQUITY
  Non-interest bearing deposits                                                 $   135,917           $   134,968
  Interest bearing deposits
    (Includes certificates of deposit in excess of $100:
    1996 - $95,803; 1995 - $89,881)                                                 835,653               779,922
                                                                                -----------           -----------
      Total Deposits                                                                971,570               914,890
  Securities sold under repurchase agreements
    and federal funds purchased                                                     187,231               138,550
  Short-term borrowings                                                               8,790                 4,370
  Long-term obligations                                                              36,110                71,589
  Accrued interest and other liabilities                                             14,840                15,364
                                                                                -----------           -----------
      Total Liabilities                                                           1,218,541             1,144,763
  Commitments and contingent liabilities                                                 --                    --
  Shareholders' equity
    Preferred stock, no stated par value;
      authorized 1,000,000 shares, none issued                                           --                    --
    Common stock, par value $2.50 per share;
      20,000,000 shares  authorized;  7,648,177 shares
      issued and 7,617,067 shares outstanding at
      September 30, 1996; 7,642,413 shares issued and
      7,594,474 shares outstanding at December 31, 1995                              19,106                19,106
    Additional paid-in-capital                                                       57,550                57,501
    Retained earnings                                                                31,787                24,646
    Valuation adjustment for securities available for sale, net of tax                1,622                 6,579
    Treasury stock (31,110 shares at cost at September 30, 1996 and
      47,939 shares at cost at December 31, 1995)                                      (828)               (1,217)
                                                                                -----------           -----------
      Total Shareholders' Equity                                                    109,237               106,615
                                                                                -----------           -----------
      Total Liabilities and Shareholders' Equity                                $ 1,327,778           $ 1,251,378
                                                                                ===========           ===========
  The  accompanying  notes  are an  integral  part of  these  condensed  financial
  statements.
  Note: The Balance Sheet at Dec. 31, 1995 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                     Nine Months Ended
  (Dollars in thousands, except per share data)                          September 30                          September 30
                                                                   1996                1995              1996               1995
  INTEREST INCOME
  Loans including fees                                            $ 23,196           $ 21,214          $ 67,123           $ 60,917
  Deposits in banks                                                     15                 21                44                 51
  Federal funds sold                                                    47                105               160                110
  Investment securities                                              3,893              4,096            11,410             12,062
                                                                  --------           --------          --------           --------
      Total interest income                                         27,151             25,436            78,737             73,140
                                                                  --------           --------          --------           --------
  INTEREST EXPENSE
  Deposits                                                           8,675              8,381            25,400             24,254
  Federal funds purchased, borrowed funds and
    securities sold under repurchase agreements                      3,052              3,156             8,750              7,978
                                                                  --------           --------          --------           --------
      Total interest expense                                        11,727             11,537            34,150             32,232
                                                                  --------           --------          --------           --------
      Net interest income                                           15,424             13,899            44,587             40,908
  Provision for loan losses                                            975                750             2,925              2,250
                                                                  --------           --------          --------           --------
      Net interest income after provision
        for loan losses                                             14,449             13,149            41,662             38,658
                                                                  --------           --------          --------           --------
  OTHER INCOME
  Trust Services                                                       548                481             1,752              1,329
  Service charges on deposit accounts                                  885                685             2,478              1,982
  Net gains (losses) on sale of securities and mortgages               (57)               125               (72)               428
  Other                                                                978                855             2,227              2,100
                                                                  --------           --------          --------           --------
      Total other income                                             2,354              2,146             6,385              5,839
                                                                  --------           --------          --------           --------
  OTHER EXPENSES
  Salaries, wages and employee benefits                              5,703              5,015            16,161             14,865
  Net premises and equipment                                         1,726              1,617             5,123              4,336
  Other operating                                                    3,216              3,084             8,858              9,012
                                                                  --------           --------          --------           --------
      Total other expenses                                          10,645              9,716            30,142             28,213
                                                                  --------           --------          --------           --------
      Income before income taxes                                     6,158              5,579            17,905             16,284
  Applicable income tax expense                                      1,872              1,684             5,511              4,914
                                                                  --------           --------          --------           --------
      Net income                                                  $  4,286           $  3,895          $ 12,394           $ 11,370
                                                                  ========           ========          ========           ========
  
  PER SHARE OF COMMON STOCK
  Net income                                                      $   0.57           $   0.52          $   1.63           $   1.51
  Dividends paid in cash                                              0.23               0.21              0.68               0.61
  The accompanying notes are an integral part of these condensed financial
  statements.
  
                                          4
  NATIONAL PENN BANCSHARES, INC. AND SUBSIDIARIES
  UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
  Nine Months Ended September 30,
  (Dollars in thousands)
                                                                                      1996               1995
  CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                                      $ 12,394           $ 11,370
    Adjustments to reconcile net income to net
        cash provided by (used in) operating activities
      Provision for loan and lease losses                                              2,925              2,250
      Depreciation and amortization                                                    2,406              2,166
      Net gains  (losses) on sale of securities and mortgages                            (72)               428
      Mortgage loans originated for resale                                           (16,045)            (7,046)
      Sale of mortgage loans originated for resale                                    16,045              7,046
      Other                                                                           (3,892)             7,235
                                                                                    --------           --------
  
        Net cash provided by operating activities                                     13,761             23,449
  
  CASH FLOWS FROM INVESTING ACTIVITIES
    Proceeds from sales of investment securities - available for sale                 30,034              6,578
    Proceeds from maturities of investment securities - held to maturity                  --              8,375
    Proceeds from maturities of investment securities - available for sale            18,873                740
    Purchase of investment securities available for sale                             (54,776)           (14,905)
    Proceeds from sales of loans                                                          --                 --
    Net increase in loans                                                            (73,380)           (86,441)
    Purchases of premises & equipment                                                 (2,070)            (3,731)
                                                                                    --------           --------
  
        Net cash (used in) investing activities                                      (81,319)           (89,384)
  
  CASH FLOWS FROM FINANCING ACTIVITIES
    Increase (decrease) in:
      Deposits                                                                        56,680             40,830
      Repurchase agreements, fed funds & short-term borrowings                        53,101             37,758
      Long-term borrowings & subordinated capital note                               (35,479)            (5,999)
    Decrease in treasury stock                                                           389              1,336
    Issuance of common stock under dividend reinvestment plan                             49                110
    Cash dividends                                                                    (5,252)            (4,670)
                                                                                    --------           --------
  
        Net cash provided by financing activities                                     69,488             69,365
  
  Net increase in cash and cash equivalents                                            1,930              3,430
  
  Cash and cash equivalents at January 1                                              41,209             34,159
                                                                                    --------           --------
  
  Cash and cash equivalents at September 30                                         $ 43,139           $ 37,589
                                                                                    ========           ========
  The accompanying notes are an integral part of these condensed financial
  statements.
  
                                          5
  NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                     (UNAUDITED)
  
  1. The accompanying  unaudited  consolidated 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, 1995.
  
  2. The results of operations for the nine-month  period ended September 30, 1996
  are not necessarily indicative of the results to be expected for the full year.
  
  3. Per share data are based on the weighted average number of shares outstanding
  of 7,614,139  and 7,547,382  for 1996 and 1995,  respectively,  and are computed
  after giving retroactive effect to a 5% stock dividend paid on October 31, 1995.
  
  4. On July 24,  1996,  the  Company's  Board of  Directors  declared  a 5% stock
  dividend  payable on October 31, 1996 to shareholders of record on September 27,
  1996.
  
                                         6
  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 $1.328 billion,  an increase of $76.4 million or
  6.1% over the $1.251  billion at December 31, 1995.  This  increase is reflected
  primarily in the loan category,  the result of the  investment of deposits,  the
  Company's primary source of funds.
  
       Total cash and cash equivalents increased $1.9 million or 4.7% at September
  30, 1996 when compared to December 31, 1995. This increase was primarily in cash
  and due from banks which was partially offset by lower interest bearing deposits
  in banks.
  
       Loans  increased to $1.011  billion at September 30, 1996.  The increase of
  $72.3  million or 7.7% compared to December 31, 1995 was primarily the result of
  the investment of deposits and securities  sold under  agreements to repurchase.
  Loans  originated for immediate  resale during the first nine months of the year
  amounted to $11.5  million.  The  Company's  credit  quality is reflected by the
  annualized  ratio of net  charge-offs  to total loans of .15%  through the third
  quarter and the level of non-accrual  loans to total loans of 1.20% at September
  30,   1996.   The   Company   has  no   significant   exposure   to  energy  and
  agricultural-related  loans. Non-accrual loans at December 31, 1995 were .77% of
  total loans.
  
       Investments, the Company's secondary use of funds, increased $.9 million or
   .38% to $241.8 million at September 30, 1996 when compared to December 31, 1995.
  The small  increase is due to investment  purchases of $54.8  million,  which is
  offset by calls and  maturities of securities and the sale and  amortization  of
  mortgage-backed securities.
  
       As the primary  source of funds,  aggregate  deposits of $971.6  million at
  September  30, 1996  increased  $56.7  million or 6.2%  compared to December 31,
  1995.  The  increase  in  deposits  during  the  first  nine  months of 1996 was
  primarily in interest  bearing  deposits  which  increased  $55.7  million while
  non-interest bearing deposits increased $.9 million.  Certificates of deposit in
  excess of $100,000  increased  $5.9  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
  
                                         7
  funds  totaled  $232.1  million at  September  30, 1996,  and $214.5  million at
  December 31, 1995. The increase of $17.6 million is due to the large increase in
  total loans.
  
       Shareholders'  equity increased  slightly through  September 30, 1996. This
  increase was due to an increase in earnings retained offset by 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 nine months of 1996 increased
  $582,000  or 12.5%  compared  to the cash  dividends  paid during the first nine
  months of 1995.  Earnings  retained  during the first  nine  months of 1996 were
  57.6% compared to 58.9% during the first nine months of 1995.
  
                                RESULTS OF OPERATIONS
  
       Net income for the quarter ended September 30, 1996 was $4.3 million, 10.0%
  more than the $3.9 million  reported for the same period in 1995.  For the first
  nine  months,  net income  reached  $12.4  million,  or 9.0% more than the $11.4
  million  reported for the first nine months of 1995.  The Company's  performance
  has been and will  continue  to be in part  influenced  by the  strength  of the
  economy and conditions in the real estate market.
  
       Net interest income is the difference between interest income on assets and
  interest  expense on liabilities.  Net interest income increased $1.5 million or
  11.0% to $15.4  million  during the third  quarter of 1996 from $13.9 million in
  the third  quarter 1995.  For the  comparative  nine month period,  net interest
  income  increased  $3.7 million or 9.0% to $44.6  million from $40.9  million in
  1995. 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. The Company's prime rate from January 1, 1996
  to January 31, 1996 was 8.50%.  On February 1, 1996,  the prime rate  changed to
  8.25%.  Interest  expense  during the first nine months of 1996  increased  $1.9
  million or 6.0%  compared to the prior year's nine  months.  Despite the current
  rate  environment,  the cost of  attracting  and holding  deposited  funds is an
  ever-increasing  expense in the banking  industry.  These increases are the real
  costs of deposit accumulation and retention,  including FDIC insurance costs and
  branch overhead  expenses.  Such costs are necessary for continued growth and to
  maintain and increase market share of available deposits.
  
       The provision  for loan and lease losses is determined by periodic  reviews
  of loan quality,  current economic conditions,  loss experience and loan growth.
  Based on these  factors,  the  provision  for loan and  lease  losses  increased
  $225,000 for the third quarter
  
                                         8
  and $657,000 first nine months of 1996 compared to the same periods in 1995. The
  allowance  for the loan and lease losses of $22.2  million at September 30, 1996
  and $20.4  December  31,  1995 as a  percentage  of total loans was 2.2% at both
  dates.  The Company's net  charge-offs of $1,113,000  and $1,867,000  during the
  first nine months of 1996 and 1995,  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 $208,000 or 9.7% during the third quarter of
  1996,  as a result of service  charges on deposit  accounts of  $200,000,  trust
  income  of  $67,000,  and other  income of  $123,000  offset by  securities  and
  mortgage losses of $182,000.  Year to date, other income  increased  $546,000 or
  9.4% when  compared  to the  first  nine  months of 1995 as a result of  service
  charges on deposit  accounts of $423,000 and trust income of $496,000 which were
  partially  offset by losses on sale of  securities  and  mortgages  of $500,000.
  "Total  other  expenses"  increased  $929,000 or 9.6%  during the quarter  ended
  September 30, 1996 and  increased  $1,929,000 or 6.8% for the nine month period.
  Of this  year-to-date  increase,  premises and equipment  increased  $787,000 or
  18.2% and salaries, wages and employee benefits increased $1,296,000 or 8.7% due
  primarily to higher staffing levels.  Other operating  expenses were affected in
  the third  quarter of 1996 by the one-time  pre-tax  assessment of $1,175,000 to
  help recapitalize the Savings Association Insurance Fund ("SAIF") segment of the
  FDIC. As a result,  FDIC insurance premiums on SAIF deposits will now be reduced
  in future quarters.
  
       Income before income taxes  increased by $579,000 or 10.4%  compared to the
  third  quarter of 1995.  In  comparing  the first  nine  months of 1996 to 1995,
  income before income taxes increased $1,621,000 or 9.95%. Income taxes increased
  $188,000 for the quarter and increased $597,000 the nine month period.
  
                       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 $109.8 million from year end 1995.  Long-term
  borrowings decreased $35.5 million during the first nine months of 1996.
  
       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
  
                                         9
  assets and  liabilities in the existing  portfolio that are subject to repricing
  in a future time period.
  
       The following table shows  separately the interest rate sensitivity of each
  category  of  interest-earning   assets  and  interest-bearing   liabilities  at
  September 30, 1996:
  Repricing Periods (1)
                                                            One Year Through
                                         Within one Year       five Years         Over Five Years
                                                             (in thousands)
  Assets  
      Interest-bearing deposits at
         banks                              $   1,460           $     ---           $     ---
      Investment securities                    25,428             107,416             108,970
      Loans and leases                        431,514             414,691             165,127
      Other assets                              3,693                  --              91,657
                                            ---------           ---------           ---------
                                              462,095             522,107             365,754
                                            ---------           ---------           ---------
  Liabilities and equity
      Noninterest-bearing deposits            135,917                  --                  --
      Interest-bearing deposits               420,633             181,619             233,401
      Borrowed funds                          194,349              15,110              22,672
      Other liabilities                            --                  --              37,018
      Hedging instruments                     100,000            (100,000)                 --
      Shareholder's equity                         --                  --             109,237
                                            ---------           ---------           ---------
                                              850,899              96,729             402,328
                                            ---------           ---------           ---------
  
  Interest sensitivity gap                   (388,804)            425,378             (36,574)
                                            ---------           ---------           ---------
  
  Cumulative interest rate
      sensitivity gap                       ($388,804)          $  36,574           $     ---
                                            =========           =========           =========
  (1)     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.
  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
  
                                         10
  increase  in a falling  rate  environment  and would  decrease  in a rising rate
  environment.  An interest rate gap table does not,  however,  present a complete
  picture of the impact of interest  rate changes on net interest  income.  First,
  changes in the general level of interest  rates do not affect all  categories of
  assets and liabilities equally or simultaneously. Second, assets and liabilities
  which can contractually reprice within the same period may not, in fact, reprice
  at the same time or to the same extent.  Third,  the table  represents a one-day
  position; variations occur daily as the Company adjusts its interest sensitivity
  throughout the year. Fourth, assumptions must be made to construct such a table.
  For example,  non-interest  bearing  deposits are assigned a repricing  interval
  within  one year,  although  history  indicates  a  significant  amount of these
  deposits  will not move  into  interest  bearing  categories  regardless  of the
  general level of interest rates. Finally, the repricing distribution of interest
  sensitive assets may not be indicative of the liquidity of those assets.
  
       The Company anticipates  volatile interest rate levels for the remainder of
  1996,  with no clear  indication of sustainable  rising or falling rates.  Given
  this assumption,  the Company's asset/liability strategy for 1996 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.
  September 30,     December 31,
                                                         1996              1996
  CAPITAL LEVELS
       Tier 1 leverage ratio                              8.02%           7.59%
       Tier 1 risked-based ratio                         11.29           10.97
       Total risked-based ratio                          12.55           12.23
  
  CAPITAL PERFORMANCE
       Return on average assets (annualized)              1.30            1.30
       Return on average equity (annualized)             15.32           16.30
       Earnings retained                                 57.62           59.30
       Internal capital growth                            8.93           25.60
  11
  The  Company's  capital  ratios  above  compare  favorably  to the  minimum
  required amounts of Tier 1 and total capital to  "risk-weighted"  assets and the
  minimum Tier 1 leverage  ratio, as defined by banking  regulators.  At September
  30, 1996,  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 June 1996, the Company's  Board of Directors  approved the repurchase of
  up to  380,000  shares of its common  stock from time to time in open  market or
  negotiated  transactions.  Repurchased shares will be used for general corporate
  purposes,  including the Company's  dividend  reinvestment plan and stock option
  plans.  To date, a total of 30,000 shares have been  repurchased at an aggregate
  cost of $799,000.
  
       The Company  anticipates  that in the  remainder of 1996 the Bank will open
  three new supermarket  branches.  The Company does not expect these new branches
  to start  contributing  to profits  until 1997 or beyond;  1996  earnings may be
  somewhat negatively impacted by the initial costs of these new operations.
  
       Prior to November 30, 1996 the Company will be required to remit $1,175,000
  to the  FDIC  as its  one-time  assessment  to  help  recapitalize  the  Savings
  Association  Insurance Fund ("SAIF")  segment of the FDIC.  This amount has been
  fully  expensed and accrued as of September 30, 1996 and will  therefore have no
  additional impact on the Company's  earnings.  As a result of this assessment on
  approximately  $225 million of deposits at branches  acquired from  Sellersville
  Savings and Loan  Association  and  Central  Pennsylvania  Savings  Association,
  future FDIC  insurance  premiums on these  deposits will be reduced to an annual
  rate comparable to the rate on commercial bank deposits.
  
                                         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.
  
           None.
  
  Item 5.  Other Information.
  
           In August 1996, the Registrant's banking subsidiary, National Penn Bank
  (the "Bank"), opened its seventh full-service supermarket branch in the Clemen's
  Market, Perkasie(Bucks County) Pennsylvania.  The Registrant anticipates that in
  the  remainder  of 1996 the Bank  will open  three  more  supermarket  branches,
  Dorneyville  (Lehigh County),  Coopersburg  (Lehigh  County),  and Emaus Avenue,
  Allentown (Lehigh County). The Bank intends to close its branch at Emaus Avenue,
  Allentown, following the opening of the new supermarket branch on Emaus Avenue.
  
           In September  1996,  the Bank opened a full service  branch in Lansdale
  (Montgomery  County).  The Bank  intends  to close its  branches  in  Kulpsville
  (Montgomery County) and West Point ( Montgomery County) in November 1996.
  
           In September  1996,  the Bank relocated its Reading Loan Center from 45
  Park  Road  North,   Wyomissing,   Pennsylvania  to  1100  Berkshire  Boulevard,
  Wyomissing, Pennsylvania. In December 1996 the Bank will close its office at 951
  Rohrerstown Road, Lancaster, Pennsylvania.
  
           On June 26, 1996,  The  Registrant's  Board of  Directors  approved the
  repurchase  of up to 380,000  shares of its common  stock to be used for general
  corporate purposes,  including the Registrant's  dividend  reinvestment plan and
  stock option plans.  The stock repurchase plan authorizes the Registrant to make
  repurchases   from  time  to  time  in  open  market  or  privately   negotiated
  transactions.  At September 30, 1996,  30,000 shares have been repurchased under
  this  repurchase  program at an aggregate cost of $799,000.  A prior  repurchase
  program of 200,000 shares authorized in February 1994 was completed June 1996.
  
           On  October  31,  1996,  the  Registrant  paid a 5% stock  dividend  to
  shareholders of record as of the close of business on September 27, 1996.
  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 September 30, 1996.
  
                                         14
  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:  November 12, 1996                 By /s/ Wayne R. Weidner
                                               ---------------------
                                               Wayne R. Weidner, Executive
                                                            Vice President
  
  Dated:  November 12, 1996                 By /s/ Gary L. Rhoads
                                               -------------------
                                               Gary L. Rhoads, Principal
                                                       Financial Officer
  
                                         15